The European Commission has adopted new State aid exemptions to allow Governments to alleviate the economic impact of COVID-19. Jonathan Branton and Alexander Rose analyse the provisions.
The European Commission has adopted an emergency measure to enable all EU Member States (plus the UK while still in the Brexit transition period) to create schemes to allow their own various arms of State to make direct grants to individual businesses of up to €800,000 each by way of emergency relief during the current COVID-19 emergency. This is a serious departure from normal State aid restrictions and offers major flexibility to grant lifelines to business, in addition to the many general measures such as tax reliefs that almost all countries are already adopting.
On Thursday 19 March 2020, the European Commission adopted a Temporary Framework to make it easier for Governments to provide State aid in response to the COVID-19 pandemic. Most specifically this emergency measure paves the way to allow public authorities across the EU (plus the UK while still working in the Brexit transition period) to award grants, repayable advances or individual tax or other benefits of a value of up to €800,000 per undertaking, provided certain compatibility conditions are met.
Crucially however the framework by itself is not a State aid block exemption. It does not give automatic approval to make awards of this nature without any further approvals. Member States seeking to avail of this must notify a general aid scheme to the European Commission under the framework, but the assumption must be this will be immediately approved. Furthermore, since the framework allows retrospective effect anyway (for grants awarded since 1 February 2020), and given the unprecedented nature of the emergency, it is expected that government authorities will move to make the awards quickly, in part on an assumption that the scheme compliance will be rubber-stamped in due course.
New options to award aid
The Temporary Framework sets out five new State aid compliant options:
1. Small Amounts of Compatible Aid
a. €120,000 for undertakings in the fishery and aquaculture sector
b. €100,000 for those in the primary production of agricultural products; and
c. €800,000 for other undertakings
2. Aid in the form of guarantees on loans;
3. Aid in the form of subsidised interest rates for loans;
4. Aid in the form of guarantees and loans channelled through financial institutions; and
5. Short term credit export insurance.
The main common requirements for measures to be compatible under the Temporary Framework are:
a. the aid is granted on the basis of a scheme with an estimated budget (schemes to be notified to the European Commission by the Member State);
b. the aid shall be legally committed between 1 February 2020 and 31 December 2020;
c. information on the aid must be published and monitoring information submitted to the European Commission.
1. Small Amounts of Compatible Aid
The exemption which will generate the most interest in the short term is the ability to award aid (in the form of direct grants, repayable advances or tax advantages) of up to €800,000. In order to be used certain conditions must be met. These are:
a. The aid does not exceed €800,000 (before the deduction of tax or any other charge);
b. the aid may only be granted to undertakings that can be shown to not be in difficulty on 31 December 2019 ; and
c. aid to undertakings active in processing or marketing agricultural products must contain specific conditions.
The maximum aid which can be provided under the cover of this provision of the Temporary Framework is €120,000 for undertakings in the fishery and aquaculture sector and €100,000 for those in the primary production of agricultural products.
2. Aid in the form of guarantees for bank loans
The European Commission has sought to improve liquidity to undertakings by publishing generous guarantee premiums (for both investments and working capital loans) which it shall regard to be compatible with the Common Market, provided other conditions are met. These include that the guarantee does not exceed 90% (reduced to 35% where losses are sustained by the State first). The duration of the guarantee must not exceed 6 years.
3. Aid in the form of subsidised interest rates for loans
As with the above, the Commission has approved a more generous credit risk rating for loans, again with the aim of improving liquidity during this challenging time. This provision is limited to loans with a duration of six years or less.
4. Aid in the form of guarantees and loans channelled through financial institutions
The Temporary Framework expressly states that such funding should "to the largest extent possible" pass on the advantages of a public guarantee or reduced interest rate to the final beneficiaries, these being the recipients of such financial instruments. It also prevents any guarantee fee being charged where a legal obligation exists on the financial institution to extend the maturity period of a loan.
5. Short term credit insurance
Member States may provide financial assistance to temporarily support the provision of such insurance where it can show that such cover is unavailable.
The European Commission has acted swiftly to respond to the economic crisis arising from the COVID-19 pandemic. A Danish measure, to provide support to organisers of events cancelled due to the outbreak, was approved within 24 hours. This framework was shared in draft form on Friday 13 March and adopted, with significant revisions following comments from Member States, six days later.
The State aid Temporary Framework is based on Article 107(3)(b) of the EU Treaty (TFEU) to remedy a "serious disturbance in the economy of a Member State". As the COVID-19 outbreak is affecting undertakings across all Member States, the Commission considers that State aid is justified in the circumstances and can be declared compatible with the internal market on this basis for a limited period (until 31 December 2020), in order to support undertakings with cash flow difficulties during this unprecedented time.
By way of background, the Commission similarly adopted a Temporary Framework in 2008 based on Article 107(3)(b), in response to the global financial crisis under which the UK successfully implemented the "Short term provision of small amounts of compatible aid (De Minimis) scheme" (N43/2009).
Additional State aid options available to Member States
Other than the measures set out in the Temporary Framework, there are a number of actions a Member State can take within the existing State aid rules to support businesses and citizens during the COVID-19 pandemic:
- Measures applicable to all companies (e.g. wage subsidies and suspensions of corporate and value added taxes) are outside of the State aid rules;
- Financial support made directly to consumers (e.g. cancelled services) also fall outside the scope of State aid control;
- On the basis of Article 107(2)(b) TFEU Member States can also compensate 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 outbreak. A recent example of this is the Commission's approval on Thursday 12 March of a DKK 91 million (€12 million) Danish aid scheme to compensate businesses forced to cancel events of more than 1000 people due to the COVID-19 restrictions. The approval came within 24 hours of the Commission receiving the notification from Denmark, which demonstrates that the Commission stands ready to act quickly to approve new State aid measures. Such swift reactions have not been seen since the banking crisis of over a decade ago; and
- The De Minimis Regulation and General Block Exemption Regulation (GBER) also offer exemptions for provisions of aid. For example GBER Article 50 already includes a provision to allow governmental authorities to create aid schemes to make good the damage arising from recognised "natural disasters", without any need to consult the European Commission first. This provision has previously been used to assist following events such as floods and earthquakes. It allows government bodies to fund up to 100% of the costs of making good the damage arising as a result of the disaster (ie. there must be a clear causal link) but must be netted off to the extent that the same damage is covered by existing insurance policies. To our knowledge this has not yet been invoked in response to a pandemic but it is surely being considered.
- Under Rescue and Restructuring State aid Guidelines, Member States can notify to the Commission aid schemes to meet acute liquidity needs and support undertakings facing financial difficulties. This is how the many cases of government support for large banks across Europe were handled at the time of the financial crisis. e.g. Northern Rock. Given the administration involved this tends to be reserved for the largest and/ or deemed most strategically important businesses only.
- Finally, notification of alternative approaches, both aid schemes and individual measures, for example against the Treaty, also remains possible.
The European Commission's announcement of the Temporary Framework offers very helpful extra flexibility to public authorities seeking to stem the negative effects of the crisis. it may be used particularly in some sectors such as aviation, transport, hospitality and tourism. We therefore expect Member States to move quickly by implementing a wide range of initiatives and adopting and notifying aid schemes under the Framework for widespread use (for example by regional and local authorities in their jurisdiction) in the coming days and weeks.
It would certainly make sense to create the broadest aid schemes the Framework allows without delay. Adopting a scheme allowing aid to be granted does not require that aid be granted (particularly if the source of budget with which to do this is unclear). Individual authorities can of course base their procedures and decisions on whether to go ahead with grants on additional criteria as they may determine.
 This is a legal test which has been a common area of difficulty for organisations awarding public funding. We can assist in providing advice as to the relevant tests and the appropriate audit trail.