Many businesses are increasingly facing severe business disruption and/or liquidity problems as the COVID-19 outbreak spreads. Supply chains are disrupted, workforces quarantined and customer demand is falling.
In response, governments across the EU (and the UK) are pledging to do whatever it takes to keep the economy going and help business. On 19 March 2020, the EU Commission took an important step to facilitate such measures (notwithstanding the general State aid prohibition enshrined in the EU Treaties) by adopting a Temporary Framework for State aid measures relating to the COVID-19 outbreak.
The Temporary Framework recalls (1) that not all support measures will qualify as State aid, (2) other measures that do qualify as State aid may be covered by existing exemptions and approvals and (3) sets out the conditions under which the Commission will approve measures by Member States in a matter of days rather than months.
Where a Member State's COVID-19 support does not comply with the State aid rules, recipient businesses run the risk that the State aid will need to be recovered (with compound interest) for up to 10 years after having benefitted from the State aid.
1. Some COVID-19 support measures will not constitute State aid
The following categories of measures do not constitute State aid. They can be put in place and benefit the economy and businesses immediately without approval from the Commission:
- Generally applicable measures - Member States can take measures that are applicable to all companies e.g. wage subsidies, suspension of (or delay to deadlines for) payments of corporate and value added tax or social contributions.
- Financial support to consumers or public services - Member States can grant financial support directly to consumers (e.g. for cancelled services or tickets that are not reimbursed by the operators concerned) or to public health systems or other non-economic public services.
- Investments, loans and guarantees, etc. that reflect market conditions - Member States can participate in investments, provide loans or offer State guarantees at conditions and prices acceptable to private investors, lenders and guarantors. However, the burden of proof will be on the Member State and/or the recipient business. Discharging this will be relatively easy where it can be shown that private co-shareholders or investors are participating on the same terms and conditions and on an economically significant scale. Where only the State is involved, contemporaneous evidence of market terms will be required by a third party valuation or benchmarking as may be appropriate.
Other Member State support measures will very likely constitute State aid.
2. COVID-19 State aid may be exempt from notification or covered by a pre-approved aid scheme
Where COVID-19 support measures meet all the conditions of an existing exemption or are covered by and granted under a pre-approved aid scheme, recipient businesses will not be at risk of having to repay aid. However, this should be confirmed in each case because it is not always safe to rely on assurances about State aid compliance from Member States.
Aid covered by an exemption (from the requirement to obtain clearance from the Commission) - There is a range of exemptions under which COVID-19 support may be provided to businesses without approval from the Commission if all applicable conditions are met. Exemptions exist inter alia for research and development, regional investment, employment and training, services of general economic interest and de minimis aid. However, these exemptions are not specifically geared toward crisis situations and remain relatively limited in terms of maximum support that can be granted. For example, de minimis aid is limited to aid up to EUR 200,000 per undertaking in most sectors over a rolling 3-year period.
Measures under existing approvals - Existing Member States' aid schemes that have received Commission approval may also be used to counter the economic and financial impact of the COVID-19 outbreak. Examples include liquidity support for small and medium-sized companies and smaller state-owned companies. Some Member States already have such schemes in place and the Commission will work with other Member States seeking to implement such schemes or significantly increase the budget of existing schemes and specifically repurpose them as COVID-19 support.
3. Accelerated approval for COVID-19 State aid: benefits and limitations
Other COVID-19 State aid measures remain subject to the requirement of prior Commission approval. However, such measures may be eligible for rapid Commission approval:
Aid to cover COVID-19 losses - Member States can compensate businesses for loss suffered as a result of the COVID-19 outbreak, which the Commission acknowledges is an exceptional circumstance justifying such aid (Article 107(2)(b) TFEU). This includes compensation for damage to companies in sectors that have been particularly affected, e.g., transport, tourism and hospitality.
Aid to meet acute liquidity needs - Member States can help businesses to meet acute liquidity needs and support otherwise healthy businesses that now face bankruptcy due to the COVID-19 outbreak, which the Commission has accepted represents a serious disturbance to the economies of the Member States (Article 107(3)(b) TFEU).
Further, accelerated approval under the Temporary Framework is available for the following five categories of measures:
Direct grants, repayable advances and tax advantages under schemes for up to EUR 800,000 per business to address its liquidity needs provided certain conditions are met.
State guarantees for investment and working capital loans provided they meet certain conditions, including with regard to premiums, loan amounts and maximum durations, to ensure banks keep providing loans to the customers who need them.
Subsidised interest loans to help businesses cover immediate working capital and investment needs provided the loan meets certain conditions, including in relation to duration, minimum interest rates and loan caps (twice the annual wage bill, or 25 per cent of turnover, or 12 months of liquidity needs for large businesses).
Guarantees and loans channelled through credit institutions or other financial institutions: Some Member States plan to build on banks' existing lending capacities, and use them as a channel for support to businesses, in particular SMEs. The Temporary Framework clarifies that when such measures are channelled through financial institutions, they will be considered as direct aid to the institutions' customers, not to the institutions themselves.
Short-term export credit insurance: Ordinarily, marketable risks cannot be covered by export-credit insurance supported by Member States. However, as a consequence of the COVID-19 outbreak, cover for marketable risks could be temporarily unavailable. Member States will have additional flexibility to demonstrate the unavailability of cover in the private insurance market, thereby enabling short-term export credit insurance to be provided by the State where needed.
Whilst the Temporary Framework includes a number of specific conditions that must be satisfied for each type of aid measure to be approved, it will significantly assist Member States to devise aid packages with a view to obtaining a swift clearance.
It is important to note that only Member States can notify State aid measures for approval - not businesses. Nevertheless, businesses may take some comfort from the confirmation provided in the Temporary Framework that the Commission will approve and not order recovery of non-notified aid that otherwise meets the conditions of the Temporary Framework (although there remains a residual risk that a national court will have to order recovery of aid that was not notified).
Inevitably, the Commission will also receive notifications of support measures above and beyond the Temporary Framework. It will assess those directly under the provisions of the TFEU. These approvals may take longer (potentially weeks or months) and the Commission may require Member States to adjust them to keep aid proportionate and limit distortions of competition. In these circumstances, businesses should request that Member States closely involve them throughout the notification and approval process (beginning with preparing the pre-notification contacts with the Commission) to ensure that approval is obtained as quickly as possible.
4. Key take-aways
The COVID-19 Temporary Framework is significantly more generous than the one adopted to alleviate the impact of the global financial crisis. The Commission can be expected to be at least as flexible as it was during the financial crisis in helping Member States to support businesses and the economy through the COVID-19 crisis.
Whilst the Temporary Framework establishes a model for Member States to design measures that will be approved very quickly, the Commission is aware that it will also have to deal swiftly with support that will exceed the limitations of the Temporary Framework. It can only be hoped that the Temporary Framework will free the required resources for those cases.
When Member States are found to have breached the State aid rules, the aid recipients pay the price: Member States must recover the aid with compound interest. Recipients remain at risk of repayment with compound interest for 10 years after having benefitted from the aid.
Potential beneficiaries of a support measure from an EU Member State or the UK (at least through the end of 2020) should verify the State aid status of any measure from which they intend to benefit, i.e. whether it qualifies as State aid and if so whether it is exempt, approved or at least materially compliant with the Temporary Framework or other State aid rules.