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knowledge 23 March 2020 |

COVID-19: State Aid Amid the Crisis - The European Commission Acts Swiftly to Guide Member States on Support to the Economy During the Pandemic

On 19 March, the European Commission published a Temporary Framework for State aid measures to support the economy during the COVID-19 outbreak (the “Temporary COVID-19 Framework”). It outlines new temporary State aid measures which the Commission considers compatible with the internal market under Article 107(3)(b) of the Treaty on the Functioning of the European Union (“TFEU”). Such measures must be notified to the European Commission for approval, but “can be approved very rapidly upon notification”.1  

In doing so, and building on its learning from the global financial crisis, the Commission has reacted quickly to offer guidance to Member States on how to grant compatible State aid to mitigate the negative effects of the outbreak on the economy. As of 23 March, the Commission has already approved support measures from 5 Member States pursuant to the new Temporary COVID-19 Framework, in each case within 48 hours of notification.

The Temporary COVID-19 Framework is supported by the guidance in the Communication on the Coordinated economic response to the COVID-19 Outbreak, issued by the EU institutions on 13 March, which outlines the various options available to Member States outside the scope of EU State aid control and which they may put in place without the involvement of the Commission.

How can Member States legally grant support to businesses and society?

There are a number of ways that Member States, including Ireland, can legally take measures to provide support to businesses and individuals facing economic difficulty as a result of COVID-19:

1. Measures can be structured so that they do not amount to a State aid, and can be implemented immediately.

(a) Measures applicable to all businesses: For example, a State aid exists only where the State measure confers a selective advantage on a business. Measures which are of “general application” to all businesses do not grant a selective advantage and as such do not amount to State aid.  Examples of such measures include wage subsidies of general application and the suspension of corporate tax or VAT payments.

(b) Measures granted directly to consumers: EU Member States may give grants to individual consumers who may have suffered loss as a result of the pandemic, for example, consumers who are not reimbursed for their cancelled holiday plans. Only benefits or advantages granted to undertakings involved in economic activity can be a State aid.

2. Measures can be structured to fall within the existing State aid rulebook, with some approaches requiring prior notification to the Commission and others being exempt from notification and capable of immediate implementation.

The existing rulebook outlines the manner in which Member States can grant compatible State aid.

(a) Approaches requiring prior notification to and approval from the Commission.

  • Article 107(3)(c) TFEU- aid to promote the development of certain economic areas or activities. Subject to Commission approval, the State aid rules based on Article 107(3)(c) TFEU (e.g., the Rescue and Restructuring Guidelines) could be relied upon to  meet acute liquidity needs and support companies facing bankruptcy due to the COVID-19 outbreak.
  • Article 107(2)(b) TFEU- aid to compensate for damage caused by exceptional occurrences. This enables Member States, subject to Commission approval, to compensate companies for the damage cause by exceptional occurrences which are unforeseeable, significant and extraordinary. This treaty basis has previously been relied upon to grant aid to the airline industry as a result of disruption arising from 9/11 and the 2010 Icelandic volcanic ash cloud. The Commission has determined that the COVID-19 outbreak is such an exceptional circumstance.  The COVID-19 Framework suggest that, subject to approval, Member States could compensate undertakings in sectors that have been particularly hit by the crisis (transport, tourism, hospitality, culture and retail) and organisers of cancelled events.2 In fact, it has already approved a €12 million Danish aid scheme compensate the organisers of certain cancelled events.

(b) Other approaches are exempt from the prior notification requirement, and can be implemented immediately

  • De Minimis Grants: Member States could grant de minimis aid to undertakings without having to notify the Commission in advance. Pursuant to De minimis Regulation grants of up to €200,000 per undertaking over a 3 year period do not constitute aid.3 
  • General Block Exemption Regulation Aid: Member States could also structure aid to comply with the conditions in the General Block Exemption Regulation (“GBER”). The GBER sets out categories of aid that are exempted from notification to the European Commission. For example, Member States could utilise the GBER to provide aid to a pharmaceutical company researching a COVID-19 vaccine.

3. Measures can be structured to fall within the conditions outlined in the Temporary COVID-19 Framework and submitted to the Commission for approval, which should issue “very rapidly”.

The COVID-19 Framework outlines liquidity supports which Member States may grant, subject to Commission approval. We set out these supports and conditions related to them below. 

The Temporary COVID-19 Framework

The temporary measures outlined in the Temporary COVID-19 Framework are considered compatible the internal market pursuant to Article 107(3)(b) TFEU. Article 107(3)(b) permits a Member State to implement measures, subject to Commission approval, to remedy a severe disturbance in its economy. This Treaty basis is interpreted narrowly and its most notable use, until now, was during the global financial crisis.

In light of the sudden liquidity shortages facing businesses, the Commission has decided that the situation created by COVID-19 is grave enough to meet this threshold throughout the whole of the EU (just last week, the thinking was that the threshold was satisfied in respect of Italy alone). On that basis, for a limited period, the Commission considers that aid to remedy the liquidity shortages faced by undertakings, particularly SMEs, and to ensure that disruptions caused by the outbreak do not undermine their viability, can be declared compatible with the internal market.4

A notifying Member State will have to demonstrate that the proposed financial measures are “necessary, appropriate and proportionate to remedy a serious disturbance in [their] economy” and that all conditions of the Temporary COVID-19 Framework are satisfied.5  The compatible temporary measures are as follows:

(a) direct grants, repayable advances or tax advantages. A maximum amount of €800,000 (up from €500,000 in the draft framework) applies per company for urgent liquidity needs. The maximum amount is lower for the agriculture, fisheries and aquaculture sectors.6  The aid must be granted by 31 December 2020 and can be combined with the aid outlined below in (b), (c) and (e);

(b) state guarantees on investment or working capital loans. The guarantee must be granted by 31 December 2020 and be limited in duration to 6 years. Minimum guarantee premiums apply. The maximum guarantee duration is 6 years. If the loan matures after 31 December 2020, limits apply to the amount of the loan principal. Loans maturing before then can be in excess of these limits but will require justification. In addition there are limits on the size of the guarantee by reference to the loan amount (in all cases, it cannot be for the full amount of the principal);

(c) subsidised interest rate for investment or working capital loans. The loan contract must be signed by 31 December 2020 and be limited in duration to 6 years. Minimum interest rates are specified by the Commission. For loans that mature after 31 December 2020, there are limits on the loan amount. Loans maturing before then can be in excess of these limits but will require justification. To note, the same loan cannot benefit from both subsidised interest rates and a state guarantee;

(d) guarantees and loans channelled through credit institutions or other financial institutions. Where the measures at (b) and (c) are granted through financial institutions there may be an indirect aid to the financial institution. To limit undue distortions of competition, the financial intermediary must be able to demonstrate “that it operates a mechanism that ensures that the advantages are passed on to the largest extent possible to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates”. In addition, no guarantee fees may be charged when there is a legal obligation to extend the maturity of existing loans for SMEs; and

(e) short term export credit insurance. This support will be compatible with the internal market where it can be demonstrated that such cover is not available on the market.

The Commission will seek to approve aid schemes and measures submitted under the Temporary COVID-19 Framework “very rapidly”.7 Thus far, the Commission has approved State aid measures notified by five Member States pursuant to the Temporary COVID-19 Framework. The Commission approved these measures within 48 hours of notification. The majority of these measures provide loan and guarantee schemes for affected businesses, and one provides grants and loans for the production of medical devices related to the outbreak.

Conclusion

The conditions outlined in the Temporary COVID-19 Framework will be of interest not just to Member States, but also to the undertakings that are to receive aid further to the Temporary Framework. It is important to remember that, notwithstanding the extraordinary current circumstances, any aid which is granted outside of the parameters outlined above or which is misused by the beneficiary or Member State (in the sense of the Member State failing to comply with a condition imposed by the Commission), may be incompatible aid and subject to recovery.

  1. Temporary COVID-19 Framework, paragraph 16.
  2. Temporary COVID-19 Framework, paragraph 15.
  3. With certain exceptions.  Note also that the limit is €100,000 in the transport sector, €30,000 in the fisheries sector and €25,000 for agricultural businesses.
  4. Temporary COVID-19 Framework, paragraph 18.
  5. Temporary COVID-19 Framework, paragraph 19.
  6. In the agricultural, fisheries and aquacultural sectors, the limits are “EUR 120 000 per undertaking active in the fishery and aquaculture sector18 or EUR 100 000 per undertaking active in the primary production of agricultural products” Temporary COVID-19 Framework, paragraph 23.
  7. Temporary COVID-19 Framework, paragraph 16.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.