COVID-19 Update – State Aid and the COVID-19 Pandemic

This article was written by Dr Annalies Muscat and Dr Laura Spiteri

“State aid” is a form of an advantage given to an undertaking by a national public authority. State aid is generally prohibited by EU State Aid rules, save in certain limited circumstances.

One of the exceptions to the general prohibition with respect to granting of aid by States is contained in Article 107(3)(b) of the Treaty on the Functioning of the European Union (“TFEU”) which provides that State aid to remedy a serious disturbance in the EU’s economy is aid that may be considered compatible with the internal market. To this end, on 16 March 2020, the European Commission (the ‘Commission’) sent the Member States of the EU a draft proposal for a State Aid Temporary Framework (the ‘Framework’) for consultation. The draft proposal has been adopted and the Framework was put into effect on 19 March 2020.

The Framework details the conditions under which aid granted to undertakings in the wake of the Covid-19 pandemic will be considered to be compatible with the internal market and therefore permissible under Article 107(3)(b) TFEU.

The framework effectively allows member States to ensure that businesses will have the necessary liquidity to continue operating and to provide support to businesses that require it. Five types of State aid have been outlined in the Framework:

i. Direct grants, repayable advances, tax advantage or payments advantages.

Member States can set up schemes that grant a company up to €800,000 to help it address its urgent liquidity needs. Such aid can only be granted on the basis of a scheme with an estimated budget. Other conditions also apply and there are additional conditions for the agricultural and the fisheries and agricultural sectors, which are allowed a maximum of €100,000 and €120,000 per undertaking respectively;

ii. Public guarantees on loans. These guarantees may be granted to ensure that banks keep providing loans to customers that need them, provided they are for a limited period and loan amount. The Framework lays down a number of conditions, including the guarantee premiums and the amount of the principal loan amount which depends on whether the loan will mature before 31 December 2020 or after the said date. The duration of the guarantee has to be limited to 6 years;

iii. Subsidised public loans to undertakings. This involves subsidised interest rates for a limited period and loan amount. Again, a number of conditions apply, with loans being limited toa maximum of6 years;

iv. Public guarantees and loans directly to undertakings or channelled through credit institutions or other financial institutions. This should also aid undertakings with sudden liquidity shortage. When channelled through financial intermediaries, credit and financial institutions may indirectly benefit from such a scheme, however, such advantage cannot be considered as aid as it does not have the objective to preserve or restore the viability, liquidity or solvency of the credit institution in question. This advantage is to be passed on as much as possible to the financial beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums and lower interest rates;

v. Short term export credit insurance. Member States can provide this if it can be shown that there is a lack of cover for marketable risks.

Undertakings that may be eligible for State aid in terms of the Framework are those that entered into difficulty after 31 December 2019. This ensures that such aid is only granted to those companies regarding issues related to the COVID-19 outbreak. Furthermore, the Framework will cease to apply after 31 December 2020, although the Commission will be reviewing the Framework before then. Although aid granted in line with the Framework still has to be notified to the Commission, the Commission has committed to a fast response on such notifications.

Aside from the Framework, Member States may also make use of the already existing rules when granting aid which is permissible under the EU State aid rules. For instance, Article 107(3)(b) TFEU may be used in conjunction with the Rescue and Restructuring State Aid Guidelinesin the design of permissible State aid to aid businesses hit by the pandemic.

Another exception to the prohibition on State aid is found in Article 107(2)(b)TFEU. This provides that aid to make good the damage caused by natural disasters or exceptional occurrences is compatible with the internal market. TheCommissionhas recognised that the Covid-19 pandemic is an “exceptional occurrence” and has already approved aid being granted by Denmark under a scheme designed to compensate undertakings for cancelled events due to the Covid-19 outbreak. The Commission has provided a template application for the Member States to ensure a fast response to aid notified under Article 107(2)(b) in the context of the current pandemic.

Finally, Member States are free to grant individual aid or grant schemes which comply with the State aid rules, for instance where they comply with the General Block Exemption Regulation or the Regulation on “De minimis” aid. The Framework simply lays down criteria for aid schemes which, if met, mean that the aid granted by the State in question will be lawful.