European Union: State Aid And Competition | Extension Of The Temporary Framework For Aid Measures To Support The Economy

1. Preamble

On 28 January 2021, the European Commission extended the Temporary Framework for State aid measures to support the economy in the current emergency of COVID-19" (the "Temporary Framework") until 31 December 2021, at the same time increasing the aid caps of some measures to help Member States cope with the persistent economic and health crisis¹. The most significant changes relate to the increase in aid in the form of subsidies (or tax advantages) from 800 thousand to 1.8 million Euro per beneficiary undertaking and contributions in the form of support for fixed costs, from 3 to 10 million Euro, also per individual undertaking.

2. The context for the extension of the Temporary Framework

The Temporary Framework, the first version of which was adopted on 19 March 2020, provides for a series of ad hoc measures, designed to deal with the current emergency, that Member States can adopt to support their businesses.

This is a Communication from the European Commission adopted on the basis of Article 107(3)(b) of the Treaty on the Functioning of the European Union ("TFEU"), which allows aid to be granted "to remedy a serious disturbance in the economy of a Member State".²

The breadth and variety of the range of instruments contained in the Temporary Framework, as well as the gradual increase in caps, demonstrate the radical change in perspective of the European Commission, which has traditionally been wary of granting State aid to companies in difficulty.

Except for specific derogations, the undertakings benefiting from the aid measures (whether general aid schemes or individual aid schemes in favour of individual undertakings) is restricted to those which experienced difficulties after 31 December 2019, in order to exclude subsidies not related to the difficulties deriving from the Covid-19 emergency³.

3. The main measures contained in the Temporary Framework

The first version of the Temporary Framework, adopted on 19 March 2020, provided for five types of aid: (i) direct grant aid schemes (or tax advantages) up to ?800,000 per undertaking (cap recently increased to ?1.8 million); (ii) State guarantees for bank loans; (iii) soft loans; (iv) aid to banks to be channelled to customers, in particular small and medium-sized enterprises; (v) short-term export credit insurance.

The changes that have gradually taken place (no fewer than four before that of today) essentially concerned: (i) support for coronavirus-related research and development⁴; (ii) recapitalisation measures in favour of non-financial companies, both large and SMEs⁵; (iii) support for micro and small enterprises and start-ups ⁶ and, finally, iv) aid in the form of support for fixed costs⁷.

The most significant measures certainly include recapitalisation aid, which can also be granted in the form of individual aid. Mindful of the potentially restrictive effects of competition and of the disparities between different Member States that such measures may produce, the Commission has set various limits on the granting of recapitalisation aid, concerning, inter alia, conditions relating to the entry and exit of the State into the capital of companies, remuneration mechanisms as well as additional restrictions on governance (dividends, buy-back, remuneration for management) and the prohibition on cross-subsidies and acquisitions⁸.

4. The new features introduced by the Extension of 28 January 2021

In view of the continuing economic and social difficulties and the assumption of the adequacy of the Temporary Framework as a means of ensuring that national support measures effectively help companies affected by the pandemic, the Commission has therefore decided to extend the validity of the Temporary Framework, already extended to 30 June 2021, until the end of the year.

In addition, the Commission has increased the aid caps under sections 3.1 (limited aid) and 3.12 (aid in the form of support for uncovered fixed costs).

With regard to limited aid, these caps have more than doubled (taking into account the availability of de minimis aid). The new caps are (i) ?225,000 per undertaking operating in the primary production of agricultural products; (ii) ?270,000 per undertaking operating in fisheries and aquaculture and (iii) ?1.8 million per undertaking in all other sectors.

Such aid may be combined with de minimis aid of up to ?200,000 per undertaking (up to ?30,000 per undertaking in the fisheries and aquaculture sector and up to ?25,000 per undertaking in the agricultural sector) over three financial years.

In addition, for companies particularly affected by the crisis, with losses in turnover of at least 30% in the eligible period (between 1 March 2020 and 30 June 2021) compared to the same period of 2019, the State can contribute to the part of the fixed costs incurred that are not covered by revenue, for an amount up to 10 million Euro per undertaking (initially, as stated, the amount was fixed at 3 million Euro).

Furthermore, in order to encourage the choice of forms of repayable aid, the Commission has given Member States the possibility, after notifying the Commission accordingly before expiry of the Temporary Framework, of converting the forms of repayable aid granted – such as repayable advances, guarantees and loans – into other forms of aid, for example, grants. The conversion must comply with the conditions set out in section 3.1 (aid of limited amount) and be implemented by 31 December 2022 at the latest.

Finally, in view of the continuing general lack of sufficient private capacity to cover all economically justifiable risks for exports to countries on the list of countries with risks insurable on the market, the Commission has planned measures to make public short-term export credit insurance more widely available⁹.

5. The Temporary Framework does not exhaust the list of possible instruments available to Member States to support businesses

The Temporary Framework sets out the conditions under which Member States can intervene with concessions and aid, but it is the various Member States which must actually package the measures and which, in accordance with Article 108(3) TFEU, must notify them to the Commission before granting them.

States must, therefore, engineer aid measures that best meet the criteria set out by the Commission in the Temporary Framework, in order to obtain rapid authorisation from the Commission (which has informally described the measures as "plug-in measures").

However, the Temporary Framework is in addition to and does not replace the instruments already available to States for granting aid in line with European rules.

Member States could therefore seek to have aid authorised on the basis of different instruments and rules, such as, for example, Article 107(2) b TFEU), which allows the granting of aid "aid to make good the damage caused by natural disasters or exceptional occurrences".

With regard to this latter rule, the Commission acknowledged in the Temporary Framework that, in principle, the conditions may exist in the Member States for granting aid to make good the damage caused by natural disasters or exceptional occurrences and referred to certain economic sectors particularly affected by the emergency, such as tourism, transport, the hotel and catering sectors.

The peculiarity of Article 107(2) b) TFEU, a provision rarely applied in the past, is that the measures granted on this basis are considered a priori not to have a distorting effect on competition and the Commission is bound to authorise them. However, the conditions for its application are strict, since the State must demonstrate (i) the exceptional nature of the event; (ii) the damage; (ii) the causal nexus between the event and the damage.

In recent months, the Commission has shown a certain reluctance to authorise aid measures notified by Member States on this legal basis, in line with the restrictive interpretation given to this rule by the Court of Justice (applied mainly for compensation following events such as earthquakes, landslides and floods), stressing that there must be a direct link between the damage caused by the exceptional event and the State aid and that as precise an assessment as possible of the damage sustained is required (excluding, for example, possible insurance payments).¹⁰

With the extension of 28 January 2021, the Commission clarified its position by specifying that "aid granted under Article 107(2)(b) TFEU must compensate for the damage directly caused by the COVID-19 pandemic, for example, the damage directly caused by the restrictive measures that prevent de jure or de facto the beneficiary from exercising its economic activity or a specific and separable part of its activity" (point 18). Furthermore, "Article 107(2)(b) TFEU requires that there is no overcompensation. Only damage caused directly by restrictive measures can be compensated and a rigorous quantification is necessary. It is therefore important to demonstrate that the aid compensates only for damage caused directly by the measure up to the level of profits that the beneficiary could credibly have generated in the absence of the measure, for the part of its activity that sustains a reduction" (point 19).

However, there has been no shortage of authorisations: to date, the Commission has approved 36 measures on this legal basis, mainly targeting airports, airlines and event organisers.

It should be noted that although the Temporary Framework does not provide for direct aid to banks, the Commission leaves the door open to the possibility that States will grant aid to credit institutions, both in the form of extraordinary public financial support, under the conditions laid down in Directive 2014/59/EU ("BRRD) (excluding in this case a priori the need for burden sharing of shareholders and subordinated creditors) and pursuant to Article 107(2)(b) TFEU, as compensation for the direct damage sustained as a result of the Covid-19 pandemic. In the latter case, the Commission specifies that the assessment of aid will take place outside the rules on banking resolutions.

6. The current situation and future scenarios

To date, the Commission has authorised around 370 aid measures based on the Temporary Framework.

Until now, the main beneficiaries of the measures have been companies in a few Member States, particularly German, while companies in Member States with lower spending capacities are obviously disadvantaged. In terms of value, around 52% of the aid concerns Germany (compared to around 15% for Italy and 14% for France).

Also to address these asymmetries, after a long gestation period, the Parliament recently approved the Recovery and Resilience Facility, with a budget of ?672.5 billion, which provides Member States with financial support to intensify public investment and reforms after the COVID-19 crisis. This is the backbone of the Next Generation EU ("NGEU"), or Recovery Fund, the new recovery instrument that will strengthen the EU budget with funds raised on financial markets for the period 2021-2024. The latter has a total budget of 750 billion Euro (390 non-repayable grants and 360 loans).

As is well known, to benefit from the measures under the Recovery and Resilience Facility, Member States must prepare national plans defining the reform and investment programme up to 2026, including intermediate and final targets and estimated costs. At least 37% of the programme budget should support the green transition and at least 20% the digital conversion. Excluding extensions, Member States should present the plans officially by 30 April 2021.

The instrument should ensure the transition from the emergency phase, managed by each Member State according to its own economic resources, to that of reviving the EU economy as a whole, by benefiting each Member State from the vast resources agreed at EU level.

However, the measures taken under the Recovery and Resilience Facility must comply with aid rules and be notified to the Commission in advance including from this standpoint. In this regard, on 21 December 2020, the Commission published a series of guidance models covering different types of investment projects, aimed at helping Member States draw up their national recovery plans in accordance with the EU aid rules.¹¹

Footnotes

1 See Communication from the European Commission of 28 January 2021 (C(2021) 564): "Fifth amendment of the temporary framework for state aid measures to support the economy in the current COVID-19 emergency and amendment of the annex to the Communication from the Commission to the Member States on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export credit insurance"

2 In the period 2008-2015 the Commission made extensive use of the derogation from the ban on State aid under Article 107(1) TFEU to authorise State aid granted to European credit institutions during the financial crisis.

3 By way of derogation from this principle, it has been provided that aid may also be granted to micro-enterprises or small companies which were already in difficulty as at 31 December 2019, provided that they are not subject to insolvency proceedings under national law and have not received rescue aid or restructuring aid.

4 See Communication of 3 April 2020.

5 See Communication of 8 May 2020.

6 See Communication of 29 June 2020 (C(2020) 4509),

7 See Communication of 13 October 2020. The new measure must be granted by States under an aid scheme for undertakings that during the so-called "eligible period" (between 1 March 2020 and 30 June 2021), experienced a fall in turnover of at least 30% compared to the same period of 2019. In addition, with the fourth amendment to the Temporary Framework, the Commission extended for the first time the measures provided for in the Temporary Framework (until 30 June 2021) and, with regard to recapitalisation measures, until 30 September 2021,

8 As regards aid for recapitalisation of large companies, Italy, as is well known, has introduced a scheme with a total budget of ?44 billion. The measures consist of capital contributions; bonds repayable by shares; convertible bonds, subordinated debt and are administered by the ad hoc corporate vehicle "Patrimonio Rilancio", pursuant to the provisions of Article 27 of Legislative Decree No. 34/2020, under management of the Cassa Depositi e Prestiti. The Commission authorised the scheme on 17 September 2020.The Dedicated Assets operate in the form and under the conditions provided for in the Temporary Framework but may also operate under market conditions (i.e. without the intervention incorporating "State aid" pursuant to Article 107 TFEU. The interventions on the Dedicated Assets will concern companies, which: a) have their registered office in Italy; b) do not operate in the banking, financial or insurance sector; c) have annual turnover in excess of fifty million Euro.

9 The new measure provides for an amendment of the list of countries with risks insurable on the market set out in the Annex to the Communication on short-term export credit insurance, and an extension until 31 December 2021 of the temporary exclusion of all countries from the list of countries "with risks insurable on the market" set out in that Annex.

10 See for example the judgment of the Court of Justice in Case C-278/00, Greece v. Commission.

11 https://ec.europa.eu/commission/presscorner/detail/it/ip_20_2494

Originally Published by NCTM, March 2021

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