European State Aid Law: A Commentary 9781472561749, 9781849461900, 9781782251064

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Foreword Good things come to those who wait. It took us a lot of time (much more than we thought) to arrive at this moment – the moment where we can finally publish this book on the modern European State aid law. In its preparation, we have been guided by the objective to provide legal scholars and professionals with a comprehensive analysis of European State aid law. The subject of the book is truly European; there is no other legal discipline, which is more European than competition and State aid law, and there is no discipline that has contributed more to implementing the European Single Market than the European State aid law. Today we look back on more than 50 years of applying Articles 107 et seq. of the Treaty on the Functioning of the European Union (TFEU) and their predecessors. Through the years, the scope of these Articles has been extended more and more. The European Union constantly enhances its State aid law through new Regulations and Guidelines (just recently through the General Block Exemption Regulation of 17th June 2014; the Environmental and Energy Aid Guidelines of 28th June 2014, the Risk Finance Guidelines of 22nd January 2014; and the Procedural Regulation of 22nd July 2013). At the same time, we observe how the European Court of Justice acts as a critical guardian of the rule of law. The Commentary shall give clear answers to questions arising from the application of EU State aid law and provide a reliable documentation and assessment of the relevant decisions of the EU Commission and the European Court of Justice. The Commentary contains explanations on all relevant provisions and takes into account the present change from a strictly legal to a more economic based application of the EU State aid law, aiming at limiting distortions of competition more effectively and safeguarding the European single market. The Commentary reflects this new approach through a comprehensive introduction to the economic foundations of modern State aid law by distinguished experts. In addition, a number of authors have systematically included aspects of social and ecologic welfare into their interpretation of the law. Other authors substantiate their reasoning by referring to economic methods. The Commentary further stands out from similar books with its detailed introduction to common terms of EU State aid law, which made it possible to keep the article-by-article annotations free from lengthy and repetitive explanations. This book is the first English edition. More than five years ago, we started working on the German edition of the Commentary entitled “Mu¨nchener Kommentar zum Deutschen und Europa¨ischen Wettbewerbsrecht, Band 3: Beihilfen- und Vergaberecht” and published by C.H. Beck publishing house. All authors of the Commentary have subjected themselves to the systematic method of explaining legal provisions not in form of a mere additive compilation of separate cases, but by taking into account the provisions’ purposes and by interpreting them according to clear and consistent general principles. The aim was to embed the relevant State aid cases into the broader context of the European competition and internal market law. The editors and authors strove for a book that preserves the law of competition and State aid as a unity of coherent and transparent principles. We are anxious to see how our Commentary – bringing together a precise analysis of cases and a scholarly interpretation of legal provisions as a useful alternative to a typical Anglo-American text book – will be received by legal professionals in the European Union and worldwide. When we started to plan this book with Gu¨nter Hirsch, a former judge of the European Court of Justice and President of the German Bundesgerichtshof, we were V

Foreword not aware of how adventurous it would be to edit a commentary in English with so many authors from different legal professions. We have to thank Ms. Baker, Mr. Scholz and Ms. Mendelsohn for their thorough and thorny revisions of the English texts. Thank you very much for your great work. In addition, we thank everyone who participated in this adventure, particularly Mr. Warth from the C.H. Beck publishing house, who had the courage and willingness to escort our journey with patience. Lord Halifax said about the legal profession: “If laws could speak for themselves, they would complain of the lawyers in the first place”. We hope that our work would prevail under the critical view of the EU State aid law if it could actually speak for itself. Berlin, Brussels, October 2015 Frank Montag

VI

Franz Ju¨rgen Sa¨cker

List of authors Christoph ARHOLD

Rechtsanwalt with White & Case in Brussels and Berlin

Part II B I, II, IV; Part VI C; Part VIII D

Charlotte DUPUIS

European Commission, DG for Competition, Brussels

Part VIII M

Birgit HASLINGER

Dr. jur., LL.M., Assistant Professor for Public International Law at the Johannes Kepler Universita¨t, Linz

Part IV Art. 36–50; Part XI

Thomas JAEGER

Dr. jur., LL.M., Professor of Law at the University of Vienna

Part VII

Thomas JESTAEDT

Dr. jur., LL.M., Rechtsanwalt and Partner with Jones Day in Brussels

Part IV Art. 1–12, 17–20, 31– 35, 57–59 and Annexes I and II

Ju¨rgen KESSLER

Dr. jur., Professor of Law at the HTW University of Applied Sciences, Berlin; Honorary Professor at the Technische Universita¨t Berlin and the Kuban University Krasnodar

Part VIII N

Michael KNOBLICH

State Ministry for Economic Affairs, Labour and Transport of the State of Saxony, Dresden

Part IV Art. 13–16, 56

¨ STER Thomas KO

Dr. jur., LL.M., European Commission, DG for Competition, Brussels

Part X Art. 7–30

Viktor KREUSCHITZ

Dr. jur., Judge at the General Court of the European Union, Luxembourg

Part II D I, II

Max LIENEMEYER

Dr. jur., LL.M., European Commission, DG for Competition, Brussels

Part VIII M

Michael NIEJAHR

Head of Unit, European Commission, Directorate General for Agriculture and Rural Development, Brussels

Part VIII C

Nina F. NIEJAHR

LL.M., Rechtsanwalt with Baker & McKenzie in Brussels

Part XII

´N ˜ EZ MU ¨ LLER Marco NU

Dr. jur., LL.M., Rechtsanwalt and Partner with Latham & Watkins LLP in Hamburg and Brussels

Part VI D-F; Part VIII F-J

Andreas ROSENFELD

Dr. jur., Rechtsanwalt and Partner with Redeker Sellner Dahs in Berlin and Brussels

Part IV Art. 52; Part VIII A, B, E

XXVII

List of authors ¨ CKER Franz Ju¨rgen SA

Dr. jur., Dr. rer. pol., Dr. h.c. mult., Professor Emeriturs of the Freie Universita¨t in Berlin; Executive Director of the Institute of Energy and Regulatory Law in Berlin

Part I A; Part II C I-IV; Part IV Art. 51

Tibor SCHARF

European Commission, Brussels

Part IV Art. 53–55; Part VIII O

¨ TTE Michael SCHU

Dr. jur., Rechtsanwalt in Brussels

Part II A III; Part V; Part VIII K, L

Andreas SCHWAB

Dr. jur., LL.M., MEP, Strasbourg and Brussels

Part II A I, II

Ulrich SCHWALBE

Dr. rer. pol., Professor for Microeconomics and Industrial Organisation at the University of Hohenheim, Stuttgart

Part I B

Ulrich SOLTE´SZ

Dr. jur., LL.M., Rechtsanwalt and Partner with Gleiss Lutz in Brussels

Part II B III, V, VI

Bernhard von WENDLAND

European Commission, DG for Competition, Brussels

Part IV Art. 21–30

Philipp WERNER

‘LL.M., Rechtsanwalt and Partner with Jones Day in Brussels

Part IX; Part X Art. 1–6b

Jo¨rg WITTING

Dr. jur., Rechtsanwalt and Partner with Bird&Bird in Du¨sseldorf

Part VI A, B

Maik WOLF

Dr. jur., Professor for Civil and IP Law at the Freie Universita¨t Berlin

Part III

XXVIII

Abbreviations A a. ................................................... a/m ............................................... ABER ........................................... acc. ............................................... AcP .............................................. admin. ......................................... adv. .............................................. AFDI ............................................ AfP ............................................... AG ................................................ AgrarR ......................................... AJCL ............................................ AktG ............................................ alt. ................................................ Ann.eur. ...................................... AO ............................................... Ao¨R .............................................. approx. ........................................ ARE .............................................

and above-mentioned Agricultural Block Exemption Regulation according to Archiv fu¨r die civilistische Praxis (journal) administration adverse Annuaire Français de Droit International (Yearbook) Archiv fu¨r Presserecht (journal) Aktiengesellschaft Agrarrecht (journal) American Journal of Comparative Law Aktiengesetz (journal) alternative Annuaire europe´en (Yearbook) Abgabenordnung (DE: Tax Procedure Law) Archiv des o¨ ffentlichen Rechts (journal) approximately Arbeitsgemeinschaft Regionaler Energieversorgungsunternehmen (Working group of regional energy suppliers) arg. ............................................... argumentum Art. ............................................... article ASCM .......................................... Agreement on Subsidies and Countervailing Measures AuR .............................................. AusfVO ....................................... Ausfu¨hrungsverordnung (implementing regulation) AWD ........................................... Außenwirtschaftsdienst des Betriebs-Beraters (journal) AWG ........................................... Außenwirtschaftsgesetz (DE: Foreign Trade Act) AWR ............................................ Archiv fu¨r Wettbewerbsrecht (journal) AWVO ........................................ Außenwirtschaftsverordnung (DE: Foreign Trade Regulations) AZO ............................................. Allgemeine Zollordnung (DE: General Customs Code) BAFA ........................................... Archiv fu¨r Wettbewerbsrecht (journal) BAG ............................................. Bundesarbeitsgericht (DE: Federal Labour Court) BAnz. ........................................... Bundesanzeiger (DE: Federal Gazette) B Baumbach/Hefermehl, WZG . Baumbach/Hefermehl, Warenzeichenrecht, 12 th edit. 1985 Baumbach/Ko¨hler/ ................... Baumbach/Ko¨hler/Bornkamm, Gesetz gegen den unlauteren Wettbewerb, 26th edit. 2008 BauR ............................................ Zeitschrift fu¨r das gesamte o¨ffentliche und private Baurecht (journal) BaWu¨ .......................................... Baden-Wu¨rttemberg BayObLG .................................... Bayerisches Oberstes Landesgericht (DE: former Bavarian Supreme Court) BayVBl ........................................ Bayerische Verwaltungsbla¨tter (journal) BB ................................................. Der Betriebs-Berater (journal) BBauG ......................................... Bundesbaugesetz (DE: Federal Building Act) BDI .............................................. Bundesverband der Deutschen Industrie (Federation of German Industry) Bechtold ...................................... Bechtold, Kartellgesetz, Gesetz gegen Wettbewerbsbeschra¨nkungen, Kommentar, 5th edit. 2008 BeckVOB-Komm/author ........ Motzke/Pietzcker/Prieß, Beck’scher VOB-Kommentar, Teil A, 2001 BER .............................................. Block Exemption Regulation BGB ............................................. Bu¨rgerliches Gesetzbuch (DE: Civil Code) BGBl. ........................................... Bundesgesetzblatt (DE: Federal Law Gazette) BGH ............................................. Bundesgerichtshof (DE: Federal Supreme Court) BGHZ .......................................... Entscheidungen des Bundesgerichtshofs in Zivilsachen (DE: Decisions of the Federal Supreme Court in civil matters) BGW ............................................ Bundesverband der deutschen Gas- and Wasserwirtschaft (DE: Federal Association of German Gas and Water Industry)

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Abbreviations BKartA ........................................ Bundeskartellamt (DE: Federal Cartel Office) BMJ .............................................. Bundesminister(ium) der Justiz (DE: Federal Ministry of Justice) BMWi/BMWA .......................... Bundesministerium fu¨r Wirtschaft und Arbeit (DE: Federal Ministry of Economics and Labour) bn ................................................. billion Boesen ......................................... Boesen, Kommentar zum Vergaberecht, 2 nd edit. 2002 Bornkamm ................................. BRat ............................................. Bundesrat (DE: Upper house of the German Parliament) BR-Drucks. ................................. Drucksachen des Deutschen Bundesrates (DE: Bundesrat printed paper BReg ............................................ Bundesregierung (DE: Federal Government) brit. .............................................. british BR-Prot. ...................................... Protokolle des Deutschen Bundesrates (DE: Official records of the German Bundesrat) BSG .............................................. Bundessozialgericht (DE: Federal Social Court) BT ................................................ Bundestag (DE: Federal Parliament) BT-Drucks. ................................. Drucksachen des Deutschen Bundestages (DE: Bundestag printed paper) BT-Prot. ...................................... Protokolle des Deutschen Bundestages (DE: Official Records of the German Bundestag) Bull. .............................................. Bulletin of the European Union BverfG ......................................... Bundesverfassungsgericht (DE: Federal Constitutional Court) BVerfGE ..................................... Entscheidungen des Bundesverfassungsgerichts (DE: Decisions of the Federal Constitutional Court) BVerwG ...................................... Bundesverwaltungsgericht (DE: Federal Administrative Court) BVerwGE .................................... Entscheidungen des Bundesverwaltungsgerichts (DE: Decisions of the Federal Administrative Court) BWGZ ......................................... Die Gem,inde(journal) BYIL ............................................ British Yearbook of International Law Byok/Jaeger/author .................. Byok/Jaeger, Kommentar zum Vergaberecht, 2 nd edit. 2005 C Calliess/Ruffert/author ............ CC ................................................ CCS .............................................. cf. .................................................. CFI ............................................... CFSP ............................................ CGE ............................................. Ch. ................................................ CIRR ............................................ CJEU ............................................ CMLR .......................................... CMLRev ...................................... col. ................................................ COM ............................................ Com. ............................................ com. ............................................. Comm. ........................................ Competition Policy Newsletter ................................................. conc. ............................................ conf. ............................................. cont. ............................................. CoR .............................................. CPA ............................................. CPC ............................................. CPR ..............................................

Calliess/Ruffert (ed.), Kommentar zum EU-/EG-Vertrag, 3rd edit. 2007 Code Civil Carbon Capture and Storage compare European Court of First Instance Common Foreign and Security Policy Compuatble General Equilibrium Models Chapter Commercial Interest Reference Rate Court of Justice of the European Union Common Market Law Reports Common Market Law Review column Documents of the European Commission EuropeanCommission comment Communication Competition Policy Newsletter (journal)

concerning conference disputed; contested Committee of the Regions Classification of Products According to Activities Central Product Classification Common Provisions Regulation; Committee of the Permanent Representatives of the Member States CPV ............................................. Common Procurement Vocabulary CSSE ............................................ Conference on Security and Safety in Europe D d.o. ............................................... dissenting opinion Dauses/author ........................... Dauses (ed.), Handbuch des EU-Wirtschaftsrechts (loose-leaf 2009)

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Abbreviations DB ................................................ dec. ............................................... def. ............................................... Dep(t) .......................................... ders. ............................................. DG ............................................... DIHT ...........................................

DVBl. ........................................... DVO ............................................ DW .............................................. DZWir .........................................

Der Betrieb (journal) decision defendant department idem Directorate-General Deutscher Industrie- und Handelstag (Association of German Chambers of Industry and Commerce) Deutsche Industrienorm (German industry standards) Directive dissenting dissertation Deutsche Notar Zeitschrift (journal) document Die o¨ ffentliche Verwaltung (journal) Dreher/Stockmann, Kartellvergaberecht, 2008 Deutsche Richterzeitung (journal) Drucksache (printed paper) Deutsche Rechtszeitschrift (journal) Deutsche Steuerzeitung (journal) Deutscher Verdingungsausschuss fu¨r Bauleistungen (German committee on contracting rules for award of public works contracts) Deutscher Verdingungsausschuss fu¨r Leistungen ausgenommen Bauleistungen (German committee on contracting rules for services other than pubic works contracts) Deutsches Verwaltungsblatt (journal) Durchfu¨hrungsverordnung (implementing regulation) Der Wettbewerb (journal) Deutsche Zeitschrift fu¨r Wirtschaftsrecht (journal)

E e. g. ............................................... e. V. .............................................. EAEC ........................................... EAEC Treaty ............................. EAFRD ........................................ EAGF ........................................... EBITDA ...................................... EC ................................................ ECB .............................................. ECHR .......................................... ECJ ............................................... ECLR ........................................... EComHR .................................... EConvHR ................................... ECR .............................................. ECSC ........................................... ECSC Treaty .............................. ed., eds; ed. ................................. EDF .............................................. edn(s); edit. ................................ EEA .............................................. EEC .............................................. EEC Treaty; TEEC ................... EEG .............................................. EESC ............................................ EFTA ........................................... EGTC .......................................... EIB ............................................... EJIL .............................................. ELJ ............................................... ELRev ..........................................

for example eingetragener Verein (DE: Incorporated society) European Atomic Energy Community Treaty Establishing the European Atomic Energy Community European Agricultural Fund for Rural Development European Agricultural Guarantee Fund earnings before interest, taxes, depreciation and amortization Treaty Establishing the European Community European Central Bank European Court of Human Rights European Court of Justice European Competition Law Review European Commission of Human Rights European Convention of Human Rights European Court Report European Coal and Steel Community Treaty Establishing the European Coal and Steel Community editor; edited Estonian Development Fund edition European Economic Area European Economic Community Treaty Establishing the European Economic Community Erneuerbare Energien Gesetz (DE: Renewable Energy Sources Act) European Economic and Social Committee European Free Trade Association European Grouping of Territorial Cooperation European Investment Bank European Journal of International Law European Law Journal European Law Review

DIN .............................................. Dir. ............................................... diss. .............................................. Diss. ............................................. DNotZ ......................................... doc. .............................................. ¨ V ............................................ DO Dreher/Stockmann ................... DRiZ ............................................ Drucks. ........................................ DRZ ............................................. DStZ ............................................ DVA ............................................ DVAL ..........................................

XXXI

Abbreviations EnWG ......................................... Gesetz u¨ber die Elektrizita¨ts- und Gasversorgung – Energiewirtschaftsgesetz (German Act on Electricity and Gas Supply) EP ................................................. European Parliament EPL .............................................. European Public Law ERDF ........................................... European Regional Development Fund ESC .............................................. Electricity Supply Companies ESF ............................................... European Social Fund esp. ............................................... especially EStAL .......................................... European State Aid Law Quarterly EStG ............................................. Einkommensteuergesetz (DE: Income Tax Act) et seq. .......................................... and the following ETC .............................................. European Territorial Cooperation etc. ................................................ et cetera ETS .............................................. Emission Trading System EU ................................................ European Union EU Treaty; TEU ........................ Treaty of the European Union EUK ............................................. Europa kompakt (journal) EuR .............................................. Europarecht (Zeitschrift) EUR ............................................. Euro EURATOM ................................ European Atomic Energy Community EUROSTAT ............................... DG responsible for statistical information on the EU EuVR ........................................... Europa¨ isches Vergaberecht (continued as “Vergaberecht”) EuYB ........................................... European Yearbook EuZW .......................................... Europa¨ ische Zeitschrift fu¨r Wirtschaftsrecht EW ............................................... Elektrizita¨tswirtschaft EWiR ........................................... Entscheidungen zum Wirtschaftsrecht EWS ............................................. Europa¨ isches Wirtschafts- und Steuerrecht ex. ................................................. example EzEG-Vergaberecht .................. Entscheidungssammlung zum Europa¨ ischen Vergaberecht (eds.: Fischer/ Noch) F FAO ............................................. FAZ .............................................. Fed. .............................................. FIW .............................................. FIW-Schriftenreihe .................. FK/author ................................... fn. ................................................. FRG .............................................. FS ................................................. G GATS ........................................... GATT .......................................... Gaz. .............................................. GBER ........................................... GBl. .............................................. GbR .............................................. GDP ............................................. Geiger, EUV/EGV .................... GemHVO ................................... GemS ........................................... GewA ........................................... GewO .......................................... GG ............................................... GK/author .................................. GKG ............................................ GmbHG ......................................

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Food and Agriculture Organization Frankfurter Allgemeine Zeitung (German newspaper) Federal Forschungsinstitut fu¨r Wirtschaftsverfassung und Wettbewerb e. V., Ko¨ln Schriftenreihe des Forschungsinstituts fu¨r Wirtschaftsverfassung und Wettbewerb e. V., Ko¨ln (Series of monographs) Helmut Glassen (ed.), Frankfurter Kommentar zum Kartellrecht, looseleaf footnote Federal Republic of Germany Festschrift (liber amicorum) General Agreement on Trade in Services General Agreement on Trade and Tariffs Gazette General Blcok Exemption Regulation Gesetzblatt (DE: Law Gazette) Gesellschaft bu¨rgerlichen Rechts (DE: Private Partnership under the Civil Code) Gross Domestic Product Geiger, EUV/EGV, 5 th edit. 2004 Gemeindehaushaltsverordnung (DE: Communal Budgets Act) Gemeinsamer Senat (DE: Joint senates of German federal courts) Gewerbearchiv (jornal) Gewerbeordnung (DE: Trade, Commerce and Industry Regulation Act) Grundgesetz fu¨r die Bundesrepublik Deutschland (German Constitution) Mu¨ller-Henneberg/Schwartz (ed.), Gemeinschaftskommentar, Kommentar zum GWB, 5th edit. 1999 et seqq. Gerichtskostengesetz (DE: Court Fees Act) Gesetz betreffend die Gesellschaften mit beschra¨nkter Haftung (DE: Limited Liability Companies Act)

Abbreviations GmS-OGB .................................. Gemeinsamer Senat der obersten Gerichtsho¨ fe des Bundes (DE: Joint Senates of the Federal Supreme Courts of Germany) GO ............................................... Gescha¨ftsordnung (Rules of procedure) Go¨hler ......................................... Go¨ hler, Gesetz u¨ber Ordnungswidrigkeiten, 14th edit. 2006 GPA ............................................. Agreement on Government Procurement GPC ............................................. Government Procurement Code Grabitz/Hilf/author .................. Grabitz/Hilf, Das Recht der Europa¨ ischen Union, looseleaf GrS ............................................... Großer Senat (DE: Enlarged senate) Gruber ......................................... Gruber, Europa¨isches Vergaberecht, 2005 GRUR .......................................... Gewerblicher Rechtsschutz und Urheberrecht (journal) GTC ............................................. General Terms and Conditions GVBl. ........................................... Gesetz- und Verordnungsblatt (DE: Law gazettes of individual States) GWB ............................................ Gesetz gegen Wettbewerbsbeschra¨nkungen (DE: Law Against Restraints on Competition) GYIL ............................................ German Yearbook of International Law H Hailbronner/Klein/Magiera/ Mu¨ller-Graff/author ................. Heidenhain/author ................... Heiermann/Riedl/author ......... Hertwig ....................................... HGB ............................................. HGrG .......................................... HHI ............................................. HICOG ....................................... HOAI .......................................... I I. Schmidt ................................... i.a. ................................................. i.d. ................................................ i. e. ................................................ i.g. ................................................. Ibid. .............................................. ibid; loc. cit; op. cit. ................. ICLQ ............................................ id. ................................................. IHK .............................................. IJLBE ........................................... ILA ............................................... IMF .............................................. Immenga/Mestma¨cker/author EG-WettbR ................................ Immenga/Mestma¨cker/author GWB ............................................ Ingenstau/Korbion ................... IP .................................................. IRR ............................................... ISM .............................................. IStR ..............................................

Hailbronner/Klein/Magiera/Mu¨ller-Graff, Handkommentar zum Vertrag u¨ber die Europa¨ische Union (EUV/EGV), looseleaf since 1991 Heidenhain (Hrsg.), Handbuch des Europa¨ ischen Beihilfenrechts, 2003 Heiermann/Riedl/Rusam, Handkommentar zur VOB, Teile A and B, 11 th edit. 2008 Hertwig, Praxis der o¨ ffentlichen Auftragsvergabe, 2000 Handelsgesetzbuch (DE: Commercial Code) Haushaltsgrundsa¨tzegesetz (DE: Law on Budgetary Procedures) Herfindahl-Hirschman-Index Allied High Commission; High Commission for Occupied Germany Verordnung u¨ber die Honorare fu¨r Leistungen der Architekten und Ingenieure (DE: Fees Order for Architects and Engineers) Ingo Schmidt, Wettbewerbspolitik und Kartellrecht, 8 th edit. 2005 among other things; inter alia the same, idem id est in general ibidem ibidem; loco citato; the cited International Comparative Law Quarterly the same DE: Chamber for Industry and Commerce International Journal of Law in the Built Society International Law Association International Monetary Fund Immenga/Mestma¨cker (ed.), EG-Wettbewerbsrecht Kommentar, I und II, 2007 Immenga/Mestma¨cker (ed.), Kommentar zum Gesetz gegen Wettbewerbsbeschra¨nkungen (GWB), 3th edit. 2001 Ingenstau/Korbion, VOB-Kommentar, Teile A und B, 15 th edit. 2004 EU Press Release Internal Rate of Return International Safety Management Internationales Steuerrecht (journal)

J JA ................................................. Juristische Arbeitsbla¨tter (journal) Jarass/Pieroth ............................. Jarass/Pieroth, Grundgesetz fu¨r die Bundesrepublik Deutschland, Kommentar, 9th edit. 2007 JBl. ................................................ Juristische Bla¨tter (journal) JMBl. ............................................ Justizministerialblatt (DE: Gazette of the Minister of Justice) JR .................................................. Juristische Rundschau (journal) Jura .............................................. Juristische Ausbildung (journal) JuS ................................................ Juristische Schulung (journal)

XXXIII

Abbreviations JW ................................................ Juristische Wochenschrift (journal) JZ .................................................. Juristenzeitung (journal) K KET .............................................. KG ................................................ KGaA ........................................... Koenig/ ....................................... Koenig/Roth/Scho¨n/author .... KostRMoG ................................. Kulartz/Kus/Portz/author .......

Key Enabling Technology Kammergericht (Berlin Court of Appeal) Kommanditgesellschaft auf Aktien (DE: Partnership limited by shares) Koenig/Ku¨hling/Ritter, EG-Beihilfenrecht, 2 nd edit. 2005 Koenig/Roth/Scho¨n (Ed.), Aktuelle Fragen des EG-Beihilfenrechts, 2001 Kostenrechtsmodernisierungsgesetz (DE: Law amending the law of costs) Kulartz/Kus/Portz, Kommentar zum GWB-Vergaberecht, 2006

L L.L. ............................................... Looseleaf edition Langen/Bunte/author ............... Langen/Bunte (Ed.), Kommentar zum deutschen und europa¨ ischen Kartellrecht, 10th edit. 2006 (Vol. 1: Deutsches Kartellrecht; Vol. 2: Europa¨isches Kartellrecht) Lenz EG-Handbuch ................. Lenz, EG-Handbuch, Recht im Binnenmarkt, 2 th edit. 1994 LG ................................................ Landgericht (DE: State Civil Court of first instance) LHO ............................................. Landeshaushaltsordnung (DE: State Budget Act) lit. ................................................. letter LKV ............................................. Landes- und Kommunalrecht (journal) LM ............................................... Lindenmaier, Mo¨hring et.al., Nachschlagewerk des Bundesberichtshofs Loewenheim/Meessen/ Loewenheim/Meessen/Riesenkampff (Ed.), Kartellrecht, 2nd edit. 2009 Riesenkampff/author ............... LPG .............................................. Landespressegesetz (DE: State Press Law) M MBl.; MinBl. .............................. MDR ............................................ MEIT ........................................... MEOT ......................................... Mestma¨cker/Schweitzer ........... Mio. ............................................. MJ ................................................ MK ............................................... MLC ............................................ MNo.; mn. .................................. Mu¨ller/author ............................ Mu¨nchHdbGesR/author ......... Mu¨nchKommAktG/author .... Mu¨nchKommBGB/author ...... Mu¨nchKommEG-WettbR ...... Mu¨nchKommHGB/ ................. Mu¨nchKommWettbR GWB .. Mu¨nchKommZPO/ .................. MuR ............................................. N NdsRpfl. ...................................... NGA ............................................ NGO ............................................ NIMEXE ..................................... NJW ............................................. NJW-RR ..................................... NJW-WettbR ............................. NL-BzAR ....................................

XXXIV

Ministerialblatt (DE: Gazette of a ministry) Monatsschrift fu¨r Deutsches Recht (journal) Market Economy Investor Test Market Economy Operator Test Mestma¨cker/Schweitzer, Europa¨isches Wettbewerbsrecht, 2nd edit. 2004 Million Maastricht Journal of European and Comparative Law Monopolkommission (DE: Monopolies Commission) Maritime Labour Convention margin number Mu¨ller/Giessler/Scholz, Wirtschaftskommentar: Kommentar zum Gesetz gegen Wettbewerbsbeschra¨nkungen (Kartellgesetz), 4th edit. 1981 Mu¨nchener Handbuch des Gesellschaftsrechts, I bis IV, 4th edit. 1991 et seq.; I to V, 3rd edit. 2006 et seqq. Goette/Habersack (eds.), Mu¨nchener Kommentar zum Aktiengesetz, 3rd edit 2008 Rebmann/Sa¨cker/Rixecker (eds.), Mu¨nchener Kommentar zum Bu¨rgerlichen Gesetzbuch, 5th edit. 2006 et seqq. Mu¨nchener Kommentar zum Wettbewerbsrecht Bd. 1 K. Schmidt, Mu¨nchener Kommentar zum Handelsgesetzbuch, 2nd edit. 2006 et seqq. Mu¨nchener Kommentar zum Wettbewerbsrecht Bd. 2 Lu¨ke/Wax (eds.), Mu¨nchener Kommentar zur Zivilprozeßordnung mit Gerichtsverfassungsgesetz und Nebengesetzen, 3 Bde., 2nd edit. 2000 et seq. Medien und Recht (journal) Niedersa¨chsische Rechtspflege (journal) Next Generation Access Non-governmental Organization(s) The nomenclature of goods for the external trade statistics of the EC and of trade between the Member States Neue Juristische Wochenschrift (journal) NJW-Rechtsprechungs-Report, Zivilrecht (journal) NJW-Entscheidungsdienst Wettbewerbsrecht (journal) Briefe zum Agrarrecht (journal)

Abbreviations no./nos ........................................ number/numbers Noch ............................................ Noch, Vergaberecht kompakt: Verfahrensablauf und Entscheidungspraxis, 4th edit. 2008 NPV ............................................. Net Present Value NRP ............................................. National Restructuring Programme NRW ........................................... Nordrhein-Westfalen (DE: State of Northrhine-Westfalia) NUTS .......................................... Common Classification of Territorial Units for Statistics NVersZ ....................................... Neue Zeitschrift fu¨r Versicherungsrecht (journal) NVwZ .......................................... Neue Zeitschrift fu¨r Verwaltungsrecht (journal) NVwZ-RR .................................. NVwZ-Rechtsprechungs-Report (journal) NZA ............................................. Neue Zeitung fu¨r Arbeits- und Sozialrecht (journal) NZBau ......................................... Neue Zeitschrift fu¨r Bau- und Vergaberecht (journal) NZM ............................................ Neue Zeitschrift fu¨r Miet- und Wohnungsrecht (journal) NZS .............................................. Neue Zeitschrift fu¨r Sozialrecht (journal) O ObG ............................................. OECD .......................................... OECD Journal of Competition Law and Policy ................. OGH ............................................ OHG ............................................ OJ ................................................. OJ ECSC ..................................... OLG ............................................. ORDO .........................................

Obergericht (superior court) Organisation for Economic Co-operation and Development OECD Journal of Competition Law and Policy (journal)

Oberster Gerichtshof (Austrian Supreme Court) Offene Handelsgesellschaft (DE: Commercial partnership) Official Journal of the European Union Official Journal of the European Coal and Steel Community Oberlandesgericht (DE: State court of appeal) ORDO, Jahrbuch fu¨r die Ordnung von Wirtschaft und Gesellschaft (yearbook) OVG ............................................ Oberverwaltungsgericht (DE: State administrative court of appeal) OWiG .......................................... Gesetz u¨ber Ordnungswidrigkeiten (DE: Administrative Offence Act) ¨ ZW ........................................... O¨ sterreichische Zeitschrift fu¨r Wirtschaftsrecht O

P p.,pp. ............................................ p.d. ............................................... p.o. ............................................... Palandt/author .......................... para. ............................................. PPLR ............................................ PPP .............................................. PPS ............................................... Prieß ............................................ PrOVG ........................................

page, pages prevailing doctrine prevailing opinion Palandt, Bu¨rgerliches Gesetzbuch, 68th edit. 2009 paragraph Public Procurement Law Review Purchasing Power Parities; Private-Public Partnership Purchasing Power Standards Prieß, Handbuch des europa¨ischen Vergaberechts, 3rd edit. 2005 Preußisches Oberverwaltungsgericht (DE: Administrative court of appeal of the former State of Prussia) PSO .............................................. Public Service Obligation pub. .............................................. publication

R R&D&I ........................................ Research and Development and Innovation R&R ............................................. Rescuing and Restructuring RA ................................................ Rechtsausschuss (DE: Committee on Legal Affairs of the German Parliament) RabelsZ ....................................... Zeitschrift fu¨r ausla¨ndisches und internationales Privatrecht, begru¨ndet von Rabel (journal) RAE ............................................. Revue des affaires europe´ennes (journal) RAG ............................................. Regional Aid Guidelines RdE .............................................. Recht der Energiewirtschaft, Recht der Elektrizita¨tswirtschaft (journal) RdL .............................................. Recht der Landwirtschaft (journal) Recht ............................................ Das Recht (journal) RefE ............................................. Referentenentwurf (First draft prepared by ministry officials) Reg. .............................................. regulation RegBegr. ...................................... Regierungsbegru¨ndung (legislative intent) RegE ............................................. Regierungsentwurf (government draft) Reidt/Stickler/Glahs ................. Reidt/Stickler/Glahs, Vergaberecht Kommentar, 2 nd edit. 2003

XXXV

Abbreviations RES .............................................. resp. ............................................. Rev. .............................................. Rev. crit. dr. internat. Prive´ .... Rev.MC ....................................... RG ................................................ RGRK .......................................... RIE ............................................... Rittner ......................................... Rittner/Dreher ........................... Riv. dir. int. ................................ RIW ............................................. RMC ............................................ RN ................................................ ROCE .......................................... ROK ............................................. RoP .............................................. RTD eur.; RTDE ....................... RTW ............................................ RuW ............................................ RWP ............................................ S s. ................................................... SAA .............................................. SAAP ........................................... SaBl. .............................................

Renewable Energy Sources respectively revue Revue critique de droit international prive´ (journal) Revue de Marche´ Commun (journal) Reichgericht (DE: German Supreme Court till 1945) Reichsgerichtsra¨tekommentar, Das Bu¨rgerliche Gesetzbuch, Kommentar, ed. by members of the German Federal Supreme Court, 12th edit. 1974 et seqq. Revista de instituciones europeos (journal) Rittner, Wettbewerbs- und Kartellrecht, 7 th edit. 2008 Rittner/Dreher, Europa¨isches und deutsches Wirtschaftsrecht, 3rd edit. 2008 Rivista di diritto internazionale (journal) Recht der internationalen Wirtschaft (journal) Revue du Marche´ commun (journal) reference number Return on Capital Employed Republic of Korea Rules of procedure Revue trimestrielle de droit europe´en (journal) Recht-Technik-Wirtschaft (yearbook) Recht und Wirtschaft (journal) Rechts- und Wirtschaftspraxis (journal)

St.Anz .......................................... Staudinger/ ................................. StGB ............................................. StPO ............................................ subpara. ....................................... Suppl. ...........................................

supra Stabilisation and Association Agreements State Aid Action Plan Sammelblatt fu¨r Rechtsvorschriften des Bundes und der La¨nder (DE: Collection of Federal and State legislation) Sa¨ chsiches Amtsblatt (Law Gazette of Saxony) State Aid Mordernization Sandrock, Grundbegriffe des Gesetzes gegen Wettbewerbsbeschra¨nkungen, 1968 State Aid Notification Interactive Schro¨ter/Jakob/Mederer (eds.), Kommentar zum Europa¨ischen Wettbewerbsrecht, 2003 (succeeding von der Groeben/Thiesing/Ehlermann) Schwarze (ed.), EU-Kommentar, 2 nd edit. 2009 Single European Act section Seufferts Archiv fu¨r Entscheidungen der obersten Gerichte in den deutschen Staaten (journal) Services in the General Economic Interest Significant Impact Test Small and medium-sized enterprise W. Siebert/J. F. Baur (eds.), Bu¨rgerliches Gesetzbuch mit Einfu¨hrungsgesetz und Nebengesetzen, 13th edit. 1999 et seqq. Staatsanzeiger (DE: Official Gazette in German States) Staudinger, Kommentar zum Bu¨rgerlichen Gesetzbuch Strafgesetzbuch (DE: Criminal Code) Strafprozessordnung (German Criminal Procedure Code) subparagraph supplement

T TEN ............................................. TEU ............................................. TFEU ........................................... TGR ............................................. TKG ............................................. Trepte .......................................... TRL .............................................. TSO ..............................................

Trans-European Networks Treaty of the European Union Treaty on the Functioning of the European Union Top Gas Recycling Telekommunikationsgesetz (DE: Telecommunication Act) Trepte, Public Procurement in the EU, 2007 Techology Readiness Level Transmission System Operators

Sa¨chsABl ..................................... SAM ............................................. Sandrock ..................................... SANI ............................................ Schro¨ter/Jakob/Mederer/ author .......................................... Schwarze/author ....................... SEA .............................................. sec. ............................................... SeuffA .......................................... SGEI ............................................ SIT ............................................... SME ............................................. Soergel/author ...........................

XXXVI

Abbreviations U U.S. .............................................. UNCITRAL ................................ UNCTAD ................................... UPR ............................................. UStG ............................................ Util. Law. Rev. ........................... UWG ........................................... V v .................................................... v. ................................................... v.s. ................................................ VAT ............................................. VBlBW ........................................ VergabeR .................................... VersR ........................................... VerwA ......................................... VerwRspr. ................................... VG ................................................ VgE .............................................. VGH ............................................ ¨ G ....................................... VgRA VgV ............................................. VIZ ............................................... VKU ............................................ ¨ A ..................................... VO PO VOB ............................................. VOB/A ........................................ VOBl. ........................................... VOF ............................................. Vol.(s) .......................................... VOL/A ........................................ von der Groeben/Thiesing/ Ehlermann/author .................... von der Groeben/Schwarze/ author .......................................... VuR .............................................. VVDStRL ................................... VVG ............................................ VwGO ......................................... VwKostG .................................... VwVfG ........................................ VwVG ......................................... VwZG ..........................................

United States Supreme Court Reports United Nations Commission on International Trade Law United Nations Conference on Trade and Development Umwelt- und Planungsrecht (journal) Umsatzsteuergesetz (DE: Value Added Tax Act) Utilities Law Review Gesetz gegen den unlauteren Wettbewerb (DE: Act Against Unfair Practices) versus vide vide supra Value Added Tax Verwaltungsbla¨tter fu¨r Baden-Wu¨rttemberg (journal) Vergaberecht (journal) Versicherungsrecht (journal) Verwaltungsarchiv (journal) Verwaltungsrechtsprechung in Deutschland (DE: Administrative law report citing volume and page) Verwaltungsgericht (DE: State administrative courtof first instance) Vergaberechtliche Entscheidungssammlung (ed. Boesen) Verwaltungsgerichtshof (DE: State administrative court of appeal) Vergaberechtsa¨nderungsgesetz (DE: Act amending the law concerning the award of public contracts) Vergabeordnung (DE: Order concerning the award of contracts) Zeitschrift fu¨r Vermo¨gens- und Investitionsrecht (journal) Verband kommunaler Unternehmen e. V. (German association of communal enterprises) Verordnung u¨ber Preise bei o¨ffentlichen Auftra¨gen (German regulation concerning prices in public works contracts) Verdingungsordnung fu¨r Bauleistungen (German contracting rules for award of public works contracts) Verdingungsordnung fu¨r Bauleistungen Teil A (D: contracting rules for award of public works contracts – part A) Verordnungsblatt (DE: Official gazette of German States) Verdingungsordnung fu¨r freiberufliche Leistungen (DE: Contracting rules for professional services) Volume(s) Verdingungsordnung fu¨r Leistungen ausgenommen Bauleistungen Teil A DE: Contracting rules for services other than public works contracts) von der Groeben/Thiesing/Ehlermann (Ed.), Kommentar zum EU-/EGVertrag, I und II: 6th edit. 2003 et seq., III bis V: 5th edit. 1997 (followed by Schro¨ter/Jakob/Mederer/author) von der Groeben/Schwarze (Eds.), Kommentar zum Vertrag u¨ber die Europa¨ische Union und zur Gru¨ndung der Europa¨ischen Gemeinschaft, 6th edit. 2003 et seqq. Verbraucher und Recht (journal) Vero¨ ffentlichungen der Vereinigung der deutschen Staatsrechtslehrer Gesetz u¨ber den Versicherungsvertrag (DE: Law concerning insurance contracts) Verwaltungsgerichtsordnung (DE: Rules for Administrative Court Proceedings) Verwaltungskostengesetz (DE: Law concerning administrative expenses) Verwaltungsverfahrensgesetz (DE: Law of Administrative Proceedings) Verwaltungs-Vollstreckungsgesetz (German Law concerning administrative enforcement) Verwaltungszustellungsgesetz (German Law on Service in Administrative Procedure)

XXXVII

Abbreviations W Weyand ....................................... Weyand, Vergaberecht: Praxiskommentar zu GWB, VgV, VOB/A/VOL/A, VOF, 3rd edit. 2009 WiB .............................................. Wirtschaftsrechtliche Beratung (journal) Willenbruch/Bischoff/author . Willenbruch/Bischoff (Hrsg.), Kompaktkommentar Vergaberecht, 2008 WIR ............................................. Wirtschaftsrecht (journal) WiStG .......................................... Wirtschaftsstrafgesetz (DE: Economic Offences Act) Wistra .......................................... Zeitschrift fu¨r Wirtschaft, Steuer, Strafrecht (journal) WM ............................................. Wertpapiermitteilungen, Zeitschrift fu¨r Wirtschaft und Bankrecht (journal) World Competition ................. World Competition WPg ............................................. Die Wirtschaftspru¨fung (journal) WPR ............................................ Wettbewerb in Recht und Praxis (journal) WRV ............................................ Weimarer Reichsverfassung (DE: Constitution of the Weimar Republic) WTO ........................................... World Trade Organisation WuB ............................................ Wirtschafts- und Bankrecht (journal) WuW ........................................... Wirtschaft und Wettbewerb (journal) WuW/E BGH ............................ Wirtschaft und Wettbewerb – Entscheidungen des Bundesgerichtshofs (DE: Federal Supreme Court Law Report) WuW/E BKartA ....................... Wirtschaft und Wettbewerb – Entscheidungen des Bundeskartellamtes (DE: Decisions of the Federal Cartel Office) WuW/E DE-R ........................... Wirtschaft und Wettbewerb – Entscheidungssammlung – Deutschland Rechtsprechung (Germany Law Report) WuW/E DE-V ........................... Wirtschaft und Wettbewerb – Entscheidungssammlung – Deutschland Verwaltung (DE: Administrative decision) WuW/E EU-R ........................... Wirtschaft und Wettbewerb – Entscheidungssammlung – Europa¨ische Union Rechtsprechung (European Union Law Report) WuW/E EU-V ........................... Wirtschaft und Wettbewerb – Entscheidungssammlung – Europa¨ische Union Verwaltung (European Union administrative decisions) WuW/E OLG ............................ Wirtschaft und Wettbewerb – Entscheidungen der Oberlandesgerichte (DE: State Courts of Appeal – Law Report) Y Yb ................................................. Yearbook Z ZEuS ............................................ ZHR ............................................. ZIP ............................................... ZKF .............................................. ZLW ............................................ ZNER .......................................... ZUM ............................................

XXXVIII

Zeitschrift fu¨r Europarechtliche Studien (journal) Zeitschrift fu¨r das Gesamte Handels- und Wirtschaftsrecht (journal) Zeitschrift fu¨r Wirtschaftsrecht (journal) Zeitschrift fu¨r Kommunalfinanzen (journal) Zeitschrift fu¨r Luft und Weltraumrecht (journal) Zeitschrift fu¨r Neues Energierecht (journal) Zeitschrift fu¨r Urheber- und Medienrecht (journal)

PART I INTRODUCTION Content A. The basic principles of state aid law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Economic Principles of State Aid Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. Economic Justification for State Aid Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1. Definition of State Aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 a) Government Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 b) Economic Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 c) Selectivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 d) Impact on Competition and Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2. Exceptions to the General Ban on State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . 13 a) Regional Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 b) Horizontal Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 c) Sectoral Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3. Incentives for State Aid Allocation and the Logic of Supranational State Aid Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4. Appropriate Targeting of State Aid Control . . . . . . . . . . . . . . . . . . . . . . . . . . 23 II. Motives for Granting State Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1. Classic Reasons for Market Failure: State Aid as a Tool for Correcting Market Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 a) External Effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 b) Public Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 c) Economies of Scale in the Area of Relevant Demand . . . . . . . . . . . . 37 d) Information Problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 e) Adjustment Defects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2. Politically Motivated Reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 a) Regional, Distributive, Employment and Industrial Political Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 b) Merit Goods and Services of General Interest. . . . . . . . . . . . . . . . . . . . . 54 3. Political Economy Reasons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 III. State Aid Control as an Element of Competition Policy . . . . . . . . . . . . . . . 62 1. State Aid Control in the System of Competition Policy. . . . . . . . . . . . . 62 2. Alternative Organizing of State Aid Control . . . . . . . . . . . . . . . . . . . . . . . . . . 69 IV. The “More Economic Approach” in State Aid Control – The State Aid Action Plan and State Aid Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . 73 1. The State Aid Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 a) Less and Better Target-Oriented State Aid. . . . . . . . . . . . . . . . . . . . . . . . . 75 b) More Effective Procedures, Better Targeted Application of Law and Better Predictability, Greater Transparency . . . . . . . . . . . . . . . . . . 76 c) Shared Responsibility between Commission and Member States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 d) A More Economically Oriented Approach . . . . . . . . . . . . . . . . . . . . . . . . 78 2. The Balancing Test. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 a) Positive Effects of Aid (Stages 1 and 2 of the Test) . . . . . . . . . . . . . . 81 b) Negative Effects of Aid and Balancing (Stage 3 of the Test) . . . . 84 3. State Aid Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 4. Economic Approach on the Factual Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 5. Economic Approach on the Justification Level . . . . . . . . . . . . . . . . . . . . . . . 126 6. Economic Problems in Assessing the Effect of Aid . . . . . . . . . . . . . . . . . . 128 a) Financing Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 b) Second-Best Problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Sa¨cker/Schwalbe

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Introduction c) Effects on Spatial Competition and Economic Policy . . . . . . . . . . . 7. Individual Case Analyses vs. Per se Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Specific Implementation of the SAAP and the SAM – Examples. . . . 1. Extension of the de minimis Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. General Block Exemption Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Rescue and Restructuring Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Community Framework Research and Development and Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141 153 157 159 163 171 176

A. The Basic Principles of State Aid Law Bibliography: Bultmann, Beihilfenrecht und Vergaberecht, 2004; Calliess/Ruffert, EUV/EGV, 3 rd edition, 2007; Mestma¨cker/Schweitzer, Europa¨isches Wettbewerbsrecht, 3rd edition, 2014; Sa¨cker/Montag/Hirsch, Competition Law: European Community Practice & Procedure, 2007; Sa¨cker/Wolf/Mohr Konzessionsvertra¨ge im System des deutschen und europa¨ischen Wettbewerbsrechts, 2011.

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State aid law serves the creation and strengthening of the internal market in the European Union. Like public procurement laws and the entire body of competition laws, State aid law is also based on the fundamental market freedoms laid down in the TFEU. 1 In order for markets to function competitively within the European Union, Member States must be prohibited from granting undue and biased advantages to competitors. Especially public enterprise need intense scrutiny in this regard as it is easier for Member States to distort competition by influencing these directly or indirectly. Public enterprises are therefore restricted by State aid law like any other enterprises on the market. State aid law is not in conflict with the fundamental market freedoms but based on them; both can therefore be applied cumulatively. Hence granting undue advantages is also violation of the fundamental market freedoms. A violation of these freedoms does, however, require the discriminatory action by a Member State and not merely by a private undertaking, as is the case with State aid law.2 Articles 101 et seq. TFEU and Articles 107 et seq. TFEU are mutually exclusive. Only where Member States have not been involved in the distortion of competition by means of State aid, can Article 101 and – in most cases – Article 102 TFEU 3 be applied. Measures of public procurement on the other hand are subject to competition laws if the actions of Member States fall within the scope of the functional understanding of actions by ‘undertakings’.4 States can act simultaneously as ‘undertakings’, public contractors, and receivers of State aid. Where the State is party to a long term contract, delegates public services, or rewards concessions, any undue market foreclosure does constitute a breach of Articles 101 et. seq. TFEU5 unless the conditions of Article 106 (1) or (2) TFEU are met. In principle State aid and public procurement provisions apply concurrently. 6 The fact that they are not always applied concurrently is owed to the fact that State aid law is dealt with by the Commission Directorate General Competition whereas public pro1

Directive 2004/18, OJ 2004 L 134/114, mn. 2. ECJ Cases C-21/88 Du Pont de Nemours [1990] ECR I-889, mn. 19; C-156/98 Germany v Commission [2000] ECR I-6857; C-225/91 Matra v Commission [1993] ECR I-3203 mn. 41; Calliess/Ruffert/Cremer EGV/EUV, Article 87 mn. 184. 3 Immenga/Mestma ¨ cker/Schweitzer, Europa¨isches Wettbewerbsrecht, Article 87 mn. 1. 4 See Brussels Commentary on European Competition Law, EU Practice and Procedure, 2 nd ed. 2012, Introduction. 5 Commission, Energy Sector Inquiry, SEC (2006) 1724, 13; Commission, 27.3.2000 COMP/37.542 – Gas Natural + Endesa; Commission, 11 October 2007 COMP/B-1/37.966 – Distrigas; Sa¨ cker/Wolf/Mohr Konzessionsvertra¨ge im System des deutschen und europa¨ischen Wettbewerbsrechts, 2011. 6 See below Art. 107 TFEU para. 12 et seqq. 2

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B. Economic Principles of State Aid Control

6

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curement falls within the competence of Commission Directorate General Internal Market. In its Annual Report on Competition Policy the Commission agreed with this reading when it stated that ‘The conditions under which public enterprises contract out services to dependent companies operating on the market may also constitute State aid.’7 Thereby referring to its Se´curipost Case (C 24/96) of 1993. In this case ‘(…)however, the Commission found that the contractual relations between the French Post Office and Sécuripost respected market prices and therefore did not confer an economic advantage on Sécuripost.’ The application of public procurement laws does not preclude the application of State aid law if the contracts in questions can be seen as a matter of State aid law and have spill-over effects on other related markets. Procurement procedures however do include a survey for real market prices, which generally preclude the possibility of there being any State aid by virtue of the same contract. It is nonetheless important that there is no general exemption from State aid law in such cases because of the danger of ‘hidden’ or ‘concealed’ aid or other advantages provided for by the State. The applicability of both areas of the law creates a system that ensures undistorted competition and makes sure that this promise can be kept. Regulation 1370/2008 expresses the uniformity of the ultimate goals of both public procurement and State aid law: to protect free and transparent markets from discrimination and distortion. State aid law is a necessary supplement to European competition law (Article 101 et 6 seq. TFEU).8 The legal system that protects competition from distortion would be incomplete if contracts to which the State is a party and areas where natural monopolies exist were not opened up to competition and market forces. This rationale also applies in cases in which the State acts as a contractor but cannot be seen as an undertaking within the meaning of Articles 101 et seq. TFEU.9 According to its ‘Interpretative Communication on the Law Applicable to Contracts Awards not Subject to the Provisions of Public Procurement Directives’10, State aid laws – as well as competition laws and the principles of the fundamental market freedoms – apply to contract awards that are below the threshold of the application of public procurement laws.

B. Economic Principles of State Aid Control Bibliography: Akerlof, The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84, 1970, 488–500; Aoki, Toward a Comparativ Institutional Analysis, 2001; Barros/Cabral, Merger Policy in Open Economies, European Economic Review, 38, 1994, 1041– 1055; Baumol/Baumol, Book Review: The Economics of the Performing Arts C. D. Throsby, G. A. Withers, Journal of Political Economy 89, 1981, 425–428; Biggar, Competition Policy in Subsidies and State Aid (2001), OECD Best Practice Roundtables in Competition Policy No. 36; Bletschacher/Klodt, Strategische Handels- und Industriepolitik: Theoretische Grundlagen, Branchenanalyse und wettbewerbspolitische Implikationen, 1992; Brander/Spencer, Export Subsidies and International Market Share Rivalry, Journal of International Economics, 18, 1985, 83–100; Brennan/Buchanan, The Power to Tax, 1980; Browning, A Neglected Welfare Cost of Monopoly – and Most Other Product Market Distortions, Journal of Public Economics, 66, 1997, 127–144; d’Aspremont/Gabszewicz/Thisse, On Hotelling’s Stability ¨ konomische Auswirkungen von in Competition, Econometrica 17, 1979, 1145–1151; Dewenter/Haucap, O o¨ffentlich-rechtlichen Online-Angeboten: Marktauswirkungen innerhalb von Drei-Stufen-Tests, 2009; 7 European Commission, XXIXth Report on Competition Policy 1999 mn. 233, p. 720 http://ec.europa.eu/competition/publications/annual_report/1999/en.pdf. 8 Bultmann, 311, 321–325. 9 CFI Case T-319/99 FENIN v Commission [2003] ECR II-357, mn. 37, ECJ Case C-205/03 P FENIN v Commission [2006] ECR I-6295. 10 European Commission, INTERPRETATIVE COMMUNICATION on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives (2006/C 179/02) mn. 1.1.

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Edwards/Keen, Tax Competition and Leviathan, European Economic Review, 40, 1996, 113–134; Ehler¨ konomische Aspekte des Subsidiarita¨tsprinzips: Harminisierung vs. Wettbewerb der Systeme, mann, O Integration 18, 1995, 11–21; Evans/Schmalensee, Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries, NBER, 2001, Working Paper No. W8268; Evans/Schmalensee, Markets with Two-sided Platforms, Issues in Competition Law and Policy (ABA Section of Antitrust Law) 2008, 667–693; Fingleton/Ruane/Ryan, Market Definition and State Aid Control, European Economy 3, 1999, 65–88; Friederiszick/Ro¨ller/Verouden, European State Aid Control: An Economic Framework, in: Buccirossi, Handbook of Antitrust Economics, 2008, 625–669; Friederiszick/Tosini, State Aid Modernization and its Implications for the Assessment of Large Investment Projects: The Relevance of Market Screens in the Regional Aid Guidelines, European State Aid Law Quarterly, 2013, 46–60; Fritsch/ Wein/Ewers, Marktversagen und Wirtschaftspolitik, 7th edition 2007; Froeb/Werden, The Reverse Cellophane Fallacy in Market Delineation, Review of Industrial Organization 7, 1992, 241–247; Gro¨ teke, Europa¨ische Beihilfenkontrolle und Standortwettbewerb: Eine o¨konomische Analyse, 2007; Gual, Reducing State Aid in the European Union, in: Neven/Ro¨ller, The Political Economy of Industrial Policy in Europe and the Member States, 2000, 11–24; Haucap, The More Economic Approach to State Aid Control: A New Institutional Economics Perspective, in: Schmidtchen/Albert/Voigt, The More Economic Approach to European Competition Law, 2007, 345–356; Haucap, Daseinsvorsorge zwischen Beihilfenkontrolle und globalem Wettbewerb, Wirtschaftsdienst 87, 2007, 712–716; Haucap/Hartwich, Fo¨rdert oder behindert die Beihilfenkontrolle der Europa¨ischen Union den (System-)Wettbewerb?, in: Scha¨fer, Wirtschaftspolitik im Systemwettbewerb, 2006, 93–144; Haucap/Mu¨ller/Wey, How to Reduce Conflicts over International Antitrust?, in: Voigt/Albert/Schmidtchen, International Conflict Resolution: Conferences on New Political Economy, 23, 2005, 307–338; Heine, Kompetitiver Fo¨ deralismus auch fu¨r das o¨ffentliche Gute “Recht”?, Vierteljahreshefte zur Wirtschaftsforschung, 72, 2003, 472–484; Hotelling, Stability in Competition, Economic Journal 39, 1929, 41–57; Knieps, Wettbewerbso¨ konomie: Regulierungstheorie, Industrieo¨konomie, Wettbewerbspolitik, 2001; Koenig/Ku¨hling/Ritter, EG-Beihilfenrecht, 2nd edition 2004; Lancaster/Lipsey, The General Theory of Second Best, Review of Economic Studies, 24, 1956, 11–32; Maier-Rigaud/Milde, The Rescue & Restructuring Aid Guidelines of the European Commission – An Economic Point of View, World Competition 38, 189–213; Miklejohn, Introduction and Synopsis, European Economy 3, 1999, 7–24; Meiklejohn, The Economics of State Aid, European Economy special issue “State Aid and the Single Market”, 1999, 25–31; Mo¨schel, Der “more economic ¨ berlegungen aus juristischer Perspektive, in: Oberender, Der “more approach in der Beihilfenkontrolle – U economic approach” in der Beihilfenkontrolle, 2008, 39–48; Monopolkommission, Systemwettbewerb, Sondergutachten 27, 1998; Monopolkommission, Wettbewerbspolitik im Schatten “Nationaler Champions”, 15. Hauptgutachten, 2004, Monopolkommission, Weniger Staat, mehr Wettbewerb, 17. Hauptgutachten, 2008; Motta, Competition Policy: Theory and Practice, 2004; Mueller, Public Subsidies for Private Firms in a Federalist Democracy, in: Galeotti/Salmon/Wintrobe, Competition and Structure: The Political Economy of Collective Decisions, 2000, 339–363; Munk, Introduction to CGE-Based Policy Analysis, Discussion Paper, University of Copenhagen, Department of Economics, 2003; Musgrave, The Theory of Public Finance: a Study in Political Economy, 1959; Neumann, Wettbewerbspolitik: Geschichte, Theorie und Praxis, 2000; Nitsche/Heidhues, Study on Methods to Analyse the Impact of State Aid on Competition, Final Report ECFIN/E/2004/004, 2005; OECD, Competition Policy in Subsidies and State Aid, 2001; Ofcom, BBC New On-Demand Proposals, Market Impact Assessment, 2006; Parry/Oates, Policy Analysis in a Second Best World, Discussion Paper 98–48 1998; Pigou, The Economics of Welfare, 1920; Salanie´, Microeconomics of Market Failures, 2000; Schmidt/Schmidt, Europa¨ische Wettbewerbspolitik und Beihilfenkontrolle, 2nd edition 2006; Schwalbe, Welfare Effects of Financing State Aid, New Developments in European State Aid Law 2006; Schwalbe, Der “more economic approach” in der Beihilfenkontrolle, in: Oberender, Der “more economic approach” in der Beihilfenkontrolle, 2008, 11–37; Schwalbe, Das Effizienzkonzept der Wirtschaftstheorie, in: Fleischer/Zimmer, Effizienz als Regelungsziel im Handelsund Wirtschaftsrecht, Beihefte der Zeitschrift fu¨r das gesamte Handelsrecht und Wirtschaftsrecht, Heft ¨ konomische Grundlagen des Wettbewerbsrechts, in: Hirsch/Montag/ 74, 2008, 43–69; Schwalbe/Kerber, O Sa¨cker, Mu¨nchener Kommentar Europa¨isches und Deutsches Wettbewerbsrecht (Kartellrecht), 2nd ¨ konomie, 2nd edition 2011; Shoven/Whaley, edition, 22–247; Schwalbe/Zimmer, Kartellrecht und O Applying General Equilibrium, 1992; Simon, Recent Developments in State Aid Policy, European Economic Reports and Studies 3, 1999, 46–64; Sinn, H.-W., Das Selektionsprinzip und der Systemwettbewerb, in: Oberhauser, Fiskalfo¨deralismus in Europa, 1997, 11–53; Sinn, S, The Taming of Leviathan: Competition among Governments, Constitutional Political Economy, 3, 1992, 177–198; Solte´sz, Commissioner Almunia’s State Aid Modernization Plan – Taking Stock, CPI Antitrust Chronicle, May 2014, 1–7; Su¨hnel, Der “Private Investor Test” im Beihilfenrecht, Europa¨isches Wirtschafts- und Steuerrecht, Heft 3, 2007, 115–120; Teece/Coleman, The Meaning of Monopoly: Antitrust Analysis in High Technology Industries’, Antitrust Bulletin, 52, 1998, 801–857; Vanhalewyn, Trends and Patterns in State Aids, European Economy special edition “State Aid and the Single Market”, 1999, 32–45; Wo¨ ssner, Die Deutschlandklausel im EG-Beihilfenrecht (Art. 87 Abs 2 lit. c), 2001.

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I. Economic Justification for State Aid Control The subject of competition policy usually involves private restrictions of competition 7 (i. e., concerning possible restrictions of competition by companies) such as through the abuse of market power, through cartels and collusive behaviour, and through horizontal and vertical mergers.11 A specific characteristic feature of European competition policy is the so-called State aid control based on Article 107 of the TFEU. It relates to possible distortions of competition through State subsidies to private or public companies that are in active or potential competition with other companies.12 Article 107, paragraph 1 of the TFEU issues a general ban on State aid. There are, however, exceptions to the rule defined in Article 107, paragraph 3 of the TFEU, which allow aid under certain conditions.

1. Definition of State Aid The term State aid is not of an economic, but a legal nature. From Article 107, 8 paragraph 1 of the TFEU, the Commission and the European Court developed four criteria that cumulatively must be met in order to speak of State aid from a legal point of view. a) Government Funds. State aid needs to be a transfer of government funds. It is 9 irrelevant whether this is a direct monetary transfer or an indirect allocation of government funds. This means that the transfer of government funds may also take place in the sense that the government forgoes revenues, as would be the case in a tax cut or a waiver of certain fees for example. This could be interpreted as an indirect transfer, which includes opportunity costs for the state. b) Economic Advantage. This state measure must confer an economic advantage 10 upon the recipient, which he would not gain in the course of a “normal” business. This therefore excludes the cases in which the state, for example, awards a contract to a supplier after a tender, as long as the services of the supplier are compensated reasonably and not excessively by the state.13 c) Selectivity. The state transfer must be conducted selectively, thus benefiting some 11 companies more than others. This criterion excludes fundamental or general measures of the state, which generally benefit all companies within the measure. For example, a selective measure would be to change the depreciation procedures for only one company; a general measure, however, might be the expansion of infrastructure of a certain region arranged by the government that increases the attractiveness of a location for investments and thus is supposed to create jobs after the establishment of companies. 14 d) Impact on Competition and Trade. The competition and trade between two or 12 more Member States must be affected by the award of government funds. This criterion is sufficiently met if it can be demonstrated that the beneficiary is situated on a market where companies from other Member States are also active. According to the new de minimis regulation, the minimum volume of State aid, where the effect on trade can be 11

See Neumann 28 et seqq.; Knieps, 6; Motta, 11. See for example Mueller, 339; Biggar, 7; Koenig/Ku¨hling/Ritter, 19. 13 See European Commission, Commission Notice on the Determination of the Applicable Rules for the Assessment of Unlawful State Aid, OJ 2002/C 119/22. 14 See Gro ¨ teke, 24. 12

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estimated, is regarded to be E 200,000.15 Amounts below this limit fall under the socalled de minimis rule and are not subject to the general ban on State aid.

2. Exceptions to the General Ban on State Aid According to Article 107, paragraph 1 of the TFEU, all State aid, which meets the four criteria mentioned above, is regarded as incompatible with the common market. However, this does not result in a complete ban on State aid, since Article 107, paragraph 3 of the EC lists exceptions that are not part of the general ban on State aid. In addition, Article 108, paragraph 2 of the TFEU empowers the European Council upon request of a Member State to determine types of State aid that are compatible with the TFEU. In practice, the Commission developed three different exception categories that nullify the general ban on State aid and thereby partially subsume the exceptions of Article 107, TFEU. These categories of exception exist in so-called regional, horizontal and sectoral aid. There are also additional categories that declare the allocation of State aid as compatible with European law. These categories are (a) State aid having a social character (Art. 107, paragraph 2 lit. a, TFEU), (b) State aid to alleviate the damages caused by natural disasters (Art. 107, paragraph 2 lit. b, TFEU), (c) State aid for the promotion of projects of European interest (Article 107, paragraph 3 lit. b, TFEU) and (d) State aid for the preservation of cultural heritage (Art. 107, paragraph 3 lit. d, TFEU). 14 In addition, the so-called “Deutschland clause” is included in Article 107, paragraph 2 lit. c, TFEU, which is an explicit permission for State aid that was conceived before the reunification in 1990 and was intended for western German regions for the alleviation of the negative consequences following the division of Germany. Since the reunification of Germany in 1990, it has been at least questionable as to whether and to what extent these negative consequences of the division of Germany still justify State aid in former West Germany today.16 Because the “Deutschland clause” has in practice hardly been used to justify State aid,17 these and the previously listed exceptions to the rule will not be discussed any further, and the following observations are limited to quantitatively more significant regional, horizontal and sectoral aid. 13

a) Regional Aid. In Article 107, paragraph 3 lit. a and c, TFEU, government transfers are excluded from the ban on State aid, which are supposed to support those regions in which the income is unusually low, or serious underemployment exists (Article 107, paragraph 3 lit. a, TFEU). The economic sectors or regions are supposed to be supported as long as this financial assistance does not affect trading conditions to such an extent that it runs counter to the common interest (Art. 107, paragraph 3 lit. c, TFEU). 16 The first part of permitted regional aid refers to areas that are disadvantaged compared to the EU average in economic terms. Therefore, in order to assess whether State aid under Article 107, paragraph 3 lit. a, TFEU can be justified, European averages such as unemployment rates or the per capita gross domestic product are used as benchmarks by the EU Commission. The second part of permitted regional aid focuses on regions that are considered disadvantaged in comparison to the average of each Member State. Thus, it is for the Member States themselves to submit petitions to the Commission in order to obtain a permit for a planned State aid allocation. 15

15 European Commission, Regulation No 1407/2013 on the Application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis Aid, OJ 2013/L 352/1. 16 For further details, see Wo ¨ ssner, 1. 17 See Wo ¨ ssner, 114.

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b) Horizontal Regulations. The Commission is of the opinion that there are other 17 fundamental economic problems that can justify the allocation of State aid in addition to the already named exceptions of Art. 107, paragraph 3 of the TFEU. For this purpose, the Commission worked out so-called “horizontal rules”. They are called horizontal rules, because their effect is not limited to a specific economic sector but rather refer to general State aid that in principle may be awarded to any company in any sector, if the necessary criteria are met.18 The concept of horizontal rules consists of the following State aid categories: State aid 18 for small and medium-sized enterprises,19 State aid for research and development,20 State aid for environmental protection,21 State aid for rescuing and restructuring companies,22 State aid for disadvantaged and disabled workers23 and State aid for training.24 c) Sectoral Rules. The EU Commission has identified certain economic sectors such 19 as coal mining, fishing, agriculture and various other branches of industry that are considered “sensitive” due to many years of economic problems and are therefore excluded from the general ban on State aid. The rules that apply to these sectors are altogether very heterogeneous; in addition, these sectors, which are handled in a special way with respect to State aid, are subject to rapid change. 25 Therefore, there will be no further elaboration on sectoral rules at this point. Basically, it should be noted that the just-presented classification of State aid has great 20 potential for arbitrariness.26 For example, it is conceivable that State aid, which is intended to serve as pure economic development, is concealed as environmental aid in order to avoid the ban on State aid. Other cases in which supposed training aid is designed to rescue a company from insolvency are also conceivable. The results of this “soft” definition of exceptions are serious and may mean that State aid will be approved by using a bypass that cannot be considered as the main objective in terms of content. The actual facts would have led to a ban on State aid under certain circumstances, and this could almost be considered as a “type II error”.

3. Incentives for State Aid Allocation and the Logic of Supranational State Aid Control In oligopolistic markets where products are traded internationally, government 21 decision-makers can succumb to the incentive to promote national champions through 18 The exceptions here are agriculture, fishing, transport, coal and steel sectors, which are considered “sensitive” sectors that have their own regulations (see Simon 49). 19 See European Commission, Guidelines on State Aid to Promote Risk Finance Investments, 2014/C 19/04. 20 See European Commission, Framework for State Aid for Research and Development and Innovation, OJ 2014/C 198/01. 21 See European Commission, Guidelines on State Aid for Environmental Protection and Energy 2014– 2020, OJ 2014/C 200/01. 22 See European Commission, Guidelines on State Aid for Rescuing and Restructuring Non-Financial Undertakings in Difficulty, OJ 2014/C 249/01. 23 See European Commission, Communication from the Commission – Criteria for the Analysis of the Compatibility of State Aid for the Employment of Disadvantaged and Disabled Workers Subject to Individual Notification, OJ 2009/C 188/6. 24 See European Commission, Communication from the Commission – Criteria for the Analysis of the Compatibility of State Aid for Training Subject to Individual Notification, OJ 2009/C 188/1. 25 A more detailed overview of the different configurations of the aid programs along with references to the official journals can be found in Simon, 55 et seqq. 26 See Vanhalewyn, 36.

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Introduction

proactive policies.27 The underlying idea is to specifically support national companies with the help of a strategic trade, fiscal and competition policy, so that they are enabled to exert market power on international markets and thus increase the national producer surplus at the expense of foreign producers and possibly also internationally scattered demand.28 Hence, this is a classic “Beggar-Thy-Neighbour” policy, as it is known e.g. from export cartels. The problems and inefficiencies of such a policy are indeed well known; it is also known, however, that the policymakers may be stuck in a prisoner’s dilemma, which leads to results that are not in the common interest of the participants.29 While the policymakers do know that it would be collectively better for everybody if it did not come to subsidy races, they all act according to the incentive to create an advantage for “their” local companies, and through this, secure more jobs and possibly tax revenues. A solution to this dilemma can be found in a contractual or legally secured cooperation such as supranational State aid control. 22 Just as the delegation of responsibilities in trade policy by the GATT or the WTO can be interpreted as a useful measure for a self-commitment to overcome a prisoner’s dilemma, the implementation of supranational State aid control by the EU prima facie may be viewed as an act of rational self-commitment in order to free oneself from a dilemma situation in which nation states employ strategic competition and trade policies by granting State aid. State aid control is thus used primarily to avoid ruinous subsidy races (so-called rat races30).

4. Appropriate Targeting of State Aid Control Along the lines of the just-cited interpretation, State aid control should be designed in a way in which subsidies are permitted only if classic market failures exist, i. e. State aid should only be eligible for approval if it is aimed at correcting a market failure. 31 However, the mentioned exceptions in Article 107, paragraph 3 TFEU de facto had little to do with market failure, apart from some horizontal aid for environmental protection and research and development (R&D). Rather, the focus was on exceptions motivated largely by distribution policy. In the implementation of the “more economic approach” regarding State aid control, it is exactly this increased focus on the economic criterion of market failure that plays a central role in the context of a refined economic approach as defined in the State Aid Action Plan (SAAP).32 24 A further step with respect to a better economic foundation has been taken with the State Aid Modernization (SAM) project initiated in 2012.33 The SAM project is part of a broader goal of a sustainable, smart and inclusive growth under the “Europe 2020 Strategy”. A modernised State aid control shall therefore be directed towards the achievement of the Europe 2020 goals, such as e. g. broadband rollout, infrastructure for the interconnection of transport and energy networks, innovation and research and 23

27

See, e. g., Monopolies Commission, Hauptgutachten 2002/2003, 9. For more on the idea of strategic trade policy, see Brander/Spencer, 84–85; Helpman/Krugman, 27 et seqq.; and Bletschacher/Klodt, 9 et seqq.; for more on strategic competition policy, see Barros/Cabral, 1043 et seqq.; Neven/Ro¨ller, 847 and Haucap/Mu¨ller/Wey, 7. 29 The prisoner’s dilemma describes a situation where individual rational behaviour leads to a poor outcome for the whole group. 30 Competition processes are called rat races when an increase in expenses does not result in any expected corresponding additional total revenues and are thus characterized by a waste of resources. 31 See Meiklejohn, 25. 32 See European Commission, State Aid Action Plan – Less and better targeted State aid: a roadmap for State aid reform 2005–2009. 33 See European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee of the Regions – EU State Aid Modernization (SAM), COM(2012) 209. 28

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development, energy efficiency, etc. It is intended to concentrate aid control on cases that really do have an impact on competition in the European Union. Further, State aid should be “well-designed, targeted at identified market failures and objectives of common interest, and least distortive”.34 State aid control targeted towards market failure can be understood as a “competitive 25 order for the competition between systems of Member States, during which steady improvement of the tax-service packages provided by Member States takes place.” 35, 36 Here, Heine37 holds the opinion that State aid control by the EU even intensifies the inter-jurisdictional competition so that this would be a positive step – provided the regional competition actually increases efficiency – at least in principle, albeit not in its actually existing form.

II. Motives for Granting State Aid 1. Classic Reasons for Market Failure: State Aid as a Tool for Correcting Market Failure At least since Pigou38 it is known from economic theory that State aid can in principle 26 help to correct so-called market failures. In contrast to what common usage may suggest, particularly in the domain of politics, the term market failure in economics describes a relatively narrowly defined field of inefficient market outcomes. From a neoclassical viewpoint, market failure is present when the market does not provide effective results with the free play of forces. No market failure exists, however, when markets deliver efficient, though not politically desired, results. Thus, widespread access to broadband internet; high-quality, nationwide postal services on weekdays; an extensive public transportation system with busses or trains; or politically correct media offered on radio, television and internet might be politically desirable but often economically inefficient. The market’s ineffectiveness to produce the desired political results is in economic theory not referred to as market failure. The term efficiency, which is essential for the identification of market failure, is often 27 divided into productive (sometimes also called technical) efficiency, allocative efficiency, and dynamic efficiency in economic literature. Productive Efficiency implies that a given bundle of services is created efficiently, i. e., at lowest possible costs. Productive inefficiency means that production resources are not efficiently used, and the production is therefore carried out inefficiently at high costs. Allocative Efficiency describes a situation where people are using a particular service or consuming a product whose willingness to pay for this service or product is higher than the additional costs of its provision. Basically, an allocation is efficient when scarce and precious resources are used in a way in which they will benefit a society as a whole to the greatest extent possible. In the simplest model of neoclassical economic theory, this is the case if the price for a service or a product is equal to the marginal costs of their provision. While the terms productive and allocative efficiency are in most cases used in a static context, so-called Dynamic Efficiency does not focus on a specific point in time but on a period of time. Here, innovations and investments play an important role, because they involve the maximization of social welfare over time. It is therefore not important that welfare is at a maximum at every single point in time but rather that it is maximized throughout the relevant 34

Ibid. para. 12. See Gro¨teke/Heine, 258. 36 See also Kerber, 200. 37 See Heine, 476. 38 See Pigou, 129 et seqq. and Fritsch/Wein/Ewers, 122. 35

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period. Dynamic inefficiency is thus the result of inadequate investment and innovation incentives.39 If productive, allocative and dynamic efficiency is not achieved in a market, this is characterized as market failure in economic literature. 28 The following five issues have been identified as classic causes for market failure in economic literature: (1) External effects (synonym: externalities), (2) public goods, (3) imperfect competition and the natural monopoly as an extreme case of imperfect competition, (4) asymmetric information distribution as well as (5) adjustment or coordination failures. In these cases, government intervention in the market can lead to economic improvements. In the institutional economic literature, there has been a debate, at least since Coase (1960), which standard of comparison is to be used in order to evaluate the efficiency of a given economic state and thus to determine whether or not a situation constitutes a market failure. The question of the relevant standard of comparison was indeed already raised by Coase (1937) and addressed particularly in his contribution to the theory of social cost.40 Later, Demsetz (1969) illustrated this problem, particularly demonstrated in his article on information and efficiency, in which he coined the term “Nirvana Approach”. The crucial point of criticism regarding Pigou‘s theory on market failure as justification for government intervention is that an imperfect reality is compared too simply to a theoretical ideal without asking and analyzing whether this theoretical ideal can ever be achieved or whether it is rather an unattainable ideal – a nirvana. The mere fact that reality does not match the ideal of the theory is thus not sufficient to deduce a market failure. The question is rather whether government intervention in reality can produce real improvement, that is, less inefficient results. It is necessary to consider that government intervention can also cause inefficiencies in the market process, which in extreme cases lead to a so-called state or policy failure. Particularly the lack of information, political disincentives, faulty analysis and forecasting as well as delays of decision-making and effect regarding the use of funds can be among the causes of state failure when aid is granted. 29 That said, an evaluation in terms of a comparative-institutional economic approach should be conducted prior to granting State aid, in which a possible market failure is weighed up against the threat of a state failure. After all, granting State aid is not economically justified if a market does not produce the same result as the theoretical ideal but only if State aid is especially appropriate to correct market failure. Below, the five types of market failures will be explained in more detail. 30

a) External Effects. Positive and negative external effects describe a situation in which the activity (e. g., production or consumption) of an economic agent affects the utility (increase or decrease), profit or production possibilities of other economic agents without these effects being considered in the price system. 41 External effects are thus a matter of damaging or favouring otherwise uninvolved third parties. External effects are a direct result of ill-defined or definable and enforceable property rights so that there is no compensation for the damage or benefit. Negative external effects are best known from environmental policy. For example, harmful emissions that occur during a production process can cause damage to the residents’ health or may require other companies to install costly filter systems. If the persons suffering from environmental pollution do not have assertive ownership rights of a “good” environment, it will not be possible for them to prevent the polluter from emitting harmful emissions or to charge the polluter with the costs for the environmental pollution (external costs). This lack of 39

For more on the concept of efficiency in economics, see Schwalbe, 43–69. See Coase, 22. 41 Since these effects occur outside voluntary market relations, they are called external effects. 40

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inclusion of external costs in the pricing mechanism (lack of internalization) results in excessive pollution. An example of such negative external effects are the CO 2 emissions that occur in the course of power production (especially coal and gas-fired power plants), as long as external effects are not internalized through taxes or tradable certificates. Positive external effects are assumed to occur in the field of basic research. Basic research is characterized by the non-excludability of third parties from using the results, as no enforceable property rights such as patenting exist. Due to the lack of exclusion freeriders may emerge who do not reveal their true payment reserves for the considered good and do not participate voluntarily in financing. This would lead to an inefficiently low level of basic research. The missing assignment of property rights leads both in the case of negative and 31 positive external effects to the price mechanism not ensuring efficient market results by itself. Therefore, with a pure market solution, more than the economically efficient amount of CO2 emissions would be produced and less than the economically efficient level of basic research would be conducted. State intervention must, in the case of serious external effects, be aimed at eliminating the divergence between private and social costs and benefits with measures to internalize the external effects. Principally, State aid can, for example, in the form of an investment grant for the 32 reduction of environmental pollution, contribute to the internalization of negative external effects. A similar outcome can be achieved with State aid for basic research. It remains important, however, that the external effect should first be identified as serious and be quantified in the form of external costs.42 The evaluation of the external effect is hereby influenced by the subjective perception and the level of information possessed by the decision maker. In addition, the period under consideration is relevant for the extent of the external effect or the amount of external costs. Finally, it is necessary to examine whether State aid as an economic tool to internalize the external effects is particularly appropriate or whether other superior economic policy instruments are available. As with taxes, the social optimum can only be achieved approximately or reached through a lengthy trial-and-error method. b) Public Goods. A good that is characterized by both non-rivalry in consumption and 33 non-excludability represents a so-called pure public good. The presence of non-rivalry in consumption is applied to an already existing good such that an additional consumer of the same good does not cause further costs of providing the good (i. e., the marginal cost of an additional user is zero). Occasionally, the economic literature already regards nonrivalry in consumption alone as a sufficient condition for the existence of a public good whose private supply without state intervention leads to market failure.43 With efficient pricing and a price equal to the marginal costs, the consequence would be that a supplier (with linear pricing, i. e., a price per unit) would receive no compensation for providing the good. In this case, the good would not be produced in the first place.44 However, if the 42 Strictly speaking, hardly any economic activity can be imagined where no positive or negative externalities occur (ubiquity of external effects). Every individual is often positively or negatively affected by the actions of another without compensation through the price mechanism or immediate compensation payments as e. g. with respect to traffic. If the state tried to internalize all externalities, this would amount to comprehensive interventionism that would often paralyse private economic activities. 43 Typical items which are characterized by non-rivalry in consumption, are virtual goods such as software and information content on the Internet. 44 This is particularly true in the context when supplying a good usually causes substantial costs for the supplier. Thus, the supply of software, which is also characterized by non-rivalry in consumption, causes high one-time research and development costs (fixed costs). The costs for reproduction, that is, the marginal cost, are negligibly low. Through an efficient price at marginal cost (i. e., near zero), it is not possible, however, to cover the fixed costs for the supply.

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good is offered at a positive price, users will be excluded, although they do not cause additional costs. The result is an inefficient allocation. 34 But the deviation from the ideal of perfect competition alone, whose strict conditions are to be found only rarely in the real world, is not a sufficient condition for market failure in an economically relevant sense. State intervention cannot be economically justified solely by the presence of non-rivalry. If it is possible to exclude potential consumers from using the good, a supplier can take into account the one-time supplying costs in pricing without this necessarily leading to an inefficient supply. 45 35 Therefore, the economic literature generally considers public goods in pure form and hereby induced market failure, if an exclusion of consumers unwilling to pay is de facto impossible due to ill-defined or definable property rights. Examples of pure public goods are internal and external security or the enforcement of law (e. g., antitrust law). No one can effectively be excluded from the benefits of internal and external security or the implementation of antitrust laws. This non-exclusivity typically results in freeloader behaviour: Since individuals unwilling to pay cannot be excluded from using these public goods, a pure public good is not supplied – or at least not in an efficient scale – without government intervention. 36 A public good does not necessarily have to be supplied by the government itself. It can also be supplied by private enterprises if they can cover their costs through public funding and are publicly assigned the supply. Such funding could come from State aid in terms of Article 107, paragraph 1 of the TFEU. However, if a proper temporary tender regarding the private supply of a public good takes place, and the company with the lowest costs for the supply is awarded the job, public grants by the European Courts do not qualify as State aid in this context. c) Economies of Scale in the Range of Relevant Demand. Supply or demand-sided economies of scale in the range of relevant market demand (“economies of scale”) can lead to a market with “naturally” incomplete competition. In the extreme case, an industry can be a natural monopoly, but cases of natural oligopolies are also known in the literature. In the case of a natural monopoly, a sole supplier most cost-effectively produces the market’s entire demand for a good or a service. Supply-sided economies of scale are found, for example, in various network industries (telecommunications, cable TV, train, gas, electricity, etc.). 38 Demand-side economies of scale arise, for example, in the presence of significant positive network effects. A positive network effect describes the phenomenon where a new consumer of the same good increases the utility for the current consumers. Therefore, a new consumer of a software application increases the utility for other users, because he represents an additional potential exchange partner (e. g., for texts, documents or information). The resultant desire to participate in the largest possible network can, in extreme cases, lead to the monopolization of the whole market by a supplier. 46 A wellknown example for a (quasi) monopoly induced from a demand-side is the application 37

45 Such an approach can be observed in various markets for virtual goods, whose supply is not characterized by market failure. In addition, the absorption price system (skimming pricing) is often used by innovators in the early market phases in order to ensure a rapid amortization of the research and development costs. Also, multi-part tariffs or “flat rates” can lead to efficient use. 46 This occurs if, during several incompatible proprietary technologies, one of these technologies reaches a so-called critical mass of consumers. Due to the then incipient positive feedback effect, this technology will attract the entire market demand (winner takes all/winner takes most) after reaching the critical mass. This form of demand-side competition for the dominant market position can be observed particularly on markets for virtual network goods, as there are no supply-sided restrictions. For example, it is possible for a software supplier to adapt his supply according to the changes in demand at any time (so-called instant scalability).

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software Microsoft Office. In addition, indirect network effects, which are characteristic for so-called two-sided markets, can lead to a strong concentration of supply. 47 In general, natural monopolies or economies of scale do not provide convincing 39 arguments for State aid. In many cases, they even require government price controls to protect consumers from exploitation and to protect potential competitors from abusive behaviour in upstream and downstream markets. These cases occur when the monopolistic supplier is protected by high barriers to entry from potential competitors and he can therefore raise his price permanently above the competitive level, i. e., even in later market phases. In the sector of broadband Internet coverage, however, a state subsidy for second-service providers may be allowed in the market in order to prevent a consolidation of power in local markets due to economies of scale.48 d) Information Problems. Information problems are on the one hand relevant because information as a good often has characteristic features of a public good. It is sometimes difficult to exclude users unwilling to pay, yet additional users often cause, in fact, zero marginal costs, i. e., non-rivalry in consumption is prevalent with many information goods. Thus, the problem is similar to the one concerning public goods. On the other hand, information problems are relevant when information procurement costs are distributed asymmetrically between market sides. Asymmetric information exists when one of the relevant actors in the market may be better informed or can more easily (cheaply) inform himself than the other side. The asymmetric distribution of information can create problems of moral hazard49 and adverse selection.50 Asymmetric information generally exists on credit markets. The suppliers of credits do not have full knowledge of the exact default risk of each potential borrower. Consequently, they will adjust their interest rate (the price of the credit) to the estimated average default risk. Consumers with low individual default risk (so-called good risks) will view this price as too high and choose not to borrow money. Consumers with above-average risks (so-called bad risks) benefit from what they perceive as comparatively low prices. The systematic crowding out of the good risks by the bad (adverse selection) can in extreme cases lead to market failure, as welfare increasing transactions are not carried out. With respect to the raising of capital for small and medium-sized enterprises in particular, it is assumed that significant information asymmetries exist, which can cause market failure. For both venture capital markets and private granting of credit by banks, it is estimated that the suppliers of capital systematically overestimate the default risk of credits to this group and therefore set the price for raising capital too high. 51 As a result, raising capital is made more difficult for small and medium-sized enterprises in comparison to larger companies, so that they suffer significant competitive disadvantages. In order to compensate for these competitive disadvantages, the public sector often grants concessional credits to small and medium-sized firms. Due to the selective nature 47

See Evans/Schmalensee, 678. European Commission, Guidelines for the Application of State Aid Rules in Relation to the Rapid Deployment of Broadband Networks, OJ 2013/C 25/01. 49 Moral hazard exists when one side of the market has the opportunity to change significant transaction-related issues after the conclusion of the contract (ex post) and does so without giving notice (due to information asymmetry) at the expense of the other side of the market. 50 The classic example of adverse selection, which is caused by information asymmetries to the detriment of the consumer, is the market for used cars. See Akerlof, 490–491. 51 One reason is that potential investors face comparatively greater problems in gaining access to reliable information on the business prospects of small and medium-sized enterprises, as would be the case with large enterprises. See European Commission, Guidelines on State Aid to Promote Risk Finance Investments, 2014/C 19/04. 48

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Introduction

of this preferential treatment, these credits have State aid character. Therefore, prior to state intervention (e. g., through a favourable granting of credit), it should always be examined whether or not the market itself generates protective measures that can prevent market failure. Possible protective measures are e.g. an effective screening or signalling, which reduce the risks of moral hazard and adverse selection. A detailed examination is also indicated against the background that information asymmetries in capital markets do not necessarily imply a too low granting of credit, because it can be shown that also inefficiently high credits can be the result of an asymmetric distribution of information. In this case, a granting of credit by the state would lead to additional efficiency losses. e) Adjustment Defects. Adjustment defects are situations in which market equilibrium does not exist because of unfavourable demand and supply conditions or a new equilibrium is not reached or is not reached at the desired speed in particular due to a lack of flexibility on the part of the market players. An example of a lack of flexibility is cutthroat competition, which is caused by the wrong order of the suppliers’ market exit (e. g., in the inland waterway transportation and agriculture sector). 46 In the EU and its Member States, State aid is often used as an instrument of sectoral structural policy. Its objective is to either accelerate the structural change or make socially acceptable the problems caused by the structural change from the agricultural (primary) and goods-producing (secondary) sector towards the service sector (tertiary sector). Sectoral structural policy is needed because of the previously mentioned lack of flexibility. 47 Under certain conditions, adjustment aid (or restructuring aid under European law) can at best be economically justified as an economic policy instrument of sectoral structural policy. Adjustment aid is granted to companies with the aim to simplify the process of adjustment to the prevailing economic conditions. Thus, after reunification, many agricultural cooperatives in former East Germany received adjustment aid. With aid granted, for example, for the purchase of modern agricultural equipment, a faster adjustment of the East German agricultural economy to the conditions of a market economy was supposed to be facilitated. 48 In principle, adjustment aid is intended to help people help themselves. It should only be paid until the necessary adjustment to changed economic conditions has taken place. However, it became frequently evident in the past that aid originally conceived as a short-term measure became a permanent benefit for a particular economic sector or certain companies because of political pressure. Hereby, old structures were preserved in contradiction to the original intention – namely to accelerate the adjustment process. A permanent benefit, however, does not constitute an adequate tool to remove market failures caused by adjustment defects. Permanent benefits that become similar to conservation subsidies rather are intended to achieve different objectives. 45

2. Politically Motivated Reasons 49

a) Regional, Distributive, Employment and Industrial Political Purposes. Conservation subsidies, also referred to as rescue aid under European law, are used as an instrument for structural policies in order to preserve economic, cultural and rural structures. They are granted, for example, in the form of a compensatory allowance in the agricultural and mining sector. Conservation aid is intended to maintain the income of workers at a certain socially desired level (distributive political objectives) in sectors affected by structural change (e.g. coal mining) and to avoid excessive unemployment in

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the affected regions (employment political objectives). A well known form of conservation subsidies is price support purchases in the EU.52 In general, aid as an instrument of structural policy, both in the form of adjustment and conservation aid, must be critically assessed because of its lack of accuracy and negative side effects. Conservation aid, in particular, sets incorrect price signals on product markets and thus leads to distortions of competition in favour of the subsidized industry. In addition, the resulting false income signals have the consequence that workers remain in an employment relationship that is no longer promising. This is hindering the necessary structural adjustment process and causes more economic inefficiencies. Other instruments such as individual support for workers to achieve employment and distributive political objectives are more appropriate. Through targeted support of workers in old industries, such as in the form of training and retraining measures, the objectives can be achieved more efficiently and sustainably without the negative side effects. The focus of regional policy is on the distribution of the production potential and the infrastructural development of the regions within an economy. The objective of regional policy measures is to create equal living conditions in a region. Against this background, industrial location aid was granted in structurally weak areas characterized by high unemployment, in order to attract companies from promising sectors and to increase labour demand. In addition, policymakers hope for further positive effects such as agglomeration advantages following the establishment of companies. 53 Aid motivated by regional politics, however, contains a substantial forecast risk and may therefore miss the intended effect. In recent years, targeted support of large enterprises (for example, through selective tax breaks) was evident on a national level. The policymakers’ intention was, among other considerations, primarily to strengthen the international competitiveness of these national champions. According to the theory of strategic trade policy, an active industrial policy can, in the presence of significant economies of scale and scope, cause the respective domestic companies to generate medium- to long-term profits abroad, which benefit one’s own economy.54 Most economists are very critical of such support for “national champions” for several reasons.55 They doubt that the subsidization of one’s industry leads to advantages for the aid-granting state, as the benefits generated by the (possible) profits abroad with the help of support are usually smaller than the costs of increased market power for the domestic market.56 Even the supporters of the strategic trade policy theory assume that when all states grant aid an inefficient outcome for everyone (prisoner’s dilemma) results and inefficient aid races (rat races) take place. 52 These were especially applied to the agricultural market in order to guarantee a certain income in the industry while simultaneously setting a minimum price. The minimum price was set above the marketclearing equilibrium price. The resulting excess supply that the suppliers were unable to sell on the market at the given minimum price was bought by government decision-makers at the previously established intervention price and – if possible – stored as stock. This storage led to the famous overproduction of butter and pork, the so-called “butter- and pork mountains.” Alternatively, price support can also be reached through an aid payment that is linked to a capacity limitation (such as abandonment premiums). 53 Aid in the context of regional policy can cause a competition between different jurisdictions “for the location of private enterprises,” that can dynamically lead to efficiency gains. It is conceivable, therefore, that the most efficient package of the several service packages will prevail – hence, the region that ascribes the highest value to the location of companies. This point is discussed in more detail below. 54 See Brander/Spencer, 90. 55 See Monopolies Commission, Hauptgutachten 2002/2003, mn. 1 et seqq. 56 See Monopolies Commission, Hauptgutachten 2002/2003, mn. 16.

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Introduction

b) Merit Goods and Services of General Interest. In many cases, aid is also granted to ensure the supply of a supposedly socially desired amount of certain goods. Finance literature coined the term “merit goods” for goods that are principally supplied in the market mechanism, but the supply is deemed to be too low by policymakers. 57 The core argument of meritorics is, that individuals either do not know what is good for them (for example certain TV programs or certain types of food), which is why these goods/ services are not in demand on the market (according to the traditional concept of meritorics), or that individuals might know which products are good for them but still do not demand them on the market, because they succumb to other temptations (the more recent concept of meritorics). It is also assumed that other individuals know very well what goods and services are good for the general public and should therefore be consumed in larger quantities. Based on this expertise, these products should be offered to the “uninformed” individuals at a reduced price so that they consume more of it for their own benefit. A classic example of merit goods cited in literature is school milk. 55 It is probably not difficult to understand why this idea is largely discredited in a strongly individualistic economic theory. Baumol/Baumol (1981, 426 f.), for example, write in the context of government support for art: “The term merit good merely becomes a formal designation for the unadorned value judgement that the arts are good for society and therefore deserve financial support…the merit good approach is not really a justification for support – it merely invents a bit of terminology to designate the desire to do so.” In economics, the concept lives a shadow existence; it is in fact used primarily as a pseudo-scientific justification for one’s beliefs, in particular those of certain interest groups. 56 The principle of merit goods as an economic concept is therefore fundamentally problematic. First, there is the problem of which good is to be classified as eligible for support (identification problem). This generally leads to state interference with the individual preferences of citizens, whereas policymakers must also normatively determine the degree of interference (the quantity to be consumed). This poses a serious potential for error and conflict, because the decision of a collective – or a collective with politicians from the government – is set above the decision of the individual. 58 There is also a lack of information on the part of government decision-makers about how the consumers respond to the changing prices. Therefore, the politically desired amount of the merit good will, at best, be achieved by an expensive trial-and-error method. Against this background, it seems more than questionable to justify a wide array of government policies, such as health care and pension plans, with the argument of meritorics. Ultimately, these are always value-judgments, which are inevitable when individual and collective preferences are weighed up against each other. 57 For State aid justified with the questionable argument of meritorics, alternative justifications are also conceivable. Assuming that the modern welfare state supports a person even if he is in self-inflicted need, certain insurance obligations can be interpreted as a means to prevent free-riding behaviour.59 It would therefore be conceivable that workers make no provisions for old age if they assume that they receive state transfer payments after retiring. In this case a possible free-riding behaviour is prevented by compulsory old-age insurance. Similar arguments can be made for compulsory health care and nursing insurance. 54

57

See Musgrave, 13–17. Such an argumentation is only undisputed in a few exceptional cases where the decision-making authority of an individual can indeed not be regarded as given (e. g., children up to a certain age). 59 This free-riding behaviour stems from the fact that the exclusion of persons in need from the state transfer system is not intended. In this respect, it would be similar to a negative external effect. 58

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In the context of goods worthy of support, the administrative term “services of 58 general economic interest” is used to justify the granting of aid. The term “services of general economic interest” includes all government measures that are supposed to ensure the “provision of basic supplies” for the population. A typical sector of services of general economic interest is the provision of public transport services. In contrast to the supporters of meritorics, this provision is not justified with the fact that a faulty evaluation of the individual benefit led to an inefficient supply of the respective good. In reality, the market was not supplying the particular good of general economic interest in the politically desired quantity. This politically desired quantity does not need to correspond to the economically efficient level of the service provision. 60 The resulting economic losses of efficiency are consciously accepted for the benefit of other policy objectives. The pursuit of these other objectives can be seen as legitimate courses of action in a democracy. However, from an economic perspective, it should be ensured that the provision of services of general economic interest to the politically desired extent are performed at the lowest possible costs to avoid unnecessary distortions of competition and the inefficiencies that go along with them. An efficient provision of services of general economic interest can be achieved by 59 competitive tendering processes. These need to be designed in a way such that the grant goes to the company that supplies the respective good in the desired quantity and quality at the lowest cost. The part of the costs that is not covered in the market-based process can be compensated by government subsidies. Under EU law, these grants – as discussed in the private provision of public goods – do not qualify as aid in the sense of Article 107, paragraph 1 TFEU, provided they are awarded within a properly conducted temporary tendering process.

3. Politico-economic Reasons The remarks above make clear that aid intervenes in the market mechanism and can 60 result in significant distortions of competition thereby causing economic costs. Since aid is paid from tax revenues, it first of all represents a reduction of income that is selectively distributed to privileged branches or companies. In addition, administration costs and transaction costs on the part of the company (e. g., for aid consultation, application and reporting duties) are consequences of granting aid. In particular, the protection of a stagnant sector by means of rescue aid takes away further funding from an economy. Moreover, aid causes undesirable side effects such as price distortions, which may lead to additional state payments. Despite these known disadvantages of State aid, the political reality is that aid is 61 granted even when, from an economic point of view, other instruments are more suitable to achieve certain competitive or non-competitive objectives. Seen from the perspective of economic theory, one-time, subject-related direct transfers (e. g., one-time payment to employees in the mining industry) show a more favourable cost-benefit ratio. The inefficient allocation of aid can also be explained by the fact that aid is granted in a political process. In the process of making political decisions, the responsible actors also pursue their own interests. When it comes to aid, the risk of self-serving behaviour by political decision-makers is particularly high, because they pay attention to their personal re-election and the electoral success of the respective party. Thus, by shortterm populist measures, the (wrong) impression can be conveyed that State aid contributed to permanently creating or preserving jobs in a particular region. A large amount of State aid that is granted to a small group (e. g., a company) is quite noticeable. In 60

See Haucap, Wirtschaftsdienst, 712, 714.

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contrast, the large group of taxpayers finances this aid through relatively small, individual, hardly noticeable amounts. While the low noticeability on the part of taxpayers results in them not taking action, the affected employers and employees mostly act with effective publicity and can therefore contribute to the electoral success of a politician or party.

III. State Aid Control as an Element of Competition Policy 1. State Aid Control in the System of Competition Policy State aid control has been, next to the ban on cartels and the prohibition of abusive behaviour, a central part of European competition policy since the Treaties of Rome, while the important Section on Merger Control was added significantly later. The legally codified competition policy of the EC-Treaty thus includes the traditional sections of the ban on cartels, merger control and the prohibition of abusive behaviour in addition to State aid control. Between State aid control and the other sections, however, there are significant conceptual differences that distinguish State aid control from the other three. Cartel ban, prohibition of abusive behaviour and merger control relate to the behaviour of companies. Their purpose is to prevent companies from restricting competition with agreements or arrangements, thus abusing a powerful market position, and to prevent external corporate growth or an enhancement of existing market power. These sections, therefore, are always about the conduct of companies. 63 State aid control is different as its purpose was to prevent, above all, Member States of the European Community from using government funds to circumvent competition rules by gaining an unfair advantage with the support of the domestic industry. 61 This already underlines a significant difference between State aid control, on the one hand, and the other Sections of competition policy on the other: State aid control is not directed at companies but at the Member States of the European Community. State aid control therefore regulates the competition among Member States, as this area involves possible distortions of competition, not by companies but by state representatives. Companies are only relevant for State aid control when they benefit from aid or suffer a competitive disadvantage to the aid-receiving companies. One could argue that the Member States compete through State aid by means of the companies. 64 Another key difference between State aid control and the other areas of competition policy is that the latter, at least from an economic perspective, are particularly concerned with the efficiency of the results produced by a market system with effective competition. As outlined in Section II. 1, markets may produce inefficient results if market failures exist, for example, because of external effects or asymmetric information. 62 State aid measures can particularly be used to reduce or eliminate inefficiencies caused by market failure, as the “State Aid Action Plan” emphasizes.63 But even if market failures do not exist, competition in the markets is effective, and market results are efficient, they may be unsatisfactory in terms of distribution or equity. Normative aspects such as equity, equality or fairness are intentionally left out in the definition of the efficiency concept in order to clearly separate between descriptive and normative statements. 64 The distribution of living conditions in different regions of a country or in different Member States of the European Community could, for example, be intolerable for normative reasons such as cohesion. Next to the efficiency aspects of market failure, these normative and basically non-economic aspects are also of key importance in State aid control. 62

61

See Mo¨schel, 40. For more on the economic fundamentals of market failure, see Salanie´ as well as para. 28 et seqq. 63 Concerning the State Aid Action Plan, see para. 74 et seqq. Section IV.1. 64 See Schwalbe, 12. 62

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The requirements of Article 107, paragraph 3 also include normative reasons for granting aid, such as the adjustment of living conditions. This political objective of the European Community refers to both the economic conditions in different Member States and the differences concerning the standard of living among regions within a single Member State.65 It would therefore be possible to support the standard of living in some regions with regional aid in order to improve the cohesion of the European Community. However, it is not just equivalent living conditions in a statical sense that is a political objective of State aid policy; it is also the development, i. e., the dynamic process of adjusting the living conditions that are supposed to be on a uniform level within the European Community.66 This could be guaranteed by regionally differing growth aid. Finally, the granting of aid is also used to reduce social inequalities between different population groups. Ultimately, these questions deal with problems of distributive justice that cannot be solved by economic theory alone. In assessing the distributional effects of State aid, the normative foundations upon which the assessment is based have to be made clear. The fact that normative considerations play a central role in State aid control, in addition to the efficiency aspects predominant in the ban on cartels, merger control and the prohibition of abusive behaviour, distinguishes State aid control from these areas of competition policy. Another key difference between State aid and other areas of competition policy is that State aid is a transfer that flows from the taxpayers to the companies. In an economic analysis regarding the effects of aid, it is equally important to consider the effects of aid payments on the financing side (that is, the so-called “shadow costs of taxation”) as the effects on the expenditure side.67 Here, it is crucial to examine which allocative distortions are caused by the tax financing of aid, or how this tax revenue could have been utilized differently. Economics has only in recent years analyzed State aid control more intensively, probably because this area is more complex as compared to the other areas of competition policy.68 For a well-founded economic analysis of State aid control, four domains of economic theory have to be considered: Industrial organization to assess the effects of State aid on competition; microeconomics for the assessment of market failure; public finance, because aid is a tax-financed transfer; and foreign trade theory, since competition and trade between countries is affected. Also knowledge of spatial economics, economic geography and regional economics is useful for an economic analysis of aid effects. Another difficulty arises from the fact that aid is used to achieve both efficiency and distribution objectives, so that positive and normative aspects have to be considered simultaneously. The overall conclusion is that granting State aid is a tax-financed competition between representatives of the state, where particularly normative objectives are pursued by means of payments to companies. Because of these significant differences in competition between state representatives, caused by the granting of aid and the competition between companies, it is questionable whether State aid control should be inserted into the usual system of competition policy or whether this European particularity should be organized within an institutional framework different from that of competition policy.69 65

See Haucap/Hartwich, 98 et seqq. See ibid. 67 For more on the shadow costs of taxation in relation to State aid control, see Schwalbe (2006), 53 and the references cited therein. 68 A recent overview of the economic literature on State aid can be found in Friederiszick/Ro ¨ ller/ Verouden, 631 et seqq. 69 “State aid control is fundamentally different from the analysis of other competition issues” Fingleton/ Ruane/Ryan, 65. 66

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2. Alternative Organizing of State Aid Control Since State aid control is not integrated into the rest of the system of European competition policy for the mentioned reasons, the exclusion of State aid control from the current system of European competition policy could be considered. This issue is usually not discussed in the “more economic approach” of State aid control; it is generally rather argued within the established institutional framework. 70 When conducting a refined economic approach to State aid control, it is principally necessary from an economic perspective to extend the analysis to the institutional organizing of State aid control. In a comparative-institutional analysis, it is crucial to assess which institution is best suited to carry out State aid control in an efficient manner. 71 For example, a purely domestic State aid control with no superior supervisory body would be conceivable. The results likely to emerge from such an organization of State aid control can be compared with the status quo, meaning State aid control by the European Commission, and the results that would, for example, come up during a control of aid allocation by another supranational institution other than the Directorate General for Competition. 70 As outlined in Section I. 3, there are a number of reasons that may cause the individual Member States to grant aid to an inefficiently high degree. This would suggest that a purely national control of State aid would not lead to a desirable result. Instead, excessive aid can much rather be expected. However, it would have to be considered that an inter-jurisdictional competition among Member States – a so-called competition among systems – would occur. If this competition takes place in an efficient manner, this could already be sufficient to discipline the governments of the Member States with regard to the granting of aid and thus increase efficiency. 72 However, it is not guaranteed that this is actually the case. In many cases, one must assume that inter-jurisdictional competition leads to an inefficient outcome. If jurisdictions compete by means of taxes, then this competition could lead to a “race to the bottom”, and the supply of public goods could be inefficiently low.73 No matter what the outcome would look like in an unrestricted competition of the systems, this result needs to be determined – also due to the subsidiary principle – as a benchmark for comparison with centralized State aid control within the framework of a comparative institutional analysis. 71 Considering the status quo (that is, a control of aid allocation by the EU Commission as a central institution), it needs to be analyzed whether this institution is best suited for this task. As already stated, many questions and problems occur in the context of State aid control that lay outside of the usually considered concepts of classical competition policy in which the Directorate General for Competition unquestionably has great competence. Traditional competition policy focuses primarily on competition among companies in markets for goods and services with related issues concerning the effects of mergers, the prevention or breaking up of cartels and the question of abusive behaviour of dominant firms. With regard to State aid control, however, the EU Commission has to answer questions on market failure facts, the evaluation of the efficiency of government expenditures and the effectiveness of inter-jurisdictional competition. Nevertheless, an expertise in these areas is not one of the core competencies of a competition authority.74 69

70

An exception is Haucap, More Economic Approach, 348. An introduction to comparative institutional analysis from a game theoretical point of view is provided by Aoki. 72 See Brennan/Buchanan; Edwards/Keen; Sinn. 73 Sinn (1997). 74 See Haucap (2007). 71

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It could therefore at least be considered a thought experiment to entrust central State 72 aid control to an institution that combines the specific competencies necessary for the assessment of aid from the different required sections of law and economics, such as public finance and international economics. This institution, similar to the “European Court of Auditors,” could then work closely together with the Directorate General for Competition, especially if the effects on competition need to be evaluated. Furthermore, it would be possible to complement State aid control on a national level with an independent national body that closely works with the supranational authority, i. e., the European Commission.75 Such a structure could, on the one hand, guarantee a certain competition of the systems among different Member States, at least for State aid without significant cross-border effects, while, on the other hand, the supranational institution would ensure that no aid is granted which leads to distortions of competition and interferences in interstate commerce.

IV. The “More Economic Approach” in State Aid Control – The State Aid Action Plan and State Aid Modernization As in other areas of competition policy, economic approaches and methods have in 73 recent years been increasingly used in State aid control. Here, the key objectives of the “more economic approach” are particularly a smaller and better targeted State aid. In the allocation of aid, a refined economic approach is necessary, and the procedures of granting aid is to be made more efficient. Furthermore, the application of law and its predictability is to be improved, and the transparency of the process is to be increased. In what follows, the two major State aid modernization projects are discussed from an economic point of view, the State Aid Action Plan including the balancing test and the State Aid Modernization (SAM) project.

1. The State Aid Action Plan The State Aid Action Plan (SAAP) was approved by the European Commission in 74 2005.76 It involves a consultation paper that lays out the objectives for a reform of State aid control and contains a “roadmap” indicating which reform measures are supposed to be taken from 2005 until 2009. a) Less and Better Targeted State Aid. In accordance with the Lisbon Strategy, the 75 SAAP provided a reduced aid level on the one hand and a better targeted allocation of aid on the other. The focus is on the objectives anchored in the Lisbon Strategy, such as research, development and innovation, investment in human capital and business formations. To reduce the level of State aid, all types of aid that do not support any measures of common European interest are to be kept to a minimum. In order to ensure a better targeted aid allocation (i. e., only granting aid without or with only minimal anticompetitive effects), aid is primarily to be used to correct market failures. Furthermore, aid is to be granted less as sectoral aid, where only specific economic sectors benefit, and more as aid of a horizontal (i. e., cross-sectoral) character. From an economic perspective, the particularly problematic rescue and restructuring aid should be avoided if possible. This way, distortions of competition between Member States can 75 This corresponds to the demand for a shared responsibility between the Commission and Member States, which was formulated both in the State Aid Action Plan and in the State Aid Modernization project. See also para. 77. 76 European Commission, State Aid Action Plan – Less and better targeted State aid: a roadmap for State aid reform 2005–2009.

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be reduced significantly. Although the EU Commission cannot affect the level of aid itself, as this is determined by the fiscal policies of Member States, a policy of better targeted aid can make an important contribution to reducing aid levels in the European Community. 76

b) More Effective Procedures, Better Targeted Application of Law and Better Predictability, Greater Transparency. In the course of the State aid control reform, a tripartite classification was proposed for the assessment of aid, whereby the lower level featured a reformed de minimis regulation.77 Furthermore, a general block exemption regulation was adopted, covering a wide variety of aid.78 Both regulations ensured an increase in efficiency of the procedure of granting aid, an improvement of transparency and an increase in legal certainty. The reduction in workload for the Directorate General for Competition associated with the more efficient process allowed a focus on the problematic cases, i. e., aid of considerable magnitude, which was not covered by the block-exemption regulation. This contributed to a more accurate assessment of the problematic cases. For a targeted application of law, it is crucial to examine the implementation of Commission decisions by Member States and particularly to better control the return of unlawfully granted aid. For this purpose, the Commission planed to better mediate the general principles, content and importance of State aid control and to initiate infringement proceedings if necessary. Another block exemption regulation, which was adopted in the course of the reform of State aid rules, involved regional aid. 79 In addition to the block exemption regulations, the European Commission adopted a set of guidelines regarding regional aid80, venture capital81 and environmental protection82. Furthermore, the community framework of research, development and innovation 83 needs to be mentioned. It clearly shows how the “more economic approach” was implemented in the course of the reform of State aid rules.

77

c) Shared Responsibility between Commission and Member States. Since the regulations adopted by the Commission are largely applied by the Member States, an improved implementation of aid policy, greater efficiency and transparency is required. Thus, careful notifications, such as the review of exemption requirements, can significantly shorten the duration of proceedings. In this context, the Commission considered releasing “guidelines for best practices”. This could enable independent authorities in the individual Member States to assist the Commission in the application of law, for example, in reviewing the implementation of Commission decisions or the return of unlawfully granted aid. These authorities had already been responsible in the new Member States for the review of the allocation of aid during the accession negotiations.

78

d) A More Economic Approach. A more economic approach should be particularly used in the allocation of aid, whereas, according to SAAP, aid should mainly serve to 77 European Commission, Regulation (EC) No 1998/2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid, OJ 2006/L 379/5. 78 European Commission, Regulation (EC) No 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation), OJ 2008/L 214/3. 79 European Commission, Regulation (EC) No 1628/2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid, OJ 2006/L 302/29. 80 European Commission, Guidelines in National Regional Aid for 2007–2013, OJ 2006/C 54/13. 81 European Commission, Guidelines on State Aid to Promote Risk Capital Investments in Small and Medium Sized Enterprises, OJ 2006/C 194/2. 82 European Commission, Guidelines on State Aid for Environmental Protection, OJ 2008/C 82/1. 83 European Commission, Framework for State Aid for Research and Development and Innovation, OJ 2006/C 323/1.

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correct possible market failures. If markets do not produce efficient results, it is than argued that State aid could contribute to correct these market failures. If companies make wrong decisions from a welfare point of view, then aid could provide incentives to companies to make better decisions. The SAAP lists a number of market failures that could be corrected by aid. These include external effects, public goods, information problems, coordination problems, and market power.84 However, aid in general also has significant anticompetitive effects that can significantly reduce welfare and undo the potential positive effects of aid. The assessment of whether and to what extent aid distorts or threatens to distort 79 competition and brings about interference in international trade requires an assessment of the economic effects of aid measures. It should be noted that different types of aid can lead to the same or similar results, depending on the specific situation. By the same token, different competitive effects can be linked to aid identical in amount and type, if the conditions in which aid is granted differ significantly. In other words, the same type of aid can have different effects in different situations, and different forms of aid can lead to the same result. An analytical approach that focuses solely on the form of aid will therefore, in many cases, provide incorrect results. It would, therefore, as in other areas of European Competition Law, make sense from an economic point of view to move from an approach solely focused on the form of aid (form-based approach) to an approach that is focused on the effects of an aid measure (effects-based approach). The SAAP and already-implemented measures have initiated such a transition. The change to an effects-based approach in State aid control was substantiated by means of a threestage test – the so-called balancing test. It should be noted, however, that this transition has not been fully completed in a satisfactory manner. This is particularly true for the economic analysis on the fact level, i. e., the question of whether the payment is actually State aid, incompatible with the common market.

2. The Balancing Test Determining whether aid is justified according to the SAAP is to be accomplished by 80 a three-stage testing procedure – the so-called “balancing test”. 85 Using this test, the positive and negative effects of aid are balanced against each other. The balancing test specifies the conditions for the discretionary decision for which the EU Commission has been offered ample leeway due to the very general wording of the grounds of justification in Article 107, paragraph 3. a) Positive Effects of Aid (Stages 1 and 2 of the Test). In the first stage of the test, it 81 is examined whether a market failure is corrected by an aid measure, whether an objective of common European interest or a different objective of regional or social character is in pursuit. If a market failure exists, then competition does not lead to an allocatively efficient market outcome. However, even if the resulting allocation is efficient from an economic perspective, the market outcome can be undesirable for political or social reasons. If the necessary precondition of market failure or a normative objective is met, then the second stage of the balancing test is initiated to examine whether an aid measure is the most appropriate tool to achieve the given objective. It is therefore important to raise the question to what extent a market failure can be eliminated specifically and effectively by aid. Even if a market failure exists, this does not imply that the situation will improve with government intervention. There might be the risk that aid would fail to achieve the desired effect and would have an adverse effect 84 85

See para. 28 et seqq. See Frederiszick/Ro¨ller/Verouden.

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on the competitive situation due to a state miscalculation. It should therefore also be examined whether there are possibly several different market failures and how the competitive situation – if only one market failure is corrected by aid – is expected to deteriorate as a result of state intervention.86 It may also be the case that other economic policy measures and tools are available that are better suited to solve the given problem. Distributional objectives could also be achieved by a change in national tax policy, for example, which is more suitable to achieve the desired objective, so that one can do without an aid payment. 82 Furthermore, it needs to be examined whether aid causes an incentive effect, i. e., causes the behaviour of the company directly or indirectly affected by aid to change in the desired direction. If aid does not lead to a change in the behaviour of the supported company, it does not result in an additional economic benefit, and tax revenues from the consumers are wasted.87 In the analysis, the welfare of all who are directly or indirectly affected by aid must always be considered. This effect not only includes the beneficiaries of aid and current or potential competitors of the beneficiary but also companies on upstream and downstream levels of the value chain. Finally, the consumers must also be considered. Since aid changes the constraints and incentives under which a company operates, it can be assumed that the behaviour of the company changes, for example, with regard to the supplied quantity, market entry or exit, or its research, development and innovation activities. This, in turn, could cause changes in the behaviour of competitors or other affected parties. Here, cross-border effects have to be taken into account, whereas the effects on employment and input markets are of particular importance. Finally, the question regarding the counterfactual must always be asked, i. e., how would the company behave if it did not receive aid? Furthermore, it needs to be examined whether aid is proportionate, that is, whether the same objective could not be achieved with less use of resources. 83 Verification that the conditions of the first and second stage are met proves to be difficult in practice, because in most cases, the quantification of market failure (e. g., the assessment of welfare loss that is caused by market failure) is problematic. This is particularly the case when several types of market failure (e. g. information and coordination problems) exist simultaneously. If this problem is not solved, then the problem concerning the proportionality of aid cannot be assessed. Only when the extent of market failure is known can the amount of aid be determined that should be used at most for the correction of a market failure. Principally, when it is analysed whether aid is the most appropriate tool to correct a market failure, a variety of alternative economic instruments in the broadest sense needs to be examined and compared to the aid measure. This in turn leads to considerable expenditures. 84

b) Negative Effects of State Aid and Balancing (Stage 3 of the Test). If the planned aid passes through the first two stages of the test, then possible anticompetitive and trade-distorting effects of aid are identified in the third stage of the test, and the actual balancing between the negative and positive effects of aid takes place. Aid should only be granted if the positive effects outweigh the negative. This sort of balancing involves a first step, where the relevant welfare standard needs to be made clear, and the relevant market must be defined. Finally, possible anticompetitive effects of aid are to be determined. The distorting effects can be measured by identifying who the beneficiaries 86

In this context, this is referred to as a “second-best-problem.” See also para. 137 et seqq. It could be argued that the authority of the European Commission concerning State aid control is limited to the protection of cross-border competition. The criterion of the incentive effect should, contrary to the draft regulation of the European Commission, not be taken into consideration for a uniform and directly applicable block exemption regulation. 87

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are and what conditions are attached to aid; what characteristic features the market and the beneficiaries have; and finally, how large the aid payment is and which tool is involved. These points will be outlined below. In assessing the effects of aid, economic objectives must be distinguished, i. e., the 85 elimination or correction of market failures on the one hand and normative objectives such as adjusting regional differences in terms of quality of life, on the other. While it is possible to include an efficiency criterion in the balancing between welfare-enhancing and welfare-reducing effects of aid concerning economic objectives, from an economic perspective regarding normative objectives, it is only possible to assess whether aid can achieve the normatively set objective in an efficient manner (with minimal distortive effects) or whether there are other, more suitable tools available. An example of this would be the adjustment of living conditions in different regions. The normative objective itself is beyond an economic analysis, and possible anticompetitive and welfare-reducing consequences connected to the achievement of this objective have to be accepted. Economic theory can only determine if aid is the best and most appropriate tool to achieve the given objectives, or whether these objectives can be achieved in a more efficient way with other instruments. The following primarily considers cases in which aid is used to achieve an economic objective – cases in which aid is used to increase the efficiency or the welfare within a market or an economy by correcting a market failure. In assessing State aid from an economic standpoint, the fundamental question is 86 therefore which welfare standard should be used as a criterion, whereby in this case, only the efficiency objectives can be considered. Previously, the criterion concerning the allocation of aid was the effect that aid has on the beneficiary company and its respective competitors (effect-on-rival standard) with which the anticompetitive effects of aid were attempted to be estimated. This concept is closely related to the idea of a level playing field. According to this criterion, an aid measure is always anticompetitive if it changes the relative market position of the companies. However, this is usually the effect of an aid measure, so that this criterion would consequently lead to the conclusion that any kind of aid is anticompetitive and therefore illegitimate. 88 When using this criterion, aid to correct market failure and increase welfare would cease to be an option. In addition, this concept does not correspond to the effects-based approach, because it does not focus on the effect of an aid measure on markets, competition and consumers. It focuses on the producer surplus of the competitors and the beneficiaries respectively. From an economic perspective, however, limiting the central criterion for the evaluation of anticompetitive effects to the effects on competitors is not useful, because the anticompetitive effects of aid generally not only affect the competitors of the beneficiary but especially the consumers. The evaluation criterion of the producer surplus of the competitors is inadequate, because allocative efficiency is determined by the economic surplus, i. e., the sum of the producer and consumer surplus. Though it could be argued that a long-term analysis shows that the negative effect of aid on the competitors of the beneficiary also negatively affects the consumers, from an economic point of view, direct focus on the effect of aid on consumers is preferable. In the other areas of European competition policy, the consumer welfare standard 87 has become the established evaluation criterion by now. If one were to apply this criterion to State aid control, only the effects of aid on the consumer would be considered. Short-term price developments, which occur on the relevant product markets as a result of aid from a consumer point of view, could hereby serve as evaluation criterion. However, this is just as problematic from an economic perspective 88

See Frideriszick/Ro¨ller/Verouden, 646.

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as the current limitation on the effects on competitors. If only the effect of aid on the consumers in the respective product markets is considered, and the effects on companies – both the beneficiaries of aid as well as their competitors – are not taken into account, aid could cut the company’s marginal costs and lead to lower prices in the short term and thus to higher consumer welfare.89 88 However, aid may in the medium or long-term lead to restrictions of competition, e. g., in the form of higher barriers to entry. Beneficiaries could increase their market share at the expense of their competitors, even if they are more efficient. These negative effects could be identified if the change in the producer surplus were to be taken into account. In addition, aid can also affect the incentives and the behaviour of market participants on upstream or downstream markets, which would have to be taken into account in an economic analysis of the effects of aid as well. Aid reduces the cost pressure that the beneficiary companies are exposed to and can cause an “aid culture”, which can lead to productive inefficiencies. If a company can expect to receive State aid the moment it runs into difficulties, then the incentives to produce efficiently, to carry out investments or to engage in research and development are reduced. This could, on the one hand, lead to productive inefficiencies if production is not carried out at minimal cost and, on the other hand, result in major dynamic inefficiencies. If aid is granted not only once but repeatedly, this can lead to a permanent distortion of relative prices and significant allocative inefficiencies.90 A limitation on consumer welfare, as it is common in other areas of competition policy, therefore appears to be problematic for assessing the effects of State aid.91 89 For these reasons, a more general criterion should be used for the evaluation of aid effects instead of the consumer welfare standard. One obvious criterion would be the total welfare standard, where the consumer and producer surplus on the relevant market as well as the upstream and downstream markets are taken into account. With this welfare standard, any kind of direct aid effect on the affected market participants (i. e., consumers and producers) could be assessed. However, from an economic point of view, the total welfare standard also falls short in assessing the effect of aid: Since aid is a transfer scheme – that is, a redistribution measure – even the total welfare standard would insufficiently take into account the financing side of aid. Because tax collection results in evasive reactions of those affected, allocative distortions occur on the financing side, which would also have to be considered. Otherwise, aid measures would generally be assessed to be too positive. It would therefore be useful, as the former chief economist of the Directorate General for Competition proposed, to take into account the interests of the taxpayers when assessing the effects of aid. 92 90 The SAAP itself does not contain any information about the welfare standard to be used, although there are references to opportunity costs of taxation. 93 In the community framework regarding State aid for research, development and innovation (R&D&I), it is pointed out that in the context of State aid control, the total welfare standard should be used, i. e., that both consumer and producer surplus should be taken into account. 94 A

89

Monopolies Commission, Hauptgutachten 2006/2007, mn. 1086. Ibid. mn. 1087. 91 A very long-term assessment with a limitation on consumer welfare would eventually capture the negative effects on competition, because in the end, potential distortions of competition resulting from aid would, for example, become visible in the form of higher prices or inferior supply. 92 See Friederiszick/Ro ¨ ller/Verouden, 647. 93 European Commission, State Aid Action Plan – Less and better targeted State aid: a roadmap for State aid reform 2005–2009, mn. 8. 94 See European Commission, State Aid Action Plan – Less and better targeted State aid: a roadmap for State aid reform 2005–2009, Section 1.1.1 Fn. 3. 90

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study on the methods to be used to economically assess aid measures that was funded by the Commission also argued for a “social welfare standard”.95 At this point of the test at the latest, it is necessary from an economic perspective to 91 define the relevant product and geographic market. Without defining the relevant market, an economically correct assessment of the competitive effects of aid is virtually impossible. In principle, analogous to merger control, the same conceptional framework could be used, i. e., the hypothetical monopolist test or SSNIP test.96 However, in the context of State aid control, some methodological modifications of the concept are necessary. These result mainly from the fact that the effects of aid can spread across different markets and economies. To identify these effects, it is necessary to track the effects of aid on companies and markets. This is a significant difference to the market definition as e. g. in merger control.97 For this purpose, it is recommended to define the market mainly by demand substitution and to consider the supply substitution only after the market has been defined. The reason for that is that matters of State aid control are always concerned with the identification of a distribution of profits and losses caused by aid, so that a separate examination of the effects on consumers and producers seems reasonable.98 All markets are to be taken into account in which the beneficiary is active or likely to be active in the short term. However, in the context of granting aid, another problem can occur, which is 92 analogous to the known phenomenon of the “cellophane fallacy.” It is well known that the definition of the relevant product market, particularly in the case of excessive prices, can easily lead to false conclusions. If prices have been increased because of a dominant position, consumers consider products as substitutes, which they would not regard as substitutable under competitive prices. This leads to the risk of defining the relevant market too broadly, particularly in cases of pricing abuse.99 An economically correct definition of the relevant product market must therefore start from competitive prices, which often are not easy to calculate in practice. If, however, aid payments cause the prices of products and services, such as fee financing of public online services, to artificially remain at a level below the competitive price level, then in such a case, a reverse cellophane fallacy is to be expected. Due to the artificially low prices, consumers are not willing to consider alternative products, which they would have accepted as attractive substitutes at a higher, competitive price. 100 In this case, there is a risk to define the relevant product market too narrowly, as important substitutes are not included in the examination. But also in such a case, for conceptual reasons alone, from an economic perspective the hypothetical monopolist test to define the relevant market is to be used, as this approach focuses on the relevant competitive constraints. Nevertheless, an integrative approach – as it is used by Ofcom, for example, the British competition and regulatory authority for communications services – could be useful, especially if it is impossible or unreasonable to have a reliable assessment of the competitive price level due to a lack of comparative markets or in the case of new products and services. This approach is based on the properties of new services and the 95

Nitsche/Heidhues, 5 et seqq. For more on the hypothetical monopolist test, see Schwalbe/Zimmer, 77 et seqq. 97 “With antitrust policy, the market is delineated to see whether the market mechanism will ensure competition. With State aid control, the definition of the market is required to trace the effects of aid across markets” (Fingleton/Ruane/Ryan, 83). 98 Fingleton/Ruane/Ryan, 83 et seqq. 99 For the cellophane fallacy, see for example Kerber/Schwalbe, para. 252 et seqq. 100 This could be called “reverse cellophane fallacy.” In connection to the provision of Internet services of public service broadcasters, see Dewenter/Haucap. For general information on the problem of “reverse cellophane fallacy,” see Froeb/Werden, Schwalbe/Zimmer. 96

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94

95

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comparison with already supplied services. Depending on the scenario, with or without new services, surveys of consumers, other commercial suppliers as well as suppliers in upstream markets are appropriate tools to assess what developments would follow and to keep the forecast risk to a minimum.101 Due to the cross-border effects of State aid, greater emphasis is to be put on determining the relevant geographic market. The role of potential competition should also be taken into account in the definition of the relevant market and not, as in other areas of competition policy, during the assessment of the competitive situation of the market as aid might just induce potential competition to emerge. This in turn could be important regarding the creation of a common market.102 The negative effects aid could have on competition can be divided into four categories, which affect the productive, allocative, and dynamic efficiency. 103 Productive efficiency could be influenced on a market if an inefficient company or an inefficient economic sector receives aid and is thus artificially kept alive. Aid will in this case lead to output that is not produced at minimal cost or that is not sufficiently demanded by the consumers. In both cases, significant welfare losses may result that especially affects the consumer. Negative effects of aid on allocative efficiency can occur in the form of the creation or strengthening of market power or a dominant position. Thus, a company or group of companies can gain such a significant competitive advantage over its competitors through an aid payment, that the market share or market power of the beneficiary company grows in a way that it is able to increase the prices for its products and its profits significantly. These additional gains could be used, among other things, to strengthen the company’s position on other markets. The beneficiary company could furthermore secure its position by the erection of barriers to entry or may be put into a position to force competitors to exit the market with abusive practices such as predatory pricing. State aid, such as in the form of aid for business start-ups, can also help to influence the location decisions of companies and thus affect the spatial allocation of economic activities. This in turn has consequences for interstate commerce, as the flow of goods between Member States is altered.104 Finally, the important effects of aid on dynamic efficiency need to be mentioned, which can be particularly reduced by changes in the dynamic incentives with regard to investments for example. There are possible scenarios regarding aid for research, development and innovation, where aid results in heavily inefficient investments in R&D.105 In particular, the effects on dynamic efficiency are important from an economic point of view, because they can have a decisive impact on the overall economic development of the community. Criteria that could be used to assess the negative effects of aid on competition are the characteristic features of the relevant market106, the nature and extent of aid and, finally, the allocation process of aid.107 Once the relevant product and geographic 101

See Ofcom, 7. Ibid. 103 For more on the efficiency concepts, see Schwalbe/Zimmer, 3 et seqq. 104 These effects could also be welfare-increasing if the companies without aid chose an inefficient location. See para. 141. 105 Aid could, for example, trigger a patent race in which companies invest more than the socially optimal amount. 106 A detailed overview of the relevant market characteristics can be found in Nitsche/Heidhues, 12. 107 For more on the criteria for assessing the anticompetitive effects of State aid, see Friederiszick/Ro ¨ller/ Verouden, 654 et seqq. 102

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market is defined, market shares of the beneficiary or beneficiaries and its competitors can be calculated. If the beneficiary already possesses a large market share, then this can be an indication of existing market power. The same also applies to a pronounced asymmetry of market shares. If this asymmetry is reinforced by aid (i. e., the market share of the beneficiary company increases relative to those of its competitors), a distortion of competition is more likely to be expected. Market shares, however, are less meaningful for differentiated products, because the closeness of substitution between the products is what matters more. Concentration is also an important criterion, as competitive problems are more likely to be expected in an already highly concentrated market. The existence of entry barriers is also an indication that distortions of competition are caused by aid. If the relevant market is characterized by significant overcapacities, low innovation and non-temporary decline in demand, it seems likely that aid merely solidifies the inefficient structures. The effects on upstream and downstream markets are also important. If aid, for example, increases the price for important inputs, it can have negative effects on other Member States. Other important characteristic features relate to the nature of the product and its distribution. If the aid beneficiary is a company that already operates in several Member States, it is more likely to be expected that aid affects trade flows among Member States or the location decisions by companies. The nature and extent of aid also allow a conclusion on the competitive effects. 99 However, a general correlation between the amount of aid and the extent of the induced distortion of competition cannot be deduced. The amount of aid is always to be assessed proportionally to the size of the market. A small amount of aid in a small market can lead to significant distortions of competition, while large aid in a sufficiently large market has no noticeable effects on competition. In principle, it is certain that larger amounts of aid more likely cause a distortion of competition for a given market size than smaller amounts of aid. In addition to the amount of aid, its intensity also needs to be taken into account, because higher aid intensity tends to lead to a greater distortion of competition. Moreover, it is to be considered whether aid is granted once or repeatedly. Particularly in the case of repeated aid measures, there is a risk that companies develop an aid mentality that harms productive efficiency. Concerning the type of aid, the effects of aid on the normal operating procedure are usually different from investment aid for example. If aid subsidizes the variable production costs of a company, then this usually translates into a direct effect on prices and therefore on competitors and consumers. An investment aid has no direct effect, but long-term effects in the form of market entry or exit can occur, or location decisions of companies are affected. It usually makes a difference whether aid is granted in the form of direct payments, tax deductions or bonds. Direct payments tend to have a greater effect on competition than indirect benefits. Concerning the allocation of aid, the degree of selectivity of a measure and the 100 transparency of the process is particularly important. It is also crucial to consider whether the measure is an ad hoc aid or an aid scheme. The lower the degree of selectivity of an aid measure is, the lower the anticompetitive effects will be. If all companies of a certain size or within a specific region receive aid, competition will be distorted in most cases less than in cases of a high degree of selectivity, that is, if only one company or a small group of companies receive aid. Similarly, a non-discriminatory, open and transparent procedure of granting aid is more likely to be unproblematic, because such a procedure is difficult to be used for industrial policy, such as to enforce the creation of national champions. It can also be assumed that aid schemes lead to fewer distortions of competition than ad hoc aid. However, aid schemes can also lead to negative effects if Schwalbe

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Introduction

only a small group of companies in a specific industry qualify as beneficiary. Aid intensity is high, and powerful companies can also receive aid within the framework of an aid scheme. In these cases, the aid scheme can also cause the creation and strengthening of market power or affect the spatial allocation of economic activities. 101 An efficiency defense, which can be put forth in horizontal and non-horizontal mergers, is not possible in the area of State aid control, since state representatives – not companies – are the cause for possible distortions of competition. However, the criterion of market failure, which is the main economic justification for granting State aid,108 can be regarded as a kind of efficiency defense, because market failures exist whenever the market does not produce an efficient outcome due to such frictions. Since the burden of proof that market failures exist lies with the Member States, and this evidence cannot be easily provided, it can be assumed that the “more economic approach” regarding State aid rules tends to lead to a more critical assessment of aid and a more restrictive State aid control.109

3. State Aid Modernization In the context of the strategy “Europe 2020” for sustainable growth, employment, social development, industrial competitiveness and the strengthening of the internal market that was initiated in 2010, the European Commission started in 2012 to adopt a major reform package of State Aid called “State Aid Modernization” (SAM). A main objective of the SAM project is a concentration of State aid control on cases that have a potentially large impact on competition in the European Union. This is achieved by exempting more categories of aid from prior control by the Commission and thereby shifting the control of State aid to the Member States. It is intended that, in particular by a reform of the General Block Exemption Regulation (GBER), up to 90 % of all State aid measures can be block-exempted. As State aid procedures are often lengthy and inefficient, the efficiency of State aid policy is to be increased by simplifying the granting of State aid and reducing red tape. 103 These wider margins for the Member States have to be balanced by strengthening the Commission’s powers of investigation of aid schemes by increasing the obligations of Member States to assess ex post the fulfillment of the awarding criteria and also the ex post effectiveness of the scheme or individual measures. 110 The ex post-controls of compliance with the formal conditions for exemption are strengthened and a targeted and proportionate ex-post evaluation of large schemes is provided. In addition, the Commission is attempting to get better investigative tools, comparable to those in other fields of competition policy. These measures – a stronger focus on schemes, stricter ex post assessment and more powerful investigative tools – would significantly increase the competencies of the Commission and also indicate a shift from an ex ante evaluation of State aid to an ex post assessment.111 The evaluation considers whether an aid scheme is effective in achieving the direct objective for which it was introduced and whether the scheme provides for indirect effects on the objective of interest. Also, potential negative indirect effects of the scheme, in particular the effect of large schemes on competition and trade are taken into account. In addition, transparency is increased by making aid awards at the individual level public to ensure peer review, public control and greater accountability. 102

108

See para. 128 et seqq. See Monopolies Commission, Hauptgutachten 2006/2007, mn. 1098. 110 Friederiszick/Tosimi, 3. 111 Ibid. 109

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With respect to the conditions under which State aid can be granted, similar 104 provisions apply as in the SAAP: Only a “good aid” should be granted, i. e. a State aid that is targeted at an objective of common interest. It must bring about an improvement that the market cannot deliver itself, i. e. either correcting a market failure or aiming at an equity or cohesion concern. The aid must be the “appropriate instrument” and must have an incentive effect, i. e. has to induce the beneficiary to undertake activities it would not have done without the aid. Further, the aid has to be “to the minimum”, i. e. it is the least amount necessary to achieve the objective of common interest and is least distortive with respect to competition.112 The requirements to prove the “incentive effect” of an aid have substantially increased as compared to the SAAP. In contrast to the SAAP and the respective legal architecture of State aid consisting of block exemptions, standard assessment, and in-depth assessment, the SAM only comprises block exemptions and a more substantive (in-depth) assessment. The standard assessment is dropped and replaced by a more substantive (in-depth) assessment which considers the incentive effect a necessary pre-condition for approval of an aid measure. 113 In the course of the SAM the Commission has adopted five regulations, the two most 105 important from an economic point of view being the General Block Exemptions Regulation (GBER)114 and the de minimis regulation.115 In comparison with the former block exemption regulation from 2008, the scope as well as the amount of blockexempted State aid as been increased. One the one hand, new categories of block exempted State aid have been introduced, e. g. innovation aid to large enterprises and broadband connections or new forms of aid within existing categories are exempted, e. g. a wider concept of investment aid for infrastructure or risk finance applies. On the other hand, the notification thresholds have been increased and larger aid intensities are allowed. In addition, the rules have also been streamlined as there are now simplified checks for the incentive effect of an aid measure as well as with respect to the proportionality of the State aid. In the new de minimis regulation, the threshold of E 200.000 per undertaking over the period of three years has not been changed but the rules have been simplified. In addition, the scope has been extended to firms in financial difficulties and automatic criteria have been introduced for the notion of an “undertaking in difficulty”. Also, the revised regulation contains safe harbours for aid in the form of guarantees and loans. Moreover, the conditions of cumulation as well as the definition of what constitutes an “undertaking” have been simplified and clarified. In addition to the revised regulations, the commission has also adopted several 106 revised guidelines on e. g. research and development and innovation, rescue and restructuring, regional aid, risk financing, environment and energy, broadband connections etc. Most of the revised guidelines contain several new features that are supposed to encourage Member States to grant aid which enhances economic growth and to align the guidelines with the common principles. This applies in particular to the guidelines that relate to the Europe 2020 objectives as e. g. the guidelines for Regional Aid, Research and Development and Innovation, Broadband and Environmental Aid. All in all the development of State aid control over the last decade shows a clear tendency to less State aid as well as to a refined economic approach. This is achieved by focussing on

112 European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – State Aid Modernization (SAM), mn. 12. 113 Friederiszick/Tosimi, 6. 114 European Commission, see also para. 163 et seqq. 115 European Commission, see also para. 159 et seqq.

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the incentive effect of State aid and by concentrating on aid measures which have a potentially large impact on competition and trade in Europe. 107 The analysis of the effects of aid on competition or on interstate commerce can principally be carried out on two different levels. During the investigation, it is first examined whether a payment in fact qualifies as aid, i. e., on the factual level. Secondly, the competitive effects of aid are especially analysed in the third stage of the balancing test – on the so-called justification level – that examines whether an aid payment is justified in a particular case. From an economic point of view, it would be useful to conduct an economic analysis of the effects of a state payment or aid on both levels. If the economic analysis is limited to the justification level, there is the danger that state payments are made, because they were not classified as aid due to the absence of an insufficient analysis on the factual level, or they are not made, because they were incorrectly classified as aid but did not pass the balancing test. In the following Section, the possibilities of an economic analysis on the factual as well as the justification level are described in more detail.

4. Economic Approach on the Factual Level The usual definition of the term State aid implies that aid is only incompatible with the common market when a favouring effect occurs as a result of transfer of state resources, and this preferential treatment selectively affects certain industry sectors or companies. This is only a necessary but not a sufficient condition for the incompatibility of State aid with the common market. Additionally, it is crucial that State aid distorts or threatens to distort competition and affects trade between Member States. 116 The aforementioned criteria of selective favouring, the distortion of competition and the effect on trade can serve as starting points for an economic analysis. However, in the course of the reform of State aid rules, an economic analysis on the fact level (Article 107, paragraph 1, TFEU) (e. g., the question concerning the incompatibility of State aid with the common market) was neither planned for the SAAP nor for the previous implementations. The SAM is addressing this problem by a clarification and a better explanation of the notion of State aid.117 The role of the Commission, however, is limited to providing clarification as to how it understands and applies the provisions of the Treaty, which could potentially result in a problematic gap. 109 Only when it was determined that the transfer of State aid is incompatible with the common market a second step is initiated on the justification level (Article 107 paragraph 3, TFEU), involving an economic analysis of whether the distorting and trade-affecting effects can be more than balanced by the positive effects, such as the correction of market failures, the achievement of an objective of common European interest or the cohesion of the EU, i. e., whether aid can be granted in exceptional cases. Nevertheless, it is problematic to substantially limit the economic analysis to the justification level, because the European ban on State aid only takes effect and justifies an intervention by the EU Commission as supervisory body when an imminent distortion of competition was previously discovered on the European single market (Article 3, paragraph 1, letter g, TFEU). 110 As part of the ban on State aid in Article 107, paragraph 1, TFEU, an in-depth economic analysis is so far only carried out with the “private investor test”, once an “advantage” is present. With the help of this test, it is examined, Therefore, in accordance 108

116

Schmidt/Schmidt, 226. See European Commission, Communication form the Commission, Draft Commission Notice on the Notion of State Aid Pursuant to Article 107(1) TFEU. 117

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with equally settled case-law, it is necessary to assess “…whether, in similar circumstances, a private investor of a dimension comparable to that of the bodies managing the public sector could have been prevailed upon to make capital contributions of the same size.”118 If this is the case, it would not be considered as an advantage, since the company could have raised capital under the same conditions on the capital market. 119 Unlike the advantage criterion, the criterion of distortion of competition is usually not subject to a thorough economic analysis. Only a general sector specific investigation is conducted, which lags well behind the standards that were applied under European Competition Law, even before the introduction of the more economic approach. Thus, a precise definition of the relevant market, which would have to be carried out within the framework of State aid control in a modified form, is omitted. 120 State aid control – unlike the antitrust provision of Article 101, TFEU – also does not require a “noticeable” distortion of competition as an unwritten characteristic feature. This practice of the EU Commission has in the past been approved by the European courts. What the jurisdiction demands of the economic arguments by the European Commission regarding State aid rules therefore deviates fundamentally from the rules they put in place for the antitrust prohibition provisions (Articles 101, 102 of the TFEU and Article 2 paragraph 3 of the Merger Regulation). When providing evidence of an effect on cross-border competition and trade in State aid cases (Article 107, paragraph 1, TFEU), the European Commission neither has to satisfy the standards of the effects-based approach, which it uses in antitrust cases, nor meet the requirements of the form-based approach traditionally significant in competition law. From an economic perspective, it appears to be reasonable to use a more refined economic approach also on the factual level (Article 107, paragraph 1, TFEU), both in relation to a possible distortion of competition and an effect on international trade, as this is also the standard in other areas of European competition policy as in merger control and the prohibition of abusive behaviour. Here, it would be useful after an adjusted market definition for State aid control to test objectively whether State aid leads to a significant distortion of competition. This procedure would have to be accompanied by a limitation on the scope of the European Commission’s aid supervision and would have to be flanked by the introduction of complementary State aid control on a national level and the private right to take legal action. In an economic analysis of a possible distortion of competition on the factual level, a first-step analogue to merger control or control of abusive behaviour would require State aid control to define the relevant product and geographic market in order to determine the market position of the advantaged company, while respective modifications are taken into account at the same time. This assumes that the advantaged company and the supported project has already been determined. If this is the case, it can be determined based on the definition of the relevant product and geographic market, whether State aid causes a significant distortion of competition or increases the risk of such a distortion. For this purpose, it is reasonable from an economic point of view to use market shares, the respective level of concentration and the HerfindahlHirschman-Index (HHI) as indicators for identifying a distortion of competition after the definition of the relevant market. Based on the data that the EU Commission listed

118

ECJ decision 2002, 4397, C-482/99 – Stardust, mn. 70. For general information on the “private investor test,” see Su¨hnel. 120 For more on the definition of the relevant market in the context of State aid control, see para. 91 et seqq. 119

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in its guidelines for the assessment of horizontal mergers, a market share threshold of 25 % and a HHI of 1,000 could be established as benchmark. 121 The higher the market concentration, the more likely it is that State aid to established companies will distort competition because a tight oligopoly involves a significant strategic interdependence between market participants. In this case, an existing factual distortion of competition seems likely. At the same time, the incentives to grant distortive aid are particularly high in the political realm. If aid is to be granted to an undertaking with market power or a market-dominant undertaking, there is a risk that this company can further strengthen its position against its competitors and continue to increase its existing market power. Furthermore, as explained above in the context of the balancing test, it needs to be considered that State aid can facilitate certain predatory practices for a market-dominant undertaking such as predatory pricing. Finally, it should be noted that State aid can prevent or hamper market entry of potential competitors by establishing or increasing barriers to entry. The degree of selectivity of the aid measure could also be used as a further criterion in the analysis of a possible distortion of competition on the factual level. If the aid is of a pronounced selective character and only affects one or very few companies, a distortion of competition is more likely. However, if the selectivity of State aid is low because, for example, all companies of a certain size or within a specific region are supported, potential distortions of competition would need to be investigated more closely. If such distortions are also to be expected with low selectivity, then State aid on the factual level would be incompatible with the common market but could possibly be approved on the justification level in exceptional cases. However, the ban on State aid of Article 107, paragraph 1, TFEU not only covers aid to specific companies or for certain projects but also so-called general aid schemes. Thus, aid measures with horizontal objectives often do not specify which companies and which sectors benefit as well as which markets are affected in practice. In this case, a definition of the relevant product and geographic market cannot be undertaken. The test should therefore be limited to the question of whether the aid measure is likely to cause a significant intervention on the market and the competitive process on the EU single market. It seems appropriate to expect from the outset a significant distortion of competition with certain kinds of aid. However, since the characteristic feature of the benefit (selectivity) of Article 107, paragraph 1, TFEU is interpreted very broadly, a general presumption cannot be justified for all constellations. Hence, measures are also classified as aid, which benefit all companies in a specific region or of a certain size. The same applies to measures that are configured horizontally and benefit companies from different industries. In general, it is to be assumed that rescue aid for undertakings in difficulty usually leads to a distortion of competition. The cause of the difficulties can in many cases be traced back to a productive inefficiency of the company that is kept alive artificially by rescue aid at the expense of efficient competitors. Therefore, the danger of inefficient and distortive State aid appears to be particularly high. The same applies to aid for sectors where significant overcapacities exist (restructuring aid). In both cases, there is a considerable risk that this kind of aid maintains and solidifies inefficient market structures. In these cases, whether State aid is exceptionally permissible following market failure – as for example due to adjustment defects or normative reasons – could 121 See European Commission, Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ 2004/C 31/5, mn. 19.

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be examined in more detail in the context of the balancing test on the justification level. The latter could be the case if social reasons, such as the loss of a large number of jobs in a region with already low standards of living, justify the granting of such aid in exceptional cases. It is therefore reasonable to perform a noticeability test along the lines of Article 107 paragraph 1, TFEU for all other forms of aid. Here, elements of the so called “significant impact test” (SIT) could be used, whose introduction had been planned by the EU Commission in 2003 in order to better concentrate on the problematic distortions of competition. The SIT of the EU Commission has not been introduced due to the resistance of the Member States, especially since they could not agree on the positive list provided therein. In this list, certain predetermined sectors were listed, in which significant cross-border effects were supposed to be considered unlikely. However, such a positive list is a very inflexible instrument, and there is a risk that relevant issues are not covered in this list. It might however prove to be useful to use certain elements of the SIT in an economic analysis on the factual level. Elements of selectivity, the amount of State aid, aid intensity and the nature of the process of granting aid could hereby be considered. The noticeability of a distortion of competition would tend to be lower if aid were not limited in advance to a particular company or sector. This applies, even if aid, which is received by a single undertaking over the course of three years, does not exceed the amount of 1 million Euro. A low noticeability can also be assumed if aid is granted based on activity, and the aid intensity (i. e., the share in funding of the total expenditure of the project) does not amount to more than 30 %. Finally, transparent processes of granting aid are to be used for individual aid and the benefit of general aid schemes must be accessible to all companies that meet certain criteria. If none of the outlined presumption requirements lead to a definite result, then the question of whether a particular action causes significant restrictions of trade between Member states is to be answered by a thorough investigation. Several factors must be considered that concern both aid and its granting (State aid criteria) as well as the relevant markets, the predictable effects on competition and the market position of the beneficiary (market conditions). State aid criteria include the amount of aid, its amount relative to the costs of the supported activity (aid intensity) and how State aid is granted. It is hereby important to consider whether aid is granted only once or repeatedly and whether an open and transparent procedure has been used. In addition, market criteria include the existence of overcapacities, the market share of the beneficiary, market concentration, market share lead compared to the second largest competitor, the height of barriers to entry (significant sunk costs), its degree of vertical integration, the degree of product differentiation, and the expected price development resulting from State aid. With regard to the characteristic feature of restrictions in the trade between Member states, the concept of “noticeability” should be used – like in antitrust law – as an unwritten precondition to avoid an extention of the scope of Article 107, paragraph 1, TFEU to matters of minor transnational importance with only a local focus. This seems appropriate, since State aid control as well as antitrust laws aim at protecting competition on the European single market (Article 3, paragraph 1, letter g, TFEU). Only a justified concern of negative cross-border effects can thus trigger State aid control and a ban on State aid on a European level. It needs to be taken into consideration that European courts which are ultimately responsible for the interpretation of the ban on State aid and the included criterion of a distortion of competition have traditionally required only a very low standard to meet this criterion. This problem could be solved by a legal clarification. However, it is also Schwalbe

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conceivable that a change in the application of law could already be sufficient, and the European courts would give up their traditional jurisdiction. The decision by the European Court of Justice in the Le Levant case from February 22, 2006 can serve as an indication as the Court rebukes the European Commission explicitly for their failure to further examine the characteristic feature of a distortion of competition in the contested negative decision.122 125 If a higher required standard for the existence of a distortion of competition came into effect, it could be argued that this might make it more difficult for Member States to assess whether or not a measure is subject to notification according to Article 108, paragraph 3, TFEU. This could be rectified by maintaining the low standards for verification in the context of Article 108, paragraph 3, TFEU and only imposing greater disclosure obligations on the EU Commission concerning Article 107, paragraph 1 TFEU.

5. Economic Approach on the Justification Level While so far a detailed economic analysis, including a definition of the relevant market and an investigation of the competitive conditions, as well as the effect of State aid on competition and trade between Member States, is not carried out on the factual level, such an investigation is intended on the justification level especially in the course of the compatibility assessment of Article 107, paragraph 3, TFEU. This applies to the criterion of the incentive effect and to the balancing of the positive and negative effects of State aid. Such an approach may prove to be problematic, since this assessment will in many cases be unnecessary. This could, for example, be the case if an aid measure already failed to satisfy a compatibility criterion, because it did not eliminate a market failure or was not appropriate or necessary to do so. In this case, the investigation is already terminated prior to the economic analysis of the competitive effects of an aid measure. Therefore, future cases are conceivable in which the EU-Commission prohibits an aid measure without having investigated its distortive effect on the EU single market. This seems problematic, because the EU Commission is only legitimized to exercise State aid control under the protective purpose of Article 107 et seqq., TFEU when competition on the European single market is impaired by State aid. 127 Therefore, as already explained in Section IV.4, it would have to be assessed from an economic point of view whether a market failure exists and whether aid is the appropriate and necessary means to correct the market failure when investigating on the factual level whether competition is distorted. If this is the case, then the competitive situation is in general not deteriorated in terms of effects, but the competitive framework is expected to improve. In many cases in which a supposed market failure is to be corrected, there is a risk of state failure due to forecast errors with the result that the existing competitive situation is deteriorated (second-best problem).123 As this could lead to an over-optimal intensity of state intervention, it is appropriate that the burden of proving the existence of a specific market failure should lie with the Member States, which should carry out a more detailed examination of the existence of a market failure only on the justification level, as practiced by the European Commission. The existence of the criterion of a distortion of competition on the factual level would have been held to be established if the State aid could have a noticeable impact on the cross-border competition process and steer the behaviour of market participants and their investment decisions into a very different 126

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ECJ, verdict of February 22, 2006, T 34/02, Le Levant/Commission, ECR 2006, II-267, mn. 127. See para. 137 et seqq.

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direction. The market failure criterion, therefore, has a comparable function on the justification level as the efficiency objection within the European ban on cartels (Article 101, paragraph 3, TFEU).

6. Economic Problems in Assessing the Effect of Aid It has already been pointed out in Section III that there are serious differences 128 between State aid control and other areas of competition policy. These can lead to problems that cannot be found to a comparable extent in the other areas of competition policy. These problems include firstly the financing problem and secondly the so-called “second-best” problem. In addition, there are some difficulties associated with the spatial competition induced by State aid and the general economic policy. a) Financing Aid. State aid is a transfer, where money is taken from a group of economic agents – taxpayers – by levying a tax that is allocated to another group, such as beneficiaries or regions. This is in contrast to merger control as well as control of abusive practices and leads to a number of additional difficulties in assessing the welfare aspects of State aid that do not occur in other areas of competition policy. If aid is financed through taxes, then levying these taxes will generally change the behaviour of economic agents, because they will make different decisions than without it. This generally results in inefficiencies and hence welfare losses. These welfare losses are called “shadow costs of taxation”. As some recent studies have shown, these welfare losses can be quite significant.124 Although such a tax will trigger only a small effect on each individual taxpayer, overall, changes in factor supply can occur that lead to welfare losses beyond previous estimates. Therefore, within a welfare-theoretic assessment of State aid, two sides have to be taken into account: the revenue and the expenditure side.125 This continues to be widely accepted in economic literature on State aid control. Thus, for example, it was stated, “Last but not least, it must be borne in mind the government’s expenditure in implementing the policy has to be financed and this is likely to lead to some loss of efficiency in other parts of the economy”.126 The effects of tax financed aid should therefore be taken into account in the assessment: “As a result, we propose that the opportunity costs of funding, that is, both the direct cost of the subsidy and the deadweight loss due to distortionary taxes, need to be included in the standard of State aid.”127 For this, the following proposal is made: “Governments should take efforts to measure under the shadow costs of using funds for State aid and require a level of benefits of State aid that is above the identified costs.”128 In the SAAP, the revenue side is mentioned: “Tax payers in the end have to finance State aid and there are opportunity costs to it. Giving aid to undertakings means taking funding away from other policy areas.“129 However, the authors confine themselves mostly to mentioning these problems. Although some empirical estimates regarding the funding costs of State aid are cited, these costs are largely ignored in a welfare analysis. In addition, the present estimates of the shadow costs of taxation cannot be transferred directly onto the issue of State aid in the European Union, as the underlying data were obtained in a model framework that is 124

See Parry/Oates, Browning. For more on the problem of considering the financing side of aid, see Schwalbe (2006). Miklejohn, 9. 127 Friederiszick/Ro ¨ ller/Verouden, 645. 128 Nitsche/Heidhues, 13. 129 European Commission, State Aid Action Plan – Less and better targeted State aid: a roadmap for State aid reform 2005–2009, mn. 8. 125 126

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not appropriate for the assessment of the overall effects of State aid. 130 The underlying data are from other countries (e. g., USA, New Zealand and Australia) with a different institutional framework. However, if welfare losses are systematically underestimated or even ignored due to the financing of State aid through taxes, then one runs the risk of overestimating the positive effects of State aid on welfare and of proceeding too generously with the granting of aid. In order to reach an economically meaningful assessment of the welfare effects of aid, the same emphasis must be placed on the financing side as on the expenditure side. Unfortunately, this is currently not the case. Heidhues/Nitsche state in their extensive scientific report, “While theoretically and empirically very relevant, there is little explicit use of the shadow costs in theoretical models and practical appraisal in the context of State aid control.”131 It would therefore have to be considered to include the shadow costs of taxation in the assessment of the effects of State aid. For this purpose, methods could be used that have already been applied many times in the investigation of tax effects and which allow an assessment of the effects of government revenues and expenditures. These procedures are so-called “computable general equilibrium models” (CGE),132 quantitative models that allow an estimation of the magnitude of the effects of economic policies. Moreover, it is not just individual markets that are analysed in these models, but a quantitative model of an entire national economy (or several economies interconnected by trade such as the European Community) is constructed. Using a CGE model the total effect of State aid (i. e., on companies, consumers and taxpayers) can principally be estimated: “This provides an ideal framework for appraising the effects of policy changes on resource allocation and for assessing who gains and who loses.”133 Due to the fact that State aid is concerned with transfers, simple partial analytical models, as merger simulation models, are not sufficient. If an estimation of the welfare effects of State aid was only limited to the expenditure side of the two scenarios – “with aid” and “without aid” – it would usually lead to an erroneous assessment of the welfare effects. A situation with aid would have to be compared with a situation without aid, where the respective amount is used for other purposes. This could be another kind of State aid but also expenditures on infrastructure or education. A tax cut or a reduction of the state budget deficit would also have to be considered. A simple partial analysis is insufficient, even if the shadow costs of taxation are taken into account, because the feedback effects of tax-financed State aid must also be borne in mind. That is exactly what also needs to be estimated when dealing with the welfare effects of State aid. Of course it would be unhelpful to try to develop a specific model for each individual aid, because the required effort would be substantial. However, such approaches could be used to determine the upper limit for the amount of aid specified in the balancing test, beyond which a detailed investigation by the Commission sets in. CGE models allow a better assessment of the welfare costs of financing State aid compared to a simple, project-related, cost-benefit analysis, which usually underestimates the cost of financing. It is to be assumed that this limit is lower than previously suspected in regard to the welfare losses due to the financing of aid by distortionary taxes. 130 The above-mentioned estimates come from partial analytical models, i. e., models that deal with analyzing individual markets. Here, however, an approach taking into account all markets would be preferable. See Parry/Oates, 9. 131 Heidhues/Nitsche, 70. 132 For an introduction to this subject, see the older but still instructive book by Shoven/Whalley or the introduction by Munk. 133 Shoven/Walley, 1.

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b) Second-Best Problems. Next to the aforementioned difficulties of an economic analysis of State aid, another conceptual problem occurs – especially concerning State aid control – that has at best been relegated to footnotes in previous theoretical economic studies, although it makes the granting of aid appear problematic overall. These problems are referred to as “second-best” problems, and the “second-best theory” has drawn attention to them. This goes back to an article by Lipsey and Lancaster on general equilibrium theory.134 In this article, they examine economies where not all conditions for a Pareto-optimum are met due to e. g. external effects or other constraints. That means that at least one of these conditions is not satisfied. In this case, it does not make sense from a welfare-theoretical point of view to try to ensure that all the other conditions for a Pareto-optimum are met, but greater welfare improvement could be achieved if one or more condition(s) were not satisfied. In other words, if more allocative distortions exist, the elimination of one distortion does not generally lead to a Pareto-improvement. If the optimality conditions for a competitive equilibrium are not met due to an external effect, and an allocative distortion is simultaneously present because of asymmetric information for example, the elimination of the inefficient allocation due to the external effect could lead to a welfare reduction. This is the case if the external effect worked as a counterweight to the inefficiency caused by asymmetric information. Due to its elimination or reduction, this counterweight is decreased, and welfare is thereby reduced. The elimination of market failure by aid does not necessarily lead to an increase in welfare. The attempt to bring about a better, more efficient allocation and achieve greater welfare through State aid can cause the exact opposite. This fact is well known in economic theory and is occasionally mentioned in economic literature on State aid control. As Gual (2000) writes, “… government intervention to achieve the social optimum is subject to the usual caveats of [a] second-best analysis. If other distortions are present in the economy, there is no guarantee that social welfare is increased …”135 However, the discussion of the second-best problem is limited to its mentioning. The reason is that a well-founded analysis of the problem not only requires examining the market where a market failure exists but an analysis of all other markets in the economy or even of the common market also needs to be conducted simultaneously. This, however is not possible due to the great complexity of the problem on the one hand and the significant problems of data availability and measurability on the other. Only if the market failures eliminated or reduced by State aid are of a comparatively small extent, it would be reasonable to assume that second-best problems are negligible, because in this case they will not have a significant balancing effect as to any imperfections on other markets. This also means that State aid will not have significant welfare-enhancing effects, for the removal of a small market imperfection usually only has minor welfare-enhancing effects. Therefore, the following problem arises: If a significant market failure is corrected or substantially reduced by State aid, then it is likely that serious second-best problems exist. If this is not the case, then aid in general will not cause large increases in welfare. How this problem can be solved in practice is unclear. It will most likely have to be assumed that second-best problems do not exist, or they are only of minor importance.

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c) Effects on Spatial Competition and Economic Policy. Another problem besides 141 the financing of State aid and the second-best problem are the undesirable effects of 134 135

Lancaster/Lipsey. Gual, 15.

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central State aid control on the spatial competition between Member States and regions as well as on the general economic policy of the individual Member States. If one assumes that not only competition among companies but also institutional competition among Member States and regions have positive effects, the question arises whether it makes sense from an economic point of view to withdraw the granting of (industrial location) aid as a competitive parameter from the Member States and regions by transferring State aid control to the EU-Commission. In economic theory, it is well known that the free choice of location for companies, especially in markets with imperfect competition, usually does not lead to an efficient spatial distribution of the companies.136 Industrial location aid could thus help companies and investors make better (i. e., more efficient) location decisions. The new political economy shows that policymakers generally have a strong interest that companies locate in their jurisdictions. This creates jobs, the tax base is increased, and the re-election chances of the decision makers are enhanced. On the demand side, mobile companies look for favourable location conditions under which they can produce with low costs, and where the produced goods and services can be sold easily. Industrial location aid is therefore an effective tool to consider and internalize the positive external effects of such an establishment, especially in the form of agglomeration advantages that an establishment can trigger in a particular region. Depending on the characteristic features of the company willing to locate and the respective region, these positive externalities can be of different extent. From an economic perspective, it is efficient that policymakers have the opportunity to conduct a price differentiation through aid in the form of differently sized discounts on tax payments. In a spatial competition, the Member State or region that expects the largest welfare gain will prevail. 137 Furthermore, it should be noted that companies often have to make long-term location-specific investments in case of an establishment, as it applies for example to infrastructure providers in the energy, transport or telecommunications industry. These location-specific investments are to be regarded as sunk costs. In these cases, there is a risk that the corresponding authority, upon completion of the location-specific investment, adversely changes the framework for the company in the form of subsequent tax increases or other regulatory interventions. This is a so-called hold-up problem. The company that anticipates such behaviour on the part of the authority will therefore either not locate or make lower location-specific investments compared to the efficient amount. Industrial location aid can thus be seen as an instrument to protect specific investments against subsequent deterioration and exploitation by the respective authority. This way, it can contribute to efficient location-specific investments. There may exist, however, a hold-up problem on the part of the beneficiary company. For example, this could be the case if a growing firm creates an increasing threat potential to relocate and thereby reduce the number of jobs in the region significantly. It depends primarily on the specificity/irreversibility of the investments and which of the two sides has the greater threat potential. Threats by a company that invested extensively in location-specific facilities (e. g., infrastructure) to relocate have only very limited credibility. Furthermore, the question arises why the granting of industrial location aid, which is just one of a variety of possible parameters in spatial competition, should be subject to oversight by the European Commission. State aid control by the EU diverts spatial 136 See, for example, Hotelling, 47–48 and d’Aspremont/Gabszewicz/Thisse, 1149. In this context, it is referred to the principle of minimum and maximum differentiation; i. e., free choice of location will cause the companies to set up either too close to one another or too far apart. 137 For more on the importance of aid for spatial competition, see Haucap/Hartwich, 114 et seqq.

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competition to other parameters of economic and industrial policy, such as the expansion of physical infrastructure, free or subsidized training of manpower, building regulations, etc. This extreme form of systems competition where (industrial location) aid is a permitted parameter of spatial competition and not subject to upstream control – would practically only be fully operational if aid were also completely financed by the Member State or the region that granted the aid (fiscal equivalence). 138 Furthermore, a region in financial difficulties is not permitted to receive compensation by another authority; i. e., the budget restrictions of the region must be “hard”. Otherwise, there is the danger that the costs associated with the establishment of a company would be passed on to other authorities, and a region could grant too much aid, so that companies make inefficient location decisions in response to excessive industrial location aid. The principle of fiscal equivalence is almost impossible to realize. It is not clear at what level it should be realized in Germany, for example – in a municipality, in parts of a federal state, a whole federal state, in multiple federal states (e. g., in Northern Germany) or the entire federal territory. If the individual federal state were to be the relevant benchmark, the problem would not be solved, because while cross-subsidization within a federal state would be unproblematic, cross-subsidization between federal states would be inadmissible. In spatial competition, each federal state would then have to set the tax burden and decide on how much aid is granted to investors. 139 Such a free State aid competition between the federal states would not be compatible with the financial constitution of the German Basic Law, as far as the federal states are entitled to the taxes, which are common taxes under Article 106 of the German Basic Law. This applies to the income, the corporate, and the VAT tax, the largest part of tax revenues. The federal government, however, has the (competing) legislative power with the result of a uniform taxation, which actually does not discriminate between the taxpayer’s state. The fiscal equalization system pursuant to Article 107, paragraph 2 of the Basic Law also stands in the way of realizing fiscal equivalence. The policy of redistribution between regions is also mandatory in the EU. The most disadvantaged areas are supported according to Article 158 et seqq., TFEU in the interest of economic and social cohesion of the Union. This involves cash flows of a substantial magnitude (often in the form of EU subsidies) motivated by distributional objectives. There is also the risk of incorrect predictions in granting industrial location aid, i. e., the expected positive effects differ from the factual. While underestimating the positive effects is rather unproblematic, the absence or an unexpectedly small amount of positive effects could prove to be problematic, although this forecast risk could theoretically be reduced by a repayment of the granted aid if the expected positive effects for the region remain absent. The realization and implementation of such a repayment obligation, however, is only possible if it includes guarantees that lie in the aid beneficiary’s area of responsibility, such as the commitment to provide a certain number of jobs. However, it cannot include the factual externalities in the region as a whole caused by a relocation because they are difficult to quantify and cannot be exactly predicted. Inefficiently high industrial location aid may also result from the fact that policymakers act selfishly concerning the granting of aid (e. g., with regard to an upcoming election) and consequently take short-term populist measures and support special interests. Since the principle of fiscal equivalence within the given legal framework cannot be sufficiently realized, and the granting of State aid coupled with forecast problems can 138 139

Monopolies Commission, Hauptgutachten 2006/2007, mn. 942. Ibid.

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trigger cross-border distortions of competition on product and service markets, it currently does not appear to make sense from an economic point of view to abandon the control of industrial location aid. It also needs to be borne in mind that the ban on State aid of Article 107, paragraph 1, TFEU is not absolute. In the current system, granting of industrial location aid is not denied from the outset to the Member States. However, it could be advantageous and efficiency enhancing from an economic point of view to take greater account of the positive effects that are caused by spatial competition for the location of companies. 150 Distortions of competition between Member States may not only be caused by State aid with selective effects such as industrial location aid but also by general economic policy measures. Therefore, the proposal to eliminate the distortions of competition of the EU by a complete harmonization of economic rules – in particular national regulations (labour market policy, environmental and product standards, company law), corporate taxes and government expenditure – can be found in literature.140 A ban on State aid on a European level would not be sufficient; the extensive enforcement of a “level playing field” should rather be achieved. This could contribute to the elimination of artificial distortions of competition caused by nation-states and would allow companies to fully utilise their cost advantages in production and would maximize welfare in the European single market.141 151 An approximation of laws can in some areas be a useful tool, for instance, if this significantly reduces transaction costs regarding cross border issues. A comprehensive harmonization within the EU is problematic, because this would completely eliminate competition among systems between the Member States and the regions in the EU, and the different habits and preferences of the Member States in relation to the design of the economic framework would not be taken into account. As part of the competition among systems, institutions are competing for mobile factors with high performance and high value-added such as companies, financial capital and mobile labour force. 142 The economic parameters available to the states and regions to attract mobile factors and prevent their relocation are comprised of public services such as infrastructure, the level of wages, training and technology as well as product regulation on the one hand and taxes and duties for financing on the other hand. Systems competition can help to reveal the actual preferences of consumers – meaning the decision-makers about mobile factors – with regard to the tax-service package provided by the state. 152 In addition, systems competition, regardless of the mobility of factors, opens up the possibility to test and compare different approaches to socio-political problems by an ideas competition. The competition among systems is a kind of discovery process and offers incentives for political agents to develop attractive institutional rules and reduce unnecessary regulations and bureaucratic hurdles.143 Competition by other authorities can lead to healthy pressures for reform. A complete harmonization of the economic framework within the EU, as it is occasionally demanded, is therefore to be opposed from an economic point of view, as it would eliminate the inter-jurisdictional competition.

7. Individual Case Analyses vs. Per se Rules 153

From an economic perspective, the question of whether a case-by-case analysis or a per se regulation should be carried out with regard to the granting of State aid is closely related to the question concerning an effects-based approach in State aid control in 140

See Ehlermann. See Monopolies Commission, Hauptgutachten (2008), mn. 937. 142 See Monopolies Commission, Sondergutachten 27, 16 et seqq. 143 For more on the competition between systems as a discovery process, see Monopolies Commission, Sondergutachten 27, 18 f. 141

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comparison to a form-based approach. As stated in para. 79, different types of aid can cause the same effect. The same aid, however, depending on the specific situation, can produce different effects. Due to this fact, an approach that is based on a case-by-case analysis would be preferable from an economic perspective. However, it should be noted that an investigation of each aid measure in terms of its effects would involve huge costs. A complete abandonment of per se rules and presumption requirements in European State aid control is therefore not advisable. An appropriate combination between per se rules and case-by-case analyses seems preferable, whereas all State aid is to be exempt from a case-by-case analysis where significant negative effects are not to be expected. This combination has been achieved by the SAAP and even more so by the SAM and 154 the associated measures for the implementation, so that a tripartite structure of State aid control results. For a low amount of aid, the amended de minimis regulation applies, which contains clear and easy-to-use rules. According to the de minimis regulation, aid below E 200,000 within three years is exempted.144 In addition to the de minimis regulation, a block exemption regulation (GBER) has been adopted, which exempts certain groups of aid.145 From an economic point of view it should be noted that some of the exempted aid is less about improving efficiency and more about normative objectives that do not necessarily increase efficiency by eliminating market failures. If an aid measure meets neither the requirements of the de minimis regulation nor 155 the block exemption regulation, it is subject to notification of Article 108, paragraph 3, sentence 1 of the TFEU and is examined by the EU Commission. While the SAAP was based on two different types of procedures, the standard assessment, where legal presumptions are also used, and an in-depth investigation of problematic cases and major projects in which a detailed economic analysis is carried out, the SAM only comprises block exemptions and a more substantive (in-depth) assessment. The latter usually relates to a high amount of aid, which cannot be subsumed under the usual categories covered in the GBER. On the one hand, this kind of aid especially has the potential to correct significant market failures, but on the other hand, because of its sheer amount, it bears the risk of significant distortions of competition so that a detailed economic analysis is necessary. As pointed out in para. 109 and para. 126, currently the EU Commission applies the 156 “more economic approach” only to the justification level (Article 107, paragraph 3, TFEU) so far, but not to the factual level (Article 107, paragraph 1, TFEU). Therefore, not the EU Commission, but the respective Member State bears the burden of proof. When a thorough test procedure is performed, the Member States on which the burden of proof lies – and the beneficiary companies in the background – must exercise a considerable effort to convince the EU Commission of the admissibility of the aid and meet many information requirements. This is one of the main differences with regard to antitrust law, where the “more economic approach” led to an intensification of the EU Commission’s obligation to provide evidence.

V. Specific Implementation of the SAAP and the SAM – Examples Following the implementation of the SAAP and the SAM, the European Commission 157 has adopted a series of block exemption regulations, guidelines and notifications in recent years. The general block exemption regulations (GBER) represent directly applicable law and their proper use can at the instigation of a competitor of the 144 However, it has to be pointed out that the de minimis regulation only relates to transparent aid. See para. 159. 145 For more on the GBER, see para. 163 et seqq.

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beneficiary for example, be reviewed by the national courts. Here, the general block exemption regulation of 2014 especially needs to be mentioned, which simplifies and extends the previous block exemption regulation of 2008.146 Also, the block exemptions for State aid that does not exceed a certain limit (de minimis) have been revised. 147 These revised GBERs definitely contribute to achieving the objective of simplifying the granting procedure, as Member States are no longer required to notify the Commission about State aid covered by these regulations and meeting the requirements set therein and no longer have to wait for the approval by the Commission before granting aid. They can rather implement a wide range of aid measures fulfilling horizontal common interest objectives without prior notification. 158 In addition to the block exemption regulations, the Commission adopted a set of revised guidelines regarding, for example, regional aid, risk finance aid, and aid for environmental protection. Overall, it is evident that the Commission has in recent years taken on and largely carried out the reforms proposed in the SAAP and the SAM. The new block exemption regulations, notifications and community framework are generally suitable for simplifying the procurement process, making it more transparent and increasing the predictability of aid decisions. The following is a discussion regarding four measures, which serve as examples of the reform of aid rules that the Commission has adopted under the SAM: The extension of the de minimis regulation, the general block exemption regulation, the rescue and restructuring guidelines and the community framework for research and development and innovation.

1. Extension of the de minimis Regulation The new de minimis Regulation has left the existing limit for aid in the amount of E 200,000 for one undertaking within a three year period unchanged as in many cases beneficiaries receive rather small amounts of aid and this ceiling was not reached. If certain conditions are met, subsidised loans of up to E 1 million and guarantees up to E 1.5 million may also benefit from the de minimis Regulation. The regulation only applies to “transparent” aid, i. e., aid whose gross substitution equivalent can exactly be calculated and no risk assessment has to be made. Here, the gross substitution equivalent is the cash value of financial support without regard to any taxes on funds. That way, grants, interest subsidies, and limited tax exemptions satisfy this condition, but capital injections by the public sector do not. Consequently, municipal projects that are implemented in a public-private partnership, for example, are not subject to the de minimis regulation and have to be notified according to Article 108, paragraph 3, sentence 1 of the TFEU, so that high transaction costs generally arise. The limitation of the de minimis regulation on transparent aid leads to greater legal certainty, as the rules of the regulation are clear and easy to handle. In addition, the regulation realizes significant cost savings on the part of the Commission, because a large number of cases can be processed without significant administrative effort. In comparison with the previous de minimis regulation the scope of the regulation has been extended as undertakings in financial difficulties are no longer excluded from receiving de minimis aid. 160 However, from an economic point of view, a number of objections to the de minimis regulation might be raised. The regulation implicitly assumes that a small amount of aid generally only causes small distortions of competition. This does not have to be the case, 159

146 European Commission, Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ 2014/L 187/1. 147 European Commission, Regulation No 1407/2013 on the Application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis Aid, OJ 2013/L 352/1.

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as in small markets with few companies, for example. Here, aid that falls under the de minimis regulation might already lead to a distortion of competition. Although the aid might only have a small impact in each individual case, granting a lot of the same kind of aid can have significant effects.148 A similar argument can be made in connection to the effect on European trade. However, these effects have not occurred or had such a limited effect in the past that they were significantly outweighed by the benefits caused by the simplification of procedures, transparency and the savings in administrative costs. From an economic perspective, it is useful to exempt small amounts of aid. Never- 161 theless, it should be noted that potential for improvement still exists. It is questionable whether a flat-rate equally valid for all sectors and industries leads to desirable results. Thus, in the current scheme, the size of the market, the position of the beneficiary and the competitive situation on the market are not taken into account. If aid is primarily to be used to correct market failures, then in some markets, the amounts provided by the de minimis regulation can be sufficient. In other markets or industries, this would require amounts higher than E 200,000, and the amounts corresponding to the de minimis regulation would be ineffective. In small markets, aid of a limited amount could in turn also generate distorting effects. In particular, de minimis aid to firms in financial difficulties might be used to support inefficient undertakings that would otherwise have to exit the market. From an economic point of view, it would therefore be useful not to include in the de 162 minimis regulation a flat-rate of equal amount for all branches and sectors, but to make the amounts dependant on the size of the market (measured in terms of total sales), the market position of the beneficiary (measured in terms of market share) as well as aid intensity (the share of aid with regard to the total expenditures of a project). This could be guaranteed by appropriately staggered flat-rates.149 Therefore, a smaller flat-rate amount could be intended for a company with a large market share on a smaller market than one with a smaller market share and/or on a larger market. Discretion could be granted to the Commission for aid above a certain threshold (e. g., 1 million). Below that, the (refutable) presumption could be valid that aid does not cause noticeable distortions of competition, whereas this presumption should be valid at low intensity levels (e. g., less than 30 %) regarding activity-based aid granted in a transparent process.150 Regularly taking into account the specific competitive situation for the de minimis regulation would be desirable on the one hand, but on the other hand, it would mean a greater effort on the part of legal practitioners and authorities and could lead to legal uncertainty. Furthermore, one could consider applying the criterion of transparency a little less stringently, so that public-private partnerships can be supported.

2. General Block Exemption Regulation The revised version of GBER includes 13 different aid groups that do not require a 163 special examination. For example, under certain general conditions, aid for access to finance for small and medium sized enterprises (SME), aid for disabled or disadvantaged workers or aid for broadband infrastructure are exempt from a detailed examination. In the course of the SAM, new categories for exemption have been introduced as e. g. aid to innovation clusters and aid to process and organizational innovation, aid schemes to make good the damage caused by natural disasters, or investment aid for local infrastructure. The GBER is, as the de minimis regulation, also only valid for transparent aid. 148

See Nitsche/Heidhues, 113 et seqq. See also Monopolies Commission, Hauptgutachten 2006/2007, mn. 1060. 150 Ibid. mn. 1061. 149

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The aid categories that are exempt from a separate test are, on the one hand, those which are appropriate, in principle, to correct market failures, such as environmental protection aid (externalities), aid for access to finance for SMEs and other aid to SME (information problems) and training aid (hold-up problem). On the other hand, these groups concern social and normative objectives (e. g. aid for disabled or disadvantaged workers, aid for culture and heritage conservation and regional aid). For the various aid groups, the regulation lists the notification thresholds of the gross grant equivalent for notifications between E 2 million (e. g., for SMEs to participate in trade fairs or for the use of advisory services) and E 100 million (investment aid for culture and heritage conservation). To check for the compliance of these measures with the GBER, aid awards are made public to increase the transparency (GBER, mn. 27), the ex post controls of compliance with the formal conditions underlying the compatibility of an aid scheme are strengthened (GBER, mn. 28) and large aid schemes are evaluated to check whether the objectives have been realised and what impact the scheme had on competition and trade (GBER, mn. 8). In accordance with the SAM, aid must have an incentive effect, i. e., it must be appropriate for altering the behaviour of the company (Article 6, GBER). Such an incentive effect would not have been present if the company had carried out the project without any aid. For small and medium-sized enterprises, it is assumed that such an incentive effect exists when an application for aid is submitted before the project was launched. For large companies, however, higher standards apply. The Member State must examine (Article 6, paragraph 3, GBER), whether the recipient has analysed the feasibility of the project ex ante based on quantitative and qualitative indicators for each of the cases with and without aid. An incentive effect for a large company is to be assumed if the size or scope of the project or the total amount of money spent increases significantly or the completion of the project is accelerated significantly. The general GBER lays down the maximum permissible aid intensities and the costs eligible for aid for the individual categories of aid. The amount of the permissible aid intensity (i. e., the share of the (approved) total cost a Member State is allowed to bear in the project) is an indication of how high the risk is of distorting competition with a certain type of aid, on the one hand, and its intended benefit for the public, on the other hand, as estimated by the Commission. The lower the permissible aid intensity, the greater the feared distortions of competition. By determining the aid intensity, an indirect – albeit flat and rough – balancing of the positive and negative consequences of aid is conducted. For example, the permissible aid intensity for research and development projects in basic research is 100 %, yet in industrial research it is only 50 %. This difference emphasizes that in basic research it is assumed that the market does not provide this research to an efficient extent. This is mainly because no immediate monetary returns can usually be realized, unlike in industrial research. If an aid measure meets the conditions specified in the regulation and does not surpass the respective group-specific intensity limit, its compatibility with the common market is to be assumed. From an economic point of view, the revised GBER have the potential to make a major contribution to the simplification of awarding State aid and reducing the duration of the process for aid beneficiaries. Thereby, the transparency and legal certainty is improved. In addition, the possibilities of Member States are extended to grant aid that is compatible with an objective of common interest by increasing the thresholds for notification and aid intensities. This allows the commission to concentrate on substantive in-depth assessments of large State aid schemes. These extended possibilities of the 46

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Member States are balanced by an increased transparency of State aid measures and a strengthening of safeguarding instruments such as ex-post controls and the evaluation of large aid schemes. The revised GBER further shifts responsibilities and also costs from the commission 170 to the Member States. E. g. a positive evidence of the incentive effect of State aid to large companies provided in the GBER, however, presupposes a costly and time-consuming process. Large companies regularly set up a “business plan” prior to applying for aid in which they have already conducted an in-depth (counterfactual) analysis. However, closer scrutiny of the analysis by the authorities of the Member State leads to a significant bureaucratic extra expenditure and seems very inefficient, since the control is entrusted to the aid-granting agency. On the one hand, it is questionable from an economic point of view whether the simplification of the procedure by the GBER is not contradicted by the additional bureaucratic expenditure of the examination of an incentive effect of aid on large companies. On the other hand, it remains to be seen whether the additional benefit of examining the incentive effect and avoiding the granting of aid without incentive effects is larger than the additional costs of the examination. This is particularly the case since the companies have an information advantage over the authorities.

3. Rescue and Restructuring Guidelines State aid for rescuing and restructuring (R&R) undertakings in difficulties are from 171 an economic point of view the most problematic as it can lead to significant distortions of competition. It could impede productivity growth at it slows down the churn process by artificially keeping alive inefficient firms that would otherwise have to exit the market. R&R aid might lead to a harmful distortion of investment activities and to moral hazard problems as firms might engage in riskier projects as they expect to receive R&R aid. In addition, the possibility of R&R aid leads to lower costs of capital giving it a competitive advantage in the market. Therefore, the conditions under which R&R aid can be granted are particularly strict 172 and can be considered as a continuation of the Commission’s more economic approach to State aid control. To assess the compatibility of R&R aid with the internal market it has to be demonstrated that it aims at an objective of common interest, in particular that a failure of the firm would lead to a social hardship or a market failure. A social hardship could be caused if unemployment would be increased in a region where the rate of unemployment is already higher than on average and where the creation of new employment is difficult. If services of general economic interest (SGEI) would be disrupted or if the firm has an “important systemic role” or if the market exit of the firm would lead to an irremediable loss of technological knowledge or expertise, R&R aid could contribute to an objective of common interest. In addition to the demonstration of an objective of common interest, a restructuring plan has to be presented that demonstrates the return to long-term viability of the firm within a reasonable timescale. Further, R&R aid must be well designed to deliver the objective of common interest, which in particular means that it must be the least distortive aid instrument, must have an incentive effect and must be proportional. To limit the negative and distortive effects of R&R aid, the guidelines include the 173 “One time, last time” principle. This principle implies that aid is granted for one restructuring operation only. In addition, the guidelines include several measures to limit potential distortions to competition. Structural measures include divestments or reductions of business activities of the aid beneficiary to increase the potential for market entry. Behavioural measures are requirements to refrain from acquiring shares Schwalbe

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in other companies and to refrain from publicising State aid as a competitive advantage. Finally, market opening measures are included as e. g. commitments of the Member State or the beneficiary to open markets that are directly or indirectly linked to the beneficiary’s activities. 174 Despite these safeguarding mechanisms, it is doubtful from an economic point of view whether R&R aid can indeed contribute to objectives of common interest. It has been pointed out in the economics literature that there are no conceivable types of market failure that could be corrected by R&R aid.151 Here, the following questions have to be answered: How was the firm able to operate and produce successfully before it got into difficulties in consideration of the market failure? Why are competitors not facing comparable difficulties? Even if the difficulties of an individual firm can be attributed to a market failure, it is unclear how a “one time – last time” R&R aid could remediate this structural problem. Here, a structural intervention would be necessary that eliminates the cause of the firm’s difficulties and not an aid measure that only treats the symptoms. Therefore, market failures as a justification of R&R aid should be excluded. 152 175 The remaining objectives of common interest are the prevention of an increase of unemployment in regions where the rate of unemployment is above average or the prevention of the interruption of a service of general economic interest. In both cases, it is highly questionable whether R&R aid is the appropriate policy instrument. Other tools, e. g. training aid, could possibly achieve the objective with considerable less distortion of competition. Thus, from an economic point of view there seem to be only very few cases where R&R aid could possibly be justified. Taking the provisions in guidelines seriously might therefore come close to a complete elimination of R&R aid. 153

4. Community Framework Research and Development and Innovation The community framework for State aid for research and development and innovation (R&D&I) of June 6, 2014 applies to aid for research, development and innovation projects that is not already exempt by the de minimis regulation or exempt from the notification duty by a block exemption regulation in accordance with Article 108, Section 3, sentence 1, TFEU. The objective of R&D&I aid is, in accordance with the Europe 2020 strategy of smart and sustainable growth, the improvement of framework conditions and the access to finance for research and innovation, or stated otherwise, economic efficiency. With reference to the SAM, different research, development and innovation-related types of market failure are cited that can be corrected by appropriate aid. These include positive externalities such as knowledge spillovers, public goods problems as they may occur in basic research, problems of imperfect and asymmetric information as well as coordination and network failures. 177 The community framework R&D&I defines various categories of aid, including aid for research and development projects, where it is distinguished among aid for different research categories such as aid for basic research; aid for applied research, and aid for the construction and upgrade of research infrastructure. For these particular categories, permissible aid intensities are given, where the intensity may be the higher the more remote the supported activity is from the market. Thus, the maximum permissible aid intensity is 100 % for basic research, 80 % for applied research (for small enterprises; for medium sized and large enterprises, the maximum aid intensities are 70 % and 60 % resp.). If there is collaboration between undertakings or between an undertaking and a 176

151

See Maier-Rigaud/Milde, 3. Maier-Rigaud/Milde, 3. 153 Ibid., 17. 152

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research organization and if the results are widely disseminated, the maximum aid intensities for applied research are 90 %, 80 %, and 70 % for the three categories of enterprises. The maximum aid intensity for the construction and upgrade of research infrastructure is 60 %. The underlying assumption is that distortions of competition on product markets are more likely, the greater the investment for the development of new or modified products or processes and the larger the enterprise. Basically, the R&D&I State aid rules consist of two parts – for R&D&I aid that does not exceed certain limits, the GBER applies, i. e. Member States can grant R&D&I aid without prior notification. If those limits are exceeded, then a detailed compatibility assessment of the aid measure is carried out. In this case, the Member State must demonstrate that the aid measure serves a legitimate common interest. Only the intended elimination of a market failure qualifies as justification for an aid measure. These include knowledge spillovers, imperfect and asymmetric information as well as coordination and network failures. Social or distributional objectives are not considered in the R&D&I framework. The respective Member State must hereby explain the specific market failure in the particular case. Further, the Member State has to demonstrate the appropriateness of the aid measure and that the aid is awarded in the form that is likely to generate the least distortions of competition and trade. A central part of the compatibility assessment is the incentive effect of the aid measure: “Member States must demonstrate to the Commission that the aid has an incentive effect and therefore need to provide clear evidence that the aid has a positive impact on the decision of the undertaking to pursue R&D&I activities which would otherwise not have been pursued.”154 To enable the Commission to carry out the assessment, the Member State has to provide a comprehensive description of the counterfactual scenario, i.e what would have happened or could reasonably have been expected to happen without the aid measure. Finally, it has to be demonstrated by the Member State that the aid measure does not exceed the maximum permissible aid intensities. The Commission will than assess whether the positive effects of the aid measure outweigh the negative effects it might have. Two main potential distortions to competition and trade are considered: distortive effects on product markets and location effects. In principle, R&D&I aid can have several types of distortive effects on product markets that can be divided into static and dynamic effects. Thus, R&D&I aid can establish or strengthen the market power of one or several companies, where the level of entry barriers, existing buying power as well as the selection process are used as indicators in this respect. It is likely that no problems regarding market power will occur when market shares of the beneficiaries are less than 25 % and the HHI is below 2,000. Another negative effect of R&D&I aid could be the preservation of inefficient market structures. Such a case could occur if significant excess capacities exist on the market, the market is declining or it is a particularly sensitive sector. The primary negative effect that R&D&I aid can bring about is a reduction of dynamic innovation incentives for competitors by increasing the presence of the beneficiary company on product markets, i. e., a crowding out effect could occur. On the opposite side, there are possible knowledge spillovers from the beneficiary company to competitors, which may in turn have positive effects on the dynamic development of the market. The amount of aid, the type of aid, its proximity to the market and the granting procedure can be used as indicators for this aid effect. Economic indicators are

154 European Commission, Framework for State Aid for Research and Development and Innovation, OJ 2014/C 198/01, mn. 66.

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potential barriers to exit, competitive incentives for a future market, the degree of product differentiation and the intensity of competition. 182 Location effects might arise because R&D&I aid can influence the choice of a location of an activity either in the case when enterprises compete across borders or when they consider different locations. Thus, R&D&I aid could lead to a displacement of economic activities from one region into another in the internal market. 183 The typification of possible distortive effects on product markets and location effects and the transparent description of assessment criteria in the R&D&I community framework are to be welcomed from an economic perspective, since this significantly increases the transparency and economic foundation of aid decisions relating to R&D&I compared to the previous practice. As discussed in para. 126, it is also critical to note that the competitive situation is not analysed on the factual level but on the justification level in the context of the assessment of the aid measure. Rather, the existence of a cross-border distortion of competition should have been verified by a rigorous economic analysis on the factual level before the suitability and necessity of an aid measure is examined as part of the balancing test in relation to the economic or distributive objective. 184 The central position that is given to the incentive effect and therefore to possible dynamic distortions of competition, is justified from an economic point of view, as research, innovation and development investments primarily influence the dynamic development of the economy, wherein the dynamic incentive effects are of particular importance. In many cases, positive externalities occur due to knowledge spillovers in research and development, so that without appropriate support, the level of research and innovation is too low compared to the social optimum. However, if aid did not cause any change in behaviour in relation to the funded project, then the beneficiary would make the same decisions regarding price or quantity without aid on the respective markets, i. e., the level of research and development would remain on an inefficiently low level. Therefore, the emphasis on the incentive effect in the context of R&D&I aid is justified. If there is no incentive effect (i. e., the behaviour compared to a situation without aid does not change), then market failure remains, and the beneficiary can possibly use the granted amounts on neighbouring markets in order to gain a competitive advantage there. It is disputed, however, whether the absence of changes in behaviour is a particularly appropriate indicator for a distortion of competition. 155 155

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PART II ARTICLE 107 TFEU Content A. Basic principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. Scope of European law on State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Territorial scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Temporal scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Material scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 II. Relationship with other provisions of the Treaty (except Article 106 TFEU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1. Special conditions in comparison with Articles 107 et seqq. TFEU 19 a) Provisions relating to production and trade in agricultural products (Article 42 TFEU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 b) Provisions in relation to public transport (Articles 93 and 96 TFEU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 c) Aid for the purposes of Articles 346 and 347 TFEU . . . . . . . . . . . . . 31 d) Relationship to the Euratom Treaty, Article 106 a(3) Euratom Treaty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2. Articles 107 et seqq. TFEU as lex specialis in relation to Article 18 TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3. Provisions that apply in parallel with Articles 107 and 108 TFEU 35 a) Free movement of goods, Articles 34, 35 TFEU . . . . . . . . . . . . . . . . . . 44 b) Article 25 and Articles 110 TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 c) The other fundamental freedoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 d) State commercial monopoly (Article 37 TFEU). . . . . . . . . . . . . . . . . . . 53 e) Relations with other competition rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4. EU legal standards with no influence on Articles 107 et seqq. TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 III. Relationship to the WTO Rules (Anti-Subsidy Rules). . . . . . . . . . . . . . . . . . 63 1. The development of the WTO anti-subsidy rules . . . . . . . . . . . . . . . . . . . . 70 2. The notion of subsidy under the WTO rules . . . . . . . . . . . . . . . . . . . . . . . . . 75 a) Financial contribution by the government. . . . . . . . . . . . . . . . . . . . . . . . . 77 b) Indirect subsidies – ‘entrusted or directed’.. . . . . . . . . . . . . . . . . . . . . . . . 80 c) Specificity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 d) Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 e) Passing on of the benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 f) Affecting trade and distorting competition v injury. . . . . . . . . . . . . . 93 3. Possible measures against subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 a) Track 1 – Imposition of countervailing duties . . . . . . . . . . . . . . . . . . . . 96 b) Track 2 – Dispute settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 4. Compatible EU State aid may violate WTO rules. . . . . . . . . . . . . . . . . . . . 99 B. The definition of State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 I. Preliminary remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 II. Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 1. General aspects – The effects doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 2. Economic advantage as (non-)cash benefit without adequate consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 a) (Non-)cash benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 aa) Mitigation of charges normally included in the budget of an undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 (1) Principle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 (2) Specific cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

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Art. 107 TFEU (a) Reduction in social contributions or taxes . . . . . . . . . . . (b) The imposition of asymmetrical tax burdens as economic advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) Costs for compliance with collective labour agreements, social plans and other agreements between social partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (d) Costs for the acquisition of public prerogatives, licences, concessions or permits . . . . . . . . . . . . . . . . . . . . . . . (e) Compensation, damages and repayments. . . . . . . . . . . . bb) Reduction of charges not normally included in an undertaking’s budget – Release from structural disadvantages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Indirect advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) No adequate consideration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Market Economy Operator Test (‘MEOT’) – principles . . . bb) Sub-categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Capital holdings – Private Investor Test. . . . . . . . . . . . . . . . . . (2) Loans – Private Lender Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Guarantees – Private Guarantor Test. . . . . . . . . . . . . . . . . . . . . (4) The State as creditor – Private Creditor Test. . . . . . . . . . . . (5) Public procurement – the Private Purchaser Test . . . . . . (6) Supply contracts – Private Supplier Test . . . . . . . . . . . . . . . . . (7) (Land-)sales and privatisations – Private Vendor Test. (8) Cross-subsidisation – Company Group Test . . . . . . . . . . . . (9) State infrastructure measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) Other specific cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Compensation for the costs for providing services of general economic interest (‘SGEI’). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Overview of the development in the case law. . . . . . . . . . . . . . . . bb) The Altmark Trans judgment and the aftermaths. . . . . . . . . . . (1) The Altmark criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) First Altmark criterion: Public service obligations to discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b) Second Altmark criterion: Establishment in advance of the parameters used to calculate the compensation in an objective and transparent manner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) Third Altmark criterion: No overcompensation . . . . (d) Fourth Altmark criterion: Procurement procedure or Benchmark-Company-Test . . . . . . . . . . . . . . . . . . . . . . . . . (2) Burden of proof before national courts. . . . . . . . . . . . . . . . . . . (3) Aid to a party other than the SGEI provider . . . . . . . . . . . . III. Granted through State resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Imputability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Stardust judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) ‘Post-Stardust’ – The Deutsche Bahn judgment and the subsequent case law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The imputation criteria in the decision-making practice . . . . . . . aa) State influence in the decision-making bodies . . . . . . . . . . . . . . . bb) Bodies appointed by the Member State . . . . . . . . . . . . . . . . . . . . . . . cc) Implementation of mandatory Community law . . . . . . . . . . . . . 3. Burden on State resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Previous case law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The more recent case law – Sloman Neptun, Kirsammer Hack and PreussenElektra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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114 115 121 125 133 139 142 150 151 168 168 191 196 205 218 222 227 230 233 237 238 239 242 249 250

255 256 258 261 262 263 263 267 267 270 279 283 284 289 291 293 293 294 296

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Art. 107 TFEU d) The criterion ‘burden on the State budget’ in the decisionmaking practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 aa) Private undertakings and bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 bb) Financial resources to which public undertakings are entitled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 cc) Funds and parafiscal charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 dd) Public regulation with indirect financial consequences . . . . . 320 ee) Loss of revenue for the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 ff) Potential burden on the State budget . . . . . . . . . . . . . . . . . . . . . . . . . . 332 gg) Statements by politicians without legally binding effect. . . . . 333 hh) Funding by EU and international organizations . . . . . . . . . . . . . 337 IV. Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 1. ‘Certain undertakings or the production of certain goods’ . . . . . . . . . 338 a) The definition of undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 aa) Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 bb) Specific cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 b) The concept of the ‘production of certain goods’. . . . . . . . . . . . . . . . . 361 2. Selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 b) Discretionary decisions to grant individual ad hoc aid or individual aid in the context of general aid schemes . . . . . . . . . . . . . 368 c) Selectivity of general aid schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 aa) Generally applicable rules – effects-based doctrine . . . . . . . . . . 373 bb) The current three-stage test – the Gibraltar judgements. . . . 375 cc) The three stages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386 (1) First stage: Determining the reference framework. . . . . . . 387 (2) Second stage: Prima facie selective nature of the advantage associated with a measure . . . . . . . . . . . . . . . . . . . . . . 392 (a) In the light of the objective pursued by the Member State’s system in question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 (b) Regional selectivity (ratione territoriae). . . . . . . . . . . . . . . 415 (c) Selectivity ratione personae – material selectivity. . . . 429 (d) Selectivity ratione materiae – sectoral selectivity.. . . . 434 (e) De facto selectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 (3) Justification due to the nature or inner structure of the (tax) system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 (a) Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 (b) Specific cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 V. Distortion of competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 1. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 2. Requirements for the existence of a distortion of competition . . . . . 456 a) Starting point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 b) Appreciability (‘de minimis’) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 aa) Meaning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 bb) ‘De minimis’ aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 cc) Limitation to ‘transparent State aid’ – determination of the ‘de minimis’ aid element. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474 dd) Treatment of guarantees under the de minimis Regulation 476 ee) Cumulating of aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 c) Cases outside the ‘de minimis’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 d) Obligation to state reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 VI. Effect on trade between Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 1. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 2. Application in practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491 a) Point of departure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491 b) Requirement of appreciability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 c) Criteria for determining effect on trade between Member States. 493 d) Trade with non-Member States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499

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Art. 107 TFEU e) Aid recipient with regional or local area of activity . . . . . . . . . . . . . f) Obligation to state reasons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Legal exemptions (Article 107(2) TFEU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. State aid with social character that is granted to individual consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Aid with social character . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Non-discrimination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Aid to make good the damage caused by natural disasters or exceptional occurrences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Natural disasters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Other exceptional occurrences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany . . . . . . . . . . . . . . . . . . . . . . . 1. The division of Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Views. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Wording and systematic interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . c) History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Relevance of the Lisbon Treaty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) The existing case law of the Court of Justice. . . . . . . . . . . . . . . . . d) Spirit and Purpose of the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Affected areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Disadvantages due to division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Necessary compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Repeal by the Council of the European Union. . . . . . . . . . . . . . . . . . . . . . . D. Compatible and incompatible aid (Article 107(3) TFEU). . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Changes due to the Treaty of Lisbon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Institutional aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Commission, Parliament, Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The role of Member States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The role of national courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The legal nature of authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Margin of appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Assessment in the ‘Union Framework’ . . . . . . . . . . . . . . . . . . . . . . . cc) No room for discretion with regard to defining State aid. . b) Principles for exercising discretionary judgement. . . . . . . . . . . . . . . . aa) Fixed term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Targeted purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Self-regulation through ‘soft law’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Self-binding through block exemption regulations . . . . . . . . . . . . . . 4. How can the Commission decide? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Based on the content of the decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Phase-One-Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Decision about initiating a formal investigation procedure cc) Phase two decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . dd) Suspension order or provisional recovery of the State aid . ee) Request for information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Depending on the object . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) New and existing State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Individual State aid and aid schemes. . . . . . . . . . . . . . . . . . . . . . . . . . cc) Notified and unlawful State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Not every letter of a Union institution is a decision. . . . . . . . . . . . . d) The Commission must end each procedure with a decision . . .

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Art. 107 TFEU 5. Period of time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 a) Statutory period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 aa) Phase one decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 bb) Phase two decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621 cc) Unlawful aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622 b) Other timely aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 aa) Information available at the time of decision. . . . . . . . . . . . . . . . . 624 bb) The Commission applies the provisions which are in force at the time of the decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628 c) Applicable law for the assessment of unlawful State aid. . . . . . . . . 633 6. Content and effect of the decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635 a) No cure for the unlawfulness of the aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . 635 b) The unlawfulness of the aid does not exempt the Commission from its obligation to examine its compatibility with the internal market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636 c) The method of financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 d) Distortion of competition and effects on trade. . . . . . . . . . . . . . . . . . . . 640 aa) General requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640 bb) Specifics regarding tax exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 646 cc) Regarding small benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 647 dd) Minor subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648 e) Incentives and necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 7. No violation of other provisions of the TFEU by the Commission’s decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654 a) No violation of other provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654 b) The modalities of State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655 c) Tax provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 aa) Direct taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 bb) Indirect taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 657 d) Quantitative restraints on trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 e) State monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661 f) Merger Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 g) The limits of considering other provisions . . . . . . . . . . . . . . . . . . . . . . . . 663 8. The obligation to state reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 a) Scope of the obligation to state reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665 b) Satisfaction of the requirement to state reasons. . . . . . . . . . . . . . . . . . . 671 c) Special cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673 aa) Complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673 bb) Complexity of aid assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675 cc) Aid schemes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677 9. Recovery of aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678 a) Objective of recovery orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678 b) Cases without recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 aa) Impossibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 bb) Recovery would breach a general principle of Union law . . 692 c) The recovery amount does not need to be specified in the decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 d) Deggendorf principle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695 e) Interest and compound interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 696 II. Cases in which aid can be approved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697 2. General assessment principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699 3. Specific provisions for exemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 a) Article 107(3)(a) TFEU: Regional aid in less developed regions 714 b) Article 107(3)(b) TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717 aa) Aid to promote important projects of common European interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718

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Art. 107 TFEU bb) Aid to remedy a serious disturbance in the economy of a Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Article 107(3)(c) TFEU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Regional aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Horizontal aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Export aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Investment aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) R&D&I aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Environmental aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) Training aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) Employment aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) SME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) State aid for the rescuing and restructuring of undertakings in difficulty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Sector specific aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Article 107(3)(d) TFEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Article 107(3)(e) TFEU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

722 727 728 734 734 740 741 745 748 750 752 756 766 771 776

A. Basic principles Bibliography: Cremer, Das Verha¨ltnis der Beihilferegeln gema¨ß Art. 92 f. EGV zur Warenverkehrsfreiheit, EuR 1996, 225; Koenig/Ku¨hling, Reform des EG-Beihilfenrechts aus der Perspektive des mitgliedstaatlichen Systemwettbewerbs – Zeit fu¨r eine Neuausrichtung?, EuZW 1999, 517; Kruse, Das Merkmal der Staatlichkeit der Beihilfe nach Art 87 Abs. 1 EG, ZHR 2001, 576; Ohlhoff, Verbotene Beihilfen nach dem Subventionsabkommen der WTO im Lichte aktueller Rechtsprechung, EuZW 2000, 645; Otting/ Solte´sz/Melcher, Verkehrsvertra¨ge vor dem Hintergrund des Europa¨ischen Beihilfenrechts – Verwaltungsrichter weisen Bru¨ssel in die Schranken, EuZW 2009, 444; Pechstein, Elektrizita¨tsbinnenmarkt und Beihilfenkontrolle im Anwendungsbereich des Euratom-Vertrags, EuZW 2001, 307; Sedemund, Neuere Entwicklungen im Beihilfentatbestand, in: v. Danwitz (ed.), Rechtsfragen der europa¨ischen Beihilfeaufsicht, 2000, 31.

I. Scope of European law on State aid 1

Within Articles 107 et seqq. TFEU it is possible to differentiate between the territorial, temporal and material scope.

1. Territorial scope 2

The territorial scope partly determines whether EU state aid provisions can be applied to a situation where state aid may be of relevance. The territorial scope of Articles 107 et seqq. TFEU and secondary legislation adopted on the basis of these standards primarily depends on the scope of the EU Treaties. According to Article 52 TFEU the Treaties shall apply in all EU Member States. As specified in Article 355 TFEU, this also encompasses the French Overseas Departments, the Azores and Madeira and the Canary Islands in its territorial scope. Article 355(3) TFEU also extends to Gibraltar, whose external relations are administered by the United Kingdom of Great Britain and Northern Ireland. 1 European law on state aid moreover extends to the Åland Islands referred to in Article 355(4) TFEU.2 The application of secondary legislation on the basis of state aid provisions must be indicated on an individual basis, however, as Article 355 TFEU merely specifies the applicability of the Treaty provisions. On the other hand, EU law on state aid 1

Cf. GC Case T-195/01 Government of Gibraltar v Commission [2002] ECR II-3915, mn. 12. Cf. Protocol No 2 to the Act concerning the conditions of accession of the Kingdom of Norway, the Republic of Austria, the Republic of Finland and the Kingdom of Sweden, OJ 1994 C 241. 2

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is not applicable in overseas countries and territories (Article 355(2) TFEU). The same applies to Greenland (Article 204 TFEU). Likewise, the Treaties only apply to a limited extent, if at all, in the Faro Islands, the Channel Islands and the Isle of Man3 and the British territories in Cyprus, Akrotiri and Dhekalia. European law on state aid does not apply here either (Article 355(5) letters a to c TFEU). The provisions of Articles 61 to 64 of the EEA Agreement, corresponding to Arti- 3 cle 107 et seqq. TFEU, shall apply to the EFTA States, Norway, Iceland and Liechtenstein, which have concluded an Agreement with the EU on the European Economic Area. 4 These state aid provisions shall be monitored by the EFTA Surveillance Authority in close cooperation with the EU Commission in order to ensure the uniform implementation, application and interpretation of the EEA Agreement and the Treaties. 5 The entire situation, where state aid is of relevance, does not need to occur entirely 4 within the territorial scope of EU state aid law. However, aid may not have a territorial impact that could distort competition within the EU and impede trade between the Member States. Aid granted within the territories to which EU law on state aid applies, but which is intended to finance projects in third countries, can have such effects. Aid granted to a business that competes with other businesses within the EU in the area of export credit insurance for exports to third countries can be assumed to have an effect that compromises trade among Member States.6 Even aid from Member States to businesses in third countries is liable to affect trade between Member States. It is conceivable that a beneficiary business from a third country could undertake to supply goods more cheaply to other businesses in the Member State granting aid, thereby improving their competitiveness in comparison with other businesses within the EU that do not receive deliveries under the same conditions.7 Articles 107 et seqq. TFEU only apply to aid from EU Member States. The EU can 5 take action against the granting of aid by third countries based on the WTO Agreement on Subsidies and Countervailing Measures.8 If businesses from third countries have been granted illegal aid either directly or indirectly for the manufacture, production, export or movement of goods and if the entry of these goods into free circulation in the EU has a damaging effect, countervailing duties may be levied on these goods by the EU. 9

2. Temporal scope The temporal scope determines when EU state aid provisions can be applied to a 6 situation and for how long the European Commission is competent to impose EU state aid law. It can also influence whether aid is categorised as ‘existing’ aid or ‘new’ aid, thus deciding on the applicable process. While new aid is always to be reported to the EU Commission according to Article 108(3) TFEU, existing aid is subject to on-going checks according to Article 108(1) TFEU. Existing aid, whether individual aid grants or aid schemes, is aid that was granted by a Member State before the EU state aid provisions came into force. In contrast, new aid is all aid that has been granted or is currently being granted after these EU provisions came into force. 3 Cf. Protocol No 3 concerning the Channel Islands and the Isle of Man to the Act concerning the conditions of accession of the Kingdom of Norway, the Republic of Austria, the Republic of Finland and the Kingdom of Sweden, OJ 1972 L 164. 4 OJ 1994 L 1/3. 5 Article 62 para. 1 EEA Agreement; Protocols 26 und 27 to the EEA Agreement. 6 ECJ Case C-44/93 Namur-Les assurances du credit SA [1994] ECR I-3829 mn. 30. 7 Wegener Jessen, State Aid and Taxation in Relation with Third Countries, p. 138. 8 OJ 1994 L 336/156. For the agricultural sector there are specific rules, cf. Agreement on Agriculture, 23 December 1994, OJ 1994 L 336/22. 9 Cf. Regulation 2026/97, OJ 1997 L 288/1.

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Art. 107 TFEU

Since the EEC Treaty came into force on 1 January 1958 the EU aid provisions apply to the six Founder States. These provisions apply to the remaining Member States from the respective date of their accession. The provisions are slightly different for the former EFTA Member States and those Central and Eastern European Member States with whom Europe Agreements were concluded prior to their accession. 8 Although the former EFTA Member States Sweden, Finland and Austria only joined the EU on 1 January 1995, Articles 107 et seqq. TFEU have applied to them through the identical provisions of Articles 61 to 64 EEA Agreement since the EEA Agreement came into force on 1 January 1994. Thus, following EU accession, the aid schemes monitored by the EFTA Surveillance Authority were transferred to the control of the Commission. Aid that was introduced before the EEA Agreement came into force is to be regarded as existing aid. Aid approved by the EFTA Surveillance Authority between 1 January 1994 and 31 December 1994 is also regarded as existing aid. On the other hand, aid introduced since 1 January 1994, but not approved, is to be classified as new aid. 10 9 Articles 107 et seqq. TFEU only applied directly to those Central and Eastern European Member States that had already concluded Europe Agreements prior to their accession11 from the date of their respective accession onwards. However, the Europe Agreements concluded already contained a prohibition on aid similar to that of Article 107 TFEU in order to protect competition and trade between the EU and the accession candidates.12 Thus, it is necessary to differentiate between new and existing aid when classifying aid in the case of these Member States:13 Aid dating back to the time before the relevant Europe Agreement came into force is to be regarded as existing aid. Aid introduced in Poland, Hungary, the Czech Republic and Slovakia after the relevant Europe Agreement came into force, but before 10 December 1994, is also treated as existing aid. Moreover, aid is considered existing aid, when introduced between 10 December 1994 and the date of the conclusion of accession negotiations and having been found by the national supervisory authority to be compatible with the Europe Agreement and the Community acquis and to which the European Commission has not objected, having been notified of it. The same applies to aid approved by the national supervisory authority in the time between the conclusion of accession negotiations and the accession of the relevant Member State that has been reported to the EU Commission and to which the European Commission has not objected within three months, as well as aid in accordance with the negotiated transitional procedures. Individual aid is to be regarded as existing aid if it has been examined by the national authority according to national law and found to be lawful, and its existence is fundamentally in line with the relevant national regulations at the time aid is granted. Transport aid introduced before accession and still in place is to be regarded as existing aid until the end of the third year following accession, providing it has been reported to the EU Commission within four months of accession.14 10 The Stabilisation and Association Agreements (SAA) concluded with some of the current (potential) accession candidates also contain a prohibition on aid similar to 7

Heidenhain/Sinnaeve § 31 mn. 21. These include Bulgaria, OJ 1994 L 358/1; Estonia, OJ 1998 L 68/1; Latvia, OJ 1998 L 26/1; Lithuania, OJ 1998 L 51/1; Poland, OJ 1993 L 348/1; Romania, OJ 1994 L 357/1; Slovakia, OJ L 359/1; Slovenia, OJ 1999 L 51/1; Czech Republic OJ 1994 L 360/1; Hungary, OJ L 1993 347/1. 12 Poland and Hungary: Article 62 para. 1 lit. iii; Estonia: Article 63 para. 1 lit. iii; Bulgaria, Latvia, Lithuania, Romania, Slovakia, Czech Republic: Article 64 para. 1 lit. iii; Slovenia: Article 65 para. 1 lit. iii. For more on this see Heidenhain/Schu¨tterle § 61 mn. 1. 13 Sanchez Rydelski/Marmagioli 805, 806; Heidenhain/Schu ¨tterle § 61 mn. 46. 14 Heidenhain/Schu ¨ tterle § 61 mn. 47. 10 11

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Article 107 TFEU.15 Article 34 of Decision No 1/95 of the EU-Turkey Association Council of 22 December 1995 also contains a similar prohibition on aid.16 In terms of time, the ten-year limitation period anchored in Article 15(1) 1 Regula- 11 tion 659/1999, OJ 1999/L 83/1 of the Council relating to special provisions for the application of Article 108 TFEU is to be taken into account. This indicates that state aid cannot be recovered if ten years have passed since it was granted. It shall be considered existing aid (Article 15(3) Regulation 659/1999) after this period has elapsed. The limitation period shall begin on the day on which the unlawful aid has been awarded to the beneficiary either as individual aid or as aid under an aid scheme (Article 15(2) sentence 1 Regulation 659/1999). Article 15 Regulation 659/1999 applies to all measures used to recover state aid, irrespective of whether the aid was granted before or after the regulation came into force on 16 April 1999. 17 However, any action taken by the European Commission or by a Member State, acting at the request of the European Commission shall interrupt the limitation period (Article 15(2) sentence Regulation 659/1999). A simple request for information from the European Commission to the relevant Member State is sufficient for such an interruption. 18 Each interruption shall start the limitation period running afresh (Article 15(2) sentence 3 Regulation 659/1999). The limitation period shall be suspended for as long as the decision of the European Commission is the subject of a legal dispute before the European Court of Justice (Article 15(2) sentence 4 Regulation 659/1999). The limitation period shall resume after each suspension. These provisions shall establish a certain degree of legal certainty for aid granted in the past. The practical significance of these provisions may be negligible, however, because the amount of illegally granted state aid still covered by the European Commission 10 years after it has been granted is almost non-existent.19

3. Material scope The material scope is determined by the criteria of Article 107(1) TFEU: state 12 measure or measures using state resources; capacity to impede trade between the Member States; granting of an advantage to the beneficiary; (threat of) distortion of competition. These will be explained further below. Where a measure cumulatively fulfils these criteria, this measure is considered incompatible with Article 107(1) TFEU. The following supplementary information is pointed out: Articles 107 et seqq. TFEU apply to all economic activities by businesses 20 from all 13 economic sectors. However, special provisions apply to certain areas and are to be applied with priority over Articles 107 et seqq. TFEU. This is the case for the areas of agriculture (Article 42 TFEU) and transport (Article 93 and 96 TFEU), the area of the European Atomic Energy Community (Article 106 a(3) EURATOM Treaty) and for measures by Member States for the purposes listed in Articles 346, 347 TFEU. 15 For example SAA former Yugoslav Republic of Macedonia, OJ 2004 L 84/13: Article 69 para. 1 iii); SAA Croatia, OJ 2005 L 26/3: Article 70 para. 1 iii. 16 OJ 1996 L 35/1. 17 GC Cases T-366/00 Scott 2003 ECR II-1763, mn. 53; T-369/00 De ´partement du Loiret [2003] ECR II851, mn. 51. 18 GC Cases T-366/00 Scott [2003] ECR II-1763, mn. 60; T-369/00 De ´partement du Loiret [2003] ECR II-851, mn. 82. 19 Heidenhain/Sinnaeve § 34 mn. 17. 20 In Ho ¨ fner and Elser v Macroton GmbH, the Court clarified the notition of ‘undertakings’ subject to the competition rules. It defined undertakings as entities engaged in an economic activity, regardless of their legal status and the way they are financed. Case C-41/90 Klaus Ho¨ fner and Fritz Elser v Macrotron GmbH [1991] ECR I-01979, para. 21.

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The term aid is broadly understood. It covers aid of all kinds: not just classic forms of aid, such as funding, loans, state guarantees or share ownership, but also measures by a Member State that go beyond classic subsidies influencing competition. 21 The Treaties do not include a definition of an aid. The sole determining factor here is whether the beneficiary business is granted, directly or indirectly, a financial advantage through the competition-related measure, which this business would not have obtained under normal market conditions.22 As merely the effect of the measure on the undertaking matters, the obligatory nature of such an advantage conferred is irrelevant. 15 The prohibition contained in Article 107(1) TFEU applies to state aid only. This is aid initiated by the state and funded from state resources. For the purposes of funding from state resources, the state may not necessarily be responsible for granting advantage directly. It is sufficient for the aid to be funded by public or private institutions designated or established by it. The notion of state resources is subject to two criteria. First, there needs to be a specific financial burden on the state.23 Second, the national measure must be imputable to the state.24 Advantages granted by independent or non-independent, regional or local institutions are covered by these provisions, as are advantages approved by public or private businesses if they are acting on behalf of the state. State resources therefore include all resources of the public sector,25 including inter-state entities and under certain circumstances resources of private bodies. 26 Moreover, measures not involving a transfer of State resources might still fall within the notion of aid.27 16 If television companies, however, are obliged to spend 5 % of their operating income on the pre-funding of European feature films and of films made for television and 60 % of that money must be spent on works whose original language is one of the official languages of this Member State, this is not an advantage granted by the state or by a public or private institution designated or established by the state. 28 17 Articles 107 et seqq. TFEU only apply to aid granted by the Member States, but not to aid distributed by the EU on the basis of secondary legislation.29 The institutions of the Union have, however, committed themselves to avoid distorting competition and impeding trade.30 In addition, on the international front, the EU is obliged to comply 14

21

Sedemund 31, 32 et seq.; Kruse ZHR 2001, 576, 579. In this context, the Market Economy Investor Principle (MEIP) is the key test of whether the measure by state would represent state aid. The essence is that when the state invests in a business on terms and in conditions, which would be acceptable to a private investor operating under normal market economy conditions, the investment is not a state aid. 23 ECJ Case C-379/98 PreussenElektra AG v Schleswag AG [2001] ECR I-02099. 24 ECJ Case C-482/99 French Republic v Commission of the European Communities [2002] ECR I04397; ECJ Case C-677/11 Doux-E´levage SNC v Ministe`re de l’Agriculture [2013], not yet published, paras. 27–28; ECJ Case C-262/12 Association Vent De Cole`re! Fe´de´ration nationale and Others [2013], not yet published, para. 16. 25 GC Case T-358/94 Compagnie nationale Air France v Commission of the European Communities [2013] ECR II-02109. 26 ECJ Case C-262/12 Association Vent De Cole `re! Fe´de´ration nationale and Others [2013], not yet published, para. 19–20. ~a [1994] ECR I-00877; ECJ Case C-6/97 Italy v 27 Cf. ECJ Case C-387/92 Banco Exterior de Espan Commission [1999] ECR I-02981; Case C-262/12 Association Vent De Cole`re! Fe´de´ration nationale and Others [2013], not yet published, para. 19. 28 ECJ Case C-222/07 UTECA [2009] ECR I-1407, mn. 43. 29 Cf. Dauses/Go ¨ tz H. III. mn. 2; krit. Koenig/Ku¨hling EuZW 1999, 517, 519. 30 Cf. Joint Declaration on aid granted through the EC structural Funds or other financial instruments, OJ 1994 L 1/3; EC Communication on regional policy and competition policy, OJ 1998 C 90/3. 22

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with WTO subsidy rules when awarding Union aid.31 However, individuals cannot invoke any infringement of this agreement due to a lack of direct applicability.

II. Relationship with other provisions of the Treaty (except Article 106 TFEU) Because of the broad scope of Article 107(1) TFEU, the question of the relationship 18 between Articles 107 et seqq. TFEU and other normative references in the Treaties is gaining increasing importance. Even if all the details of the relationship between Articles 107 et seqq. TFEU and other provisions in the Treaties have not been fully clarified, it is possible to differentiate between four possible basic constellations: (1) other normative references have precedence over Articles 107 et seqq. TFEU as special provisions; (2) Articles 107 et seqq. TFEU are themselves lex specialis with respect to other EU legal standards; (3) other EU legal standards apply in addition to Articles 107 et seqq. TFEU and influence whether aid from Member States can be approved; and (4) other applicable EU legal standards have no influence over whether aid from Member States can be approved according to Articles 107 et seqq. TFEU.

1. Special conditions in comparison with Articles 107 et seqq. TFEU Special rules apply to the areas of agriculture and transport and within the scope of 19 the Euratom Treaty that either partially replace Articles 107 et seqq. TFEU or in relation to which Articles 107 et seqq. TFEU only apply on a subsidiary basis. Article 348 TFEU provides for a procedure that differs from Article 108(2) TFEU when state aid is to be granted in order to promote the aims set down in Articles 346 and 347 TFEU. a) Provisions relating to production and trade in agricultural products (Article 42 20 TFEU). According to Article 42 TFEU, the rules on competition shall apply to production of and trade in agricultural products as defined in Article 39 TFEU only to the extent determined by the Council and in accordance with the objectives of general agricultural policy. On the one hand, this normative reference sets down the fundamental precedence of agricultural policy over competition objectives, while at the same time authorising the Council to decide on the extent to which competition rules are to apply in this area. The Council has broad discretion in exercising this authority. 32 The Council made extensive use of these powers in the past, issuing numerous 21 regulations setting down the applicability of Articles 107 et seqq. TFEU to agricultural produce in concrete terms. For this reason, in each case, separate checks are required for each agricultural area to establish whether and to what extent the agricultural produce affected by aid measures are subject to the contractual provisions relating to state aid and the extent to which divergent special provisions have been implemented. 33 A series of provisions on the relationship between Articles 107 et seqq. TFEU and special secondary legislative provisions in the agricultural sector and on whether aid can be approved in this area, as partly explained in greater detail below, can be found in the EU Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020.34 Aid must be provided to promote certain agricultural produce and must be differentiated for general structural policy reasons. 31 Cf. General Agreement on Tariffs and Trade 1994, OJ 1994 L 336/11 as well as Agreement on Subsidies and Countervailing Measures, OJ 1994 L 336/156; cf. Ohlhoff EuZW 2000, 645; Koenig/Ku¨hling/ Ritter 18. 32 ECJ Case 139/79 Maizena [1980] ECR 3393, mn. 23. 33 ECJ Cases C-346/03 Giuseppe Atzeni and others [2006] ECR I-1875, mn. 42. 34 OJ 2014 C 204/1.

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The Council has set down regulations on the common organisation of agricultural markets for most agricultural goods referred to in Article 38 TFEU. These state that Articles 107 et seqq. TFEU apply to the agricultural sector regulated by the regulations on the common organisation of agricultural markets, provided that the relevant regulation does not contain contrary provisions.35 Because the applicability of Articles 107 et seqq. TFEU depends on the specifications of the relevant market regulations, 36 the European Commission cannot approve an aid project according to Articles 107 et seqq. TFEU that is incompatible with the regulations on the common organisation of agricultural markets or that would impede the smooth functioning of this organisation.37 If the regulations on the common organisation of agricultural markets contain final provisions determining whether a Member State is permitted to grant aid, the Member States are not permitted to grant aid contrary to these provisions.38 This principle applies even if the aid from Member States would promote objectives pursued by EU legislation. If the Council has exercised its powers to frame Common Agricultural Policy by establishing regulations on the common organisation of agricultural markets, the Member States shall have no further powers to implement unilateral measures. It is solely a matter for the EU to find solutions to any problems that arise within the framework of the Common Agricultural Policy.39 Unilateral measures by the Member States would run counter to the objective of the uniform application of EU law. 23 As part of the State Aid Modernisation, new revised criteria were introduced under which Member States can support agriculture in line with EU state aid rules. These new criteria go hand in hand with the Common Agricultural Policy and the new EU rural development policy.40 As a result of the reform, the scope of the former guidelines was widened. Moreover, Member States have to follow only one administrative procedure vis-a`-vis the Commission now. Overall, the new rules significantly reduce the administrative burden for state aid control in the agricultural sector. 24 Articles 107 et seqq. TFEU apply to general support measures by EU Member States within the framework of structural policy for promoting rural development. Their application may only be excluded when the EU Member States merely fund support measures by the EU within the scope of Regulation No 1305/2013 on support for rural development by the European Agricultural Fund for Rural Development.41 22

25

b) Provisions in relation to public transport (Articles 93 and 96 TFEU). Articles 107 et seqq. TFEU apply to transport in general. Articles 93 and 96 TFEU contain special conditions that supersede Articles 107 et seqq. TFEU within their area of application.42 35 European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, mn. 50, OJ 2014 C 204/1; for example Article 5 Regulation 827/68, OJ 1968 L 151/16; Article 23 Regulation 804/68, OJ L 148/13. 36 ECJ Case 177/78 Pigs and Bacon Commission [1979] ECR 2161, mn. 11. 37 European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, mn. 50, OJ 2014 C 204/1. 38 ECJ Cases 177/78 Pigs and Bacon Commission [1979] ECR 2161, mn. 14; 216/84 Commission v France [1988] ECR 793, mn. 18; C-86/89 Italy v Commission [1990] ECR I-3891, mn. 19; 90/86 Zoni [1988] ECR 4285, mn. 26; C-173/02 Spain v Commission [2004] ECR I-9735, mn. 19. 39 ECJ Cases 216/84 Commission v France [1988] ECR 793, mn. 18; C-86/89 Italy v Commission [1990] ECR I-3891, mn. 19; C-173/02 Spain v Commission [2004] ECR I-9735, mn. 19. 40 European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, mn. 5, OJ C 204/1. 41 Article 81 para. 1, Regulation (EU) No 1305/2013 of the European Parliament and of the Council of 17 December 2013 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) and repealing Council Regulation 1698/2005, OJ 2013 L 347/487. 42 ECJ Case C-156/77 Commission v Belgium [1978] ECR 1881 mn. 9/13.

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Article 93 TFEU introduces an additional exception for the transport sector on top of the general provisions applicable to state aid; this lays down that state aid, which meets the requirements for coordinating transport or paying for certain public-service-related services, is compatible with the Treaty.43 If Article 93 TFEU is to apply, aid must comply with Article 107(1) TFEU. This normative reference thus represents a special condition for Article 106(2) TFEU44 and is to be checked before the general exceptions. However, it does not exclude the following application of Articles 106(2) and 107(2) and (3) TFEU.45 In order to specify this exceptional provision for compensation payments for the operation of public passenger transport services or for complying with tariff obligations established through general rules, the Council adopted Regulations 1191/69 and 1107/ 70. These regulations exempt aid that arises under the aforementioned regulations from notification obligations. They are to be regarded as conclusive. If aid that falls within the scope of these regulations is not compatible with the common market under the conditions set down there, the Member State is not permitted to invoke Article 93 TFEU.46 All that is left to it then is the possibility of justification according to Articles 106(2), 107(2) and (3) TFEU.47 The aforementioned regulations are repealed by Regulation 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road. Here Article 9(1) sentence 2 of Regulation 1370/2007 provides as well an exemption from notification obligations. Unlike previous regulations, this regulation does not specify Article 93 TFEU conclusively. It is possible to invoke Article 43 TFEU for aid that falls within the scope of this regulation under the criteria of Article 9(2) of Regulation 1370/2007.48 Article 96 TFEU sets down a specific prohibition on aid. As a special condition it has precedence over Articles 107 et seqq. TFEU.49 Modernising its rules for state aid control, the Commission has introduced new guidelines on state aid to specifically airports and airlines to align the policy with the priorities of the EU’s growth strategy, Europe 2020.50

26

27

28

29 30

c) Aid for the purposes of Articles 346 and 347 TFEU. If state aid serves the 31 production of weapons, munitions and war materials, trade in such goods for reasons of national defence and national security or to prevent serious disturbances affecting the maintenance of law and order, if it is granted in time of war or in order to meet an obligation for the purpose of maintaining peace and international security, these measures fall within the scope of Articles 346 or 347 TFEU. If such measures have the capacity to distort competitive conditions in the common market, they shall be measured against Articles 107 et seqq. TFEU. However, the European Commission is not authorised to impose unilateral measures on the Member State to halt aid incompatible with the common market according to Article 108(2) TFEU. Instead, according to Article 348(1) TFEU, the European Commission is obliged to work with 43 ECJ Cases C-280/00 Altmark Trans GmbH and others [2003] ECR I-7747, mn. 34; C-504/07 Associaça˜o Nacional de Ministros and others [2009] ECR I 3867 mn. 23. 44 Regulation 1370/2007, OJ 2007 L 315/1, No. 3. 45 GC Case T-157/01 Danske Busvognmænd [2004] ECR II-917 mn. 102; Commission, Staatliche Beihilfe C 31/2007, OJ 2007 C 217/44 Busunternehmen des Co´ras Iompair E´ireann (Dublin Bus und Irish Bus). 46 ECJ Case C-280/00 Altmark Trans GmbH and others [2003] ECR I-7747, mn. 107; GC Case T-157/0, Danske Busvognmænd ECR [2004], II-917, mn. 101. 47 AA. Otting/Solte ´sz/Melcher EuZW 2009, 444. 48 Cf. auch Regulation 1370/2007, No. 37; Vesterdorf/Nielsen mn. 5–003. 49 Vesterdorf/Nielsen mn. 5–004; Grabitz/Hilf/Nettesheim/Boing Article 76 EG mn. 2. 50 Guidelines on State aid to airports and airlines, OJ 2014 C 99/3.

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the relevant Member State to find a solution for adapting the state aid to the EU law provisions on state aid.51 Article 348(1) TFEU thus supersedes Article 108(2) TFEU. In order to avoid Member States making extensive use of Articles 346 and 347 TFEU, the Commission or any other Member State may bring a case directly before the European Court of Justice by way of derogation from the procedure laid down in Articles 258 et seq. TFEU to Article 348(2) TFEU, if it considers that another Member State is making improper use of the special conditions.52 d) Relationship to the Euratom Treaty, Article 106 a(3) Euratom Treaty. Article 106 a(3) Euratom Treaty sets down the general requirement that the normative references of the Euratom Treaty and TFEU should not impede the provisions of the Treaty establishing the European Atomic Energy Community (EAEC). Thus, measures within the scope of the EAEC Treaty can only be measured against provisions in the EU Treaties if the EAEC Treaty does not contain special provisions for this area. 53 A special provision is when primary or secondary EAEC legislation expressly differs from EU law or the provision under EU legislation is incompatible with the particular integrationist objectives of the EAEC.54 Accordingly, Articles 107 et seqq. TFEU can only be applied on a subsidiary basis. 33 The EAEC Treaty simply contains a number of isolated special provisions in relation to the permissibility of aid from Member States.55 If state-aid-related issues are not covered by these special provisions, Articles 107 et seqq. TFEU shall also apply. 56 32

2. Articles 107 et seqq. TFEU as lex specialis in relation to Article 18 TFEU 34

The opposite situation also exists, where Articles 107 et seqq. TFEU, as special provisions, supersede a general provision of the Treaty of the EU. This is the case in relation to Article 18 TFEU. According to Article 18 TFEU, any discrimination on grounds of nationality within the scope of application of the general prohibition on discrimination shall be prohibited ‘without prejudice to any special provisions of the Treaties’. It follows that the general prohibition on discrimination can only be applied to situations for which the Treaties of the EU do not provide special prohibitions on discrimination.57 According to the European Court of Justice, the special prohibitions on discrimination include the competition provisions contained in the TFEU.58 These cover discrimination that is not associated with the nationality of the allegedly affected business, but rather according to the provisions of the relevant sector-related markets. Thus, there is no room for the independent application of Article 18 TFEU and Article 107 TFEU. In comparison with Article 18 TFEU, Articles 107 et seqq. TFEU are to be regarded as conclusive special provisions.59 Thus, authorisable aid according to Articles 107 et seqq. TFEU may also be aid that is restricted to citizens of the Member 51

GC Case T-26/01 Fiocchi munizioni [2003] ECR II-3591, mn. 63; Koenig/Ku¨hling/Ritter mn. 65. Koenig/Ku¨hling/Ritter mn. 65. 53 ECJ Case C-62/88 Greece v Commission [1990] ECR I-1527, mn. 17. 54 Pechstein EuZW 2001, 307, 309 with further references. 55 Cf. Article 4 et seqq. EAEC Treaty, Article 45 et seqq. EAEC Treaty (particularly Article 48 EAEC Treaty). 56 GA Reischl, Opinions, 188–190/80, ECR 1982, 2583, mn. 11 – France et al. v Commission; Koenig/ Ku¨hling/Ritter mn. 49; Pechstein EuZW 2001, 307, 309. 57 ECJ Cases 305/87 Commission v Greece [1989] ECR 1461, mn. 12; C-179/90 Merci convenzionali porto di Genova SpA [1991] ECR I-5889, mn. 11; C-379/92 Matteo Peralta [1994] ECR I-3453, mn. 18; GC Case T-158/99 Thermenhotel Stoiser Franz Gesellschaft mbH & Co. KG [2004] ECR II-1, mn. 146. 58 ECJ Case C-379/92 Matteo Peralta [1994] ECR I-3453, mn. 20; GC Case T-158/99 Thermenhotel Stoiser Franz Gesellschaft mbH & Co. KG [2004] ECR II-1, mn. 147. 59 Schwarze/Ba ¨ r-Bouyssie`re EU-Kommentar, Artikel 107 AEUV, mn. 14. 52

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State providing the funding. However, this principle only applies insofar as such measures do not fall within the scope of application of a fundamental freedom that applies in parallel with Articles 107 et seqq. TFEU and infringes this.

3. Provisions that apply in parallel with Articles 107 and 108 TFEU Interventions by Member States can be organised so that they affect the scope of 35 application of other provisions in the Treaty, as well as Articles 107 et seqq. TFEU. Besides Articles 107 et seqq. TFEU, the prohibitions in relation to certain levies (Article 30, 110, 111 TFEU), the free movement of goods (Article 34, 35 TFEU), the remaining fundamental freedoms (Article 49 TFEU, Article 56 TFEU, Article 45 TFEU, Article 63 TFEU), state commercial monopoly (Article 37 TFEU) and the remaining competition rules (Articles 101 et seqq. TFEU) may also be affected. Even if these standards mainly pursue the same objective as Articles 107 et seqq. TFEU, which involves preventing the distortion of competition in the common market, their parallel application alongside the aid provisions is justified because they have different criteria and are therefore not aimed against the aid itself, but rather its particulars, providing for different legal consequences. Thus, in the opinion of the European Court of Justice, the simple fact that a national measure can possibly be regarded as aid under the terms of Article 107(1) TFEU does not provide sufficient reason to exempt it from the prohibition of a directly applicable standard.60 The parallel application of Articles 107 et seqq. TFEU and other EU legal standards 36 can lead to a conflict of competence and process because the task of verifying the compatibility of a measure by a Member State with the aforementioned standards is sometimes assigned to different institutions (in particular the European Commission on the one side and national courts in Member States on the other) and is subject to different processes. The European Court of Justice has set down a series of provisions, on the basis of which the competences of the responsible institutions can be separated and their examination powers specified: The primary task of the European Commission in the procedure according to 37 Article 108 TFEU is to evaluate the compatibility of state aid with the common market. The European Commission has further discretion when evaluating whether state aid is compatible with the common market in the procedure according to Article 108 TFEU. The procedure according to Article 108 TFEU should never lead to a result that contradicts the special provisions of the Treaty.61 Thus, when assessing whether aid is compatible with the common market, the European Commission is obliged to take account of all other provisions of the Treaty that also apply and that the aid from the Member State could infringe.62 If state aid as referred to in Article 107(1) TFEU infringes one of the aforementioned provisions, the European Commission may not declare the measure by the Member State to be compatible with the common market. 63 However, because it only has the competence to control the state aid of Member States in the procedure according to Article 108 TFEU, it may not use this competence to examine the legality of a measure by a Member State that does not fall within the scope of application of Article 107(1) TFEU on the basis of the aforementioned standards. 60

ECJ Case C-21/88 Du Pont de Nemours Italiana SPA [1990] ECR I-889, mn. 20. ECJ Cases 73/79 Commission v Italy [1980] ECR 1533, mn. 11; C-21/88 Du Pont de Nemours Italiana [1990] ECR I-889, mn. 20; C-225/91 Matra SA [1993] ECR I-3203, mn. 41; C-156/98 Germany v Commission [2000] ECR I-6857, mn. 79; C-204/97 Portugal v Commission [2001] ECR I-3175, mn. 41; C-234/99 Niels Nygård [2002] ECR I-3657, mn. 54. 62 ECJ Case C-204/97 Portugal v Commission [2001] ECR 2001, I-3175, mn. 41. 63 ECJ Case C-113/00 Spain v Commission [2002] ECR I-7601, mn. 79. 61

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Thus, while the European Commission can examine compliance with aid provisions and the compatibility of a measure by a Member State with other provisions of the Treaty in the procedure according to Article 108 TFEU, this does not apply to courts in Member States. With the exception of Article 108(3) sentence 3 TFEU and contrary to the aforementioned provisions, Articles 107 et seqq. TFEU are not directly applicable. Subject to verification by the European Court of Justice, sole responsibility in relation to the question whether a measure by a Member State that infringes a directly applicable normative reference in the Treaty and also involves state aid is compatible with the common market on the basis of Articles 107 et seqq. TFEU, lies with the European Commission in the procedure set down in Article 108 TFEU and Article 258 TFEU. 64 Courts in Member States only have the competence to examine whether intervention by a Member States involves state aid and has been implemented in violation of Article 108(3) sentence 3 TFEU, and whether this measure infringes the aforementioned provisions of the Treaty, insofar as these are directly applicable. This parallel application of normative references means that it is possible for the court of a Member State to be called upon to decide on the compatibility of a measure by the Member State with directly applicable normative references and, at the same time, for the European Commission to examine whether the state aid granted in the measure is compatible with the common market in the procedure set down in Article 108 TFEU. These parallel examining powers of the courts or Member States involving the application of directly applicable normative references that provide for different operative events and legal consequences from Articles 107 et seqq. TFEU entails an intrinsic risk of significant changes in competences which reduces the freedom of the European Commission and of the Member States in shaping economic policy. While Articles 107 et seqq. TFEU allow the European Commission considerable discretion and also give Member States freedom in granting aid, the freedom for intervention measures under the directly applicable normative references, in particular the prohibition on certain levies and basic freedoms, are much more limited. The broader the scope of application of the directly applicable normative references, the less freedom remains to Member States in granting aid. In order to counter such a shift in competences, the European Court of Justice has reduced the examining powers of the courts in Member States in cases where significant overlaps typically occur between directly applicable normative references and Articles 107 et seqq. TFEU. To ensure they do curtail the decision-making freedom of the European Commission, the courts in the Member States are not entitled to examine the aid itself for its compatibility with directly applicable normative references. They only have the powers to examine the details of an aid scheme on the basis of directly applicable normative references, and then only in cases where such an examination can be carried out in isolation. The details must involve criteria or parts of the state aid provisions that are not indispensable in achieving the purpose of the aid or its functions.65 It must be possible for the courts in the Member States to declare that part of the provision unlawful, which infringes the directly applicable prohibition, so that the state aid provision can continue to exist without this part. If it is not possible to separate the details in relation to state aid from the actual aid provision, i. e. if they are so inseparably linked with the purpose of the aid that they cannot be assessed in isolation, then an examination by the courts in the Member States 64 ECJ Cases C-72/92 Scharbatke [1993] ECR I-5509, mn. 19; C-261/01 Euge `ne van Calster et al. [2003] ECR I-12249, mn. 45; C-234/99 Niels Nygård [2002] ECR I-3657, mn. 53. 65 ECJ Cases 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 14; C-234/99 Niels Nygård [2002] ECR I3657, mn. 57.

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is not possible. In such cases, it is solely for the European Commission and, secondarily, for the European Court of Justice to assess the state aid on the basis of Articles 107 et seqq. TFEU and the other related provisions of the Treaty in the procedure according to Article 108 TFEU.66 In general, such a separation of powers is to be welcomed because this is the only way 43 to ensure that the European Commission and the Member States retain sufficient freedom in relation to economic policy. It may not always be easy, however, for the courts in the Member States to determine whether the details of an aid scheme can be dealt with in isolation. The European Court of Justice has specified the relationship to Articles 107 et seqq. TFEU as follows: a) Free movement of goods, Articles 34, 35 TFEU. The aforementioned separation 44 principles have primarily been developed on the basis of cases in which the free movement of goods, Articles 34, 35 TFEU, applied in addition to Articles 107 et seqq. TFEU. Since the Dassonville judgment,67 there are generally considerable overlaps in the scope of application. Because the Dassonville formula has extended the scope of application of the free movement of goods to all actual or potential, direct or indirect restriction, all aid that has only indirect or potential influence on the free movement of goods would fall within the scope of application of Article 34 TFEU. As the justifications available under Article 34 TFEU are much narrower than under Article 107(2) and (3) TFEU, the Member States would generally not be permitted to grant aid. Also, aid would mainly be examined before the courts in the Member States on the basis of the directly applicable Article 34 TFEU. Because the courts in the Member States can only examine whether aid exists as referred to in Article 107(1) TFEU, and thus the directly applicable standstill clause of Article 108(3) last sentence TFEU applies, but not whether the aid is compatible with the common market, the Member States would be deprived of significant freedom in relation to economic policy, as outlined in the European law on state aid. In addition, the examining powers of the European Commission, which is permitted considerable freedom in its assessments and organisational arrangements in the scope of application of Articles 107(1) and 108 TFEU, would also be significantly curtailed. In an effort to prevent this, the European Court of Justice stipulated in the Iannelli 68 45 case, as a kind of filter for the Dassonville formula, that aids as referred to in Articles 107 and 108 TFEU were not subject per se to the scope of application of the quantitative import restrictions established in Article 34 TFEU. In other words, a system of state aid or aid supplied from state funds, which simply has the capacity to at least indirectly impede the import of similar or competitor products from the other Member States as a consequence of favouring certain indigenous businesses, shall not be sufficient to equate aid per se with a measure with the same effect, such as quantitative import restrictions as referred to in Article 34 TFEU. 69 In other words, in order for Article 34 TFEU to apply, the aid provision must 46 coincide with the scope of application of the free movement of goods based on certain additional (discriminatory) details. The fact that this also involves aid under the terms of Article 107 TFEU does not exclude the powers of national courts to examine the details involved in this measure on the basis of the free movement of goods. 70 66

ECJ Case 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 14, 17. ECJ Case 8/74 Dassonville [1974] ECR 837, mn. 5. ECJ Case 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 9/10. 69 ECJ Case 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 9/10. 70 ECJ Cases 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 14; 249/81 Commission v Ireland [1982] ECR mn. 18; 103/84 Commission v Italy [1986] ECR 1759 mn. 19; C-21/88 Du Pont de Nemours Italiana SpA [1990] ECR I-889, mn. 20. 67 68

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However, if the procedure does in fact involve state aid, what matters is the separability of the subsidiary provision that may infringe the principle of the free movement of goods from the overall provision. If it is not possible to examine the particulars of an aid scheme on the basis of the free movement of goods in isolation, it is solely a matter for the European Commission in a procedure according to Article 108(2) TFEU and for the European Court of Justice to examine the particulars of state aid for compatibility with the principle of the free movement of goods.71

b) Article 25 and Articles 110 TFEU. There is a large overlap between Article 25 TFEU or Article 110 TFEU, on the one hand, and Articles 107 et seqq. TFEU, on the other. The situation often arises that a Member State’s parafiscal levy is applied both to domestic products and imported goods, but the revenue accruing from this levy is simply used to equalise the burden on domestic producers. In view of the use of the revenue accrued, such a measure may represent aid that is incompatible with the common market and may fall within the scope of application of Article 107(1) TFEU as well as Articles 30 TFEU or 110 TFEU.72 49 In such cases, Articles 30 TFEU and 110 TFEU, on the one hand, and Articles 107 et seqq. TFEU, on the other, shall apply in parallel. A parallel application is justified because, unlike the aid rules, Articles 30 TFEU and 110 TFEU specifically aim to protect the free movement of goods and competition between national and imported products, while Articles 107 et seqq. TFEU generally serve to maintain competition between businesses.73 The two groups of normative references also differ significantly in relation to the operative events and legal consequences. The operative event is the regulated form of intervention by the Member State, the granting of aid on the one hand and the imposition of discriminatory levies on the other. The type of funding through levies is simply preceded by the actual granting of aid. On the legal consequences side, Articles 107 and 108 TFEU also leave the European Commission a considerable degree of discretion, while Article 30 TFEU and Article 110 TFEU are to be applied strictly. 74 The European Court of Justice has not reduced the scope of application of Article 30 TFEU and Article 110 TFEU in constellations in which these normative references apply alongside Articles 107 et seqq. TFEU.75 50 Here too, the European Court of Justice separates the jurisdiction of the courts in the Member States from the competency of the European Commission. The European Commission may not separate the actual aid from the way it is funded and may not ignore this when, the link between funding and the actual aid leads to an incompatibility of the whole scheme with the common market.76 Thus, within the framework of the procedure referred to in Article 108 TFEU, it must examine whether the method of 48

71 ECJ Cases 74/76 Iannelli & Volpi SpA [1977] ECR 557, mn. 14; C-113/00 Spain v Commission, [2002] ECR I-7601, mn. 78. 72 ECJ Cases 73/79 Commission v Italy [1980] ECR 1533, mn. 9; 17/81 Pabst & Richarz [1982] ECR 1331, mn. 22; C-206/06 Essent Netwerk Noord BV [2008] ECR I-5497, mn. 59. 73 ECJ Cases 148/77 Hansen & Balle [1978] ECR 1787, mn. 8; C-206/06 Essent Netwerk Noord BV [2008] ECR I-5497, mn. 60. 74 ECJ Cases 73/79 Italy v Commission [1980] ECR 1533, mn. 8; 277/83 Commission v Italy [1985] ECR 2049, mn. 16; 17/81 Pabst & Richarz [1982] ECR 1331, mn. 22; C-234/99 Niels Nygård [2002] ECR I3657, mn. 55. 75 Cf. e. g. ECJ Cases C-144/91 Gilbert Demoor en Zonen NV [1992] ECR I-6613, mn. 14; C-266/91 Celulose Beira Industrial SA [1993] ECR I-4337, mn. 8; C-72/92 Firma Herbert Scharbatke GmbH [1993] ECR I-5509, mn. 9; C-393/04 Air Liquide Industries Belgium SA [2006] ECR I-5293, mn. 39; C-34/01 Enirisorse SpA [2003] ECR I-14234, mn. 53; C-234/99 Niels Nygård [2002] ECR I-3657, mn. 16; C-206/06 Essent Netwerk Noord BV [2008] ECR 2008 I-5497, mn. 40. 76 ECJ Cases C-261/01 van Calster et al. [2003] ECR I-12249, mn. 46; C-34/01 Enirisorse SpA [2003] ECR I-14234, mn. 44.

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funding state aid infringes Article 30 TFEU or 110 TFEU. If this is the case, the aid itself, which comprises the levy, cannot be declared compatible with the common market. 77 On the other hand, courts in the Member States can only examine the details of the 51 aid provision in the form of the levy as a financing method on the basis of Article 30 TFEU or 110 TFEU, if this is possible in isolation as described above. 78 Because the method of funding simply precedes the actual aid, this should generally be the case. If courts in the Member States find in such a case that the intervention by the Member State infringes Articles 30 TFEU or 110 TFEU, they may declare the separable part relating to funding unlawful. The courts in the Member States may even do this if the European Commission has already declared the state aid to be compatible with the common market. Accordingly, the courts of the Member States play a complementary role. In comparison with the European Commission, the national courts are in a better position to gather the necessary information when assessing the distribution of the revenue from a domestic parafiscal levy and to carry out the relevant evaluations on the basis of data that is regularly yielded from accounts and other administrative documents from the authorities that impose the levy or that grant state aid. 79 Because it is possible to examine the funding method in isolation, this does not impede the central role of the European Commission in applying Articles 107 et seqq. TFEU.80 c) The other fundamental freedoms. The remaining fundamental freedoms, i. e. 52 freedom of establishment, Article 49 TFEU, freedom to provide services, Article 56 TFEU, freedom of movement for workers, Article 45 TFEU, and free movement of capital, Article 63 TFEU, shall also apply in parallel with Articles 107 et seqq. TFEU. Here too, the case law of the European Court of Justice indicates no restriction on the scope of application of the aforementioned fundamental freedoms. 81 If state aid infringes one of these fundamental freedoms in its particulars, then likewise it shall be deemed incompatible with the common market and disallowed by the European Commission.82 National courts do not have the power to assess the compatibility of an aid measure with the common market here either. Responsibility for this assessment lies solely with the European Commission, subject to review by the European Court of Justice.83 This is why a separate judgment from a court in a Member State is only possible if the infringement of the fundamental freedoms relates to an isolated, counteravailable detail of the aid without which state aid can still continue to exist. d) State commercial monopoly (Article 37 TFEU). A measure by a Member State 53 can also affect the scope of application of Article 37 TFEU and, at the same time, fall under the scope of Article 107(1) TFEU. Such cases are very rare in practice. Such a constellation exists when measures by the state are associated with the exercising of an exclusive right by a state commercial monopoly and the guarantee of state aid in favour 77 ECJ Cases 73/79 Commission v Italy [1980] ECR 1533, mn. 11; C-261/01 van Calster et al. [2003] ECR I-12 249, mn. 48. 78 ECJ Case C-234/99 Niels Nygård [2002] ECR I-3657, mn. 57. 79 ECJ Case C-234/99 Niels Nygård [2002] ECR I-3657, mn. 61. 80 ECJ Case C-234/99 Niels Nygård [2002] ECR I-3657, mn. 62. 81 Cf. e. g. ECJ Cases C-430/99 Sea-Land Service Inc. et al. [2002] ECR I-5235, mn. 24; C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, mn. 1; C-451/03 Servizi Ausiliari Dottori Commercialisti Srl [2006] ECR I-2941, mn. 27; C-208/05 ITC Innovative Technology Center GmbH [2007] ECR I-181, mn. 46; GC Case T-158/99 Thermenhotel Stoiser Franz Gesellschaft mbH & Co. KG [2004] ECR II-1, mn. 149. 82 ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 78. 83 ECJ Cases C-237/04 Enirisorse SpA [2006] ECR I-2843, mn. 23; C-451/03 Servizi Ausiliari Dottori Commercialisti Srl [2006] ECR I-2941, mn. 71.

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of the producer affected by the monopoly are linked to these measures. 84 Such a measure is not excluded from the scope of application of Article 37 TFEU because it entails state aid. Instead Article 37 TFEU shall apply alongside Articles 107 et seqq. TFEU.85 Even if these standards mainly pursue the same objective, namely to prevent the two forms of intervention – the operation of a state commercial monopoly or the granting of aid – which either distort competitive conditions in the common market or lead to discrimination against the producers or trade from other Member States, there is a justification in applying them both in parallel. Here too, the provisions have different criteria, which are adapted to the relevant form of intervention used by the Member State. They also differ in their legal consequences. While Articles 107 et seqq. TFEU leave the European Commission a considerable degree of discretion, this is not the case with Article 30 TFEU, which is directly applicable. Article 37 TFEU is not lex specialis in the sense that this normative reference completely excludes the application of Articles 107 et seqq. TFEU.86 Instead, these articles stand on an equal footing. e) Relations with other competition rules. The remaining competition rules in the Treaty, in other words Articles 101 et seqq. TFEU, also apply in parallel with Articles 107 et seqq. TFEU. This means, for example, that a state’s allocation of a significant part of a levy to a public company may constitute state aid and, at the same time, lead to an exploitation of this company’s dominant position in the market, contrary to Articles 102 and 106 TFEU.87 55 Because of the common objective of ensuring undistorted competition within the common market, the European Court of Justice regards the European Commission as having a particular obligation to observe the remaining competition rules as part of an aid scheme according to Article 108 TFEU, when determining whether state aid is compatible with the common market.88 When making this decision, it should not disregard the risk that the individual economic operators could impede competition within the common market.89 56 The same also applies vice versa to restrictive practice and merger control procedures. Here too, when assessing the legality of a matter, the European Commission has a particular obligation to consider the effects of the granting of aid by Member States, in order to avoid future anomalies when applying different competition rules. 90 For example, the granting of state aid can play a role when assessing the financial consequences of a merger in a merger control procedure. As part of its competition analysis, the European Commission must then consider whether and to what extent the financial and economic power of the merged entity would be strengthened because of the financial support afforded by this possible aid.91 57 Even if Articles 107 et seqq. TFEU and Articles 101 et seqq. TFEU apply in parallel, the procedures according to Articles 101 et seqq. TFEU and 107 et seqq. TFEU remain mutually independent procedures with specific rules. Thus, insofar as parallel procedures are in progress under competition law, the European Commission can carry out a 54

84

ECJ Case 91/78 Hansen [1979] ECR 1979, 935, mn. 8. ECJ Case 91/78 Hansen [1979] ECR 1979, 935, mn. 9. 86 Vesterdorf/Nielsen mn. 5–024; Heidenhain/Heidenhain § 60 mn. 12. 87 ECJ Case C-34/01 Enirisorse SpA [2003] ECR I-14243, mn. 50. 88 ECJ Case C-225/91 Matra SA [1993] ECR I-3203, mn. 43; GC Case T-197/97 Weyl Beef Products BV et al. [2001] ECR II-303, mn. 75. 89 ECJ Case C-225/91 Matra SA [1993] ECR I-3203, mn. 43; GC Cases T-197/97 Weyl Beef Products BV et al. [2001] ECR II-303, mn. 75; Case T-156/98 RJB Mining plc [2001] ECR II-337, mn. 113. 90 ECJ Cases C-225/91 Matra SA [1993] ECR I-3203, mn. 41; C-164/98 P DIR International Film et al. [2000] ECR I-447, mn. 21, 30; GC Case T-156/98 RJB Mining plc [2001] ECR II-337, mn. 112. 91 GC Case T-156/98 RJB Mining plc [2001] ECR II-337, mn. 125. 85

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separate and independent examination based on an economic analysis, in which it takes account of all the relevant competition rules. It does not need to await the result of the parallel procedure, particularly not if it forms the opinion that there is no infringement of the relevant competition rules.92 Thus, for example, in the procedure according to Article 108 TFEU, it can decide for 58 itself whether the recipient of aid has the capacity to infringe Article 101 or Article 102 TFEU. The same principle applies in the opposite case. Thus, it can make a decision in a merger control procedure on the compatibility of a merger between businesses with the common market, without needing to await the result of a parallel aid procedure according to Article 108 TFEU.93

4. EU legal standards with no influence on Articles 107 et seqq. TFEU The Treaty also contains provisions that have no effect on the applicability or evaluation of aid according to Articles 107 et seqq. TFEU. For example, in the area of freedom of establishment, Article 50(2)(h) TFEU, whereby directives for the realisation of freedom of establishment must ensure that the conditions for establishment are not distorted by aid, does not exclude the application of Article 107(1) TFEU.94 This standard, whereby the Council and European Commission ensure that the conditions for establishment are not distorted by aid, simply contains a call to the aforementioned institutions for legislation, but does not exclude Article 107(1) TFEU. In other cases, this standard is of almost no practical significance because of the direct applicability of freedom of establishment.95 In the case of Deufil GmbH & Co. the European Court of Justice also made it clear that the reasons and objectives for a Member State’s granting of aid are basically of no significance (the exception being state aid granted in pursuit of the purposes specified in Articles 346 and 347 TFEU). Thus, invoking the pursuit of economic policy objectives as referred to in Article 121 TFEU, for example, does not render aid granted by Member States exempt from Articles 107 et seqq. TFEU. 96 Likewise, the protection of the rules in Member States governing the system of property ownership according to Article 346 TFEU cannot restrict the scope of application of Articles 107 et seqq. TFEU. Even if the rules in Member States governing the system of property ownership continue to fall within the area of responsibility of the Member States, they are still covered by Articles 107 et seqq. TFEU. 97

III. Relationship to the WTO Rules (Anti-Subsidy Rules) Bibliography: Bagwell/Staiger, The Economics of the World Trading System (2002); Desmedt, European Court of Justice on the Effect on WTO Agreements in the EC Legal Order, LIEI (2000) 93; Ehlermann/ Goyette, The Interface between EU State Aid Control and the WTO Disciplines on Subsidies, 4 EStAL (2006) 695; Flett/Jessen/Talaber-Ritz, The Relationship between WTO Subsidies Law and EC State Aid Law, in: EC State Aid Law/Le droit des aides d’E´tat dans le CE: Liber Amicorum Francisco Santaolalla Gadea (2008), 441; ¨ bereinkommen u¨ber Subventionen und AusgleichsmaßnahGrave, Der Begriff der Subvention im WTO-U men, 2002; Gross, Das Europa¨ische Beihilfenrecht im Wandel – Probleme, Reformen, Perspektiven, Diss. St. 92

ECJ Case C-225/91 Matra SA [1993] ECR I-3203, mn. 44. GC Case T-156/98 RJB Mining plc [2001] ECR II-337, mn. 115. 94 Schwarze/Ba ¨ r-Bouyssie`re, EU Kommentar, Artikel 107 AEUV mn. 17, according to which Article 50(2)(h) TFEU is a lex specialis to Article 107(1) TFEU. 95 Grabitz/Hilf/Nettesheim, AEUV Artikel 50, mn. 19. 96 ECJ Case 310/85 Deufil GmbH & Co. KG [1987] ECR 901, mn. 8. 97 GC Cases T-116/01 P & O European Ferries [2003] ECR II-2957 mn. 152; T-228/99 Westdeutsche Landesbank Girozentrale et al. [2003] ECR II-435, mn. 192. 93

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Gallen 2003; Hilf/Schorkopf, WTO und EG: Rechtskonflikte vor den EuGH? Anmerkung zum Urteil des EuGH vom 23. 11. 1999, Rs. C-149/96 Portugal v. Rat, EuR 2000, 74; Luengo Herna´ ndez de Madrid, Regulation of Subsidies and State Aids in WTO and EC Law: Conflicts in International Trade Law, 2007; id., Conflicts between the Disciplines of EC State Aids and WTO Subsidies: of Books, Ships and Aircraft, 13 European Foreign Affairs Review (2008) 1; Ohlhoff, Verbotene Beihilfen nach dem Subventionsabkommen der WTO im Lichte aktueller Rechtsprechung, EuZW 2000, 645; Raaflaub, Subventionsregeln der EU und des GATT: Theorie und Politik fu¨r die Hochtechnologie (1994); Rubini, The Definition of Subsidy and State Aid – WTO and EC Law in a Comparative Perspective (2009); Rulfs, Welthandelsregeln fu¨r den Schiffbau und deren Durchsetzung (2006); Sa`nchez Rydelski, EG und WTO Antisubventionsrecht: Ein konzeptioneller Vergleich der EG Antisubventions-Verordnung mit den Beihilfevorschriften des EG-Vertrages unter Beru¨cksichtigung des Subventionsu¨bereinkommens der WTO (2001); Slocock, EC and WTO Subsidy Control Systems – Some Reflections, 2 EStAL (2007) 249; Weber/Moos, Rechtswirkungen von WTO-Streitbeilegungsentscheidungen im Gemeinschaftsrecht, EuZW 1999, 229; Wegener Jessen, Rules on State aid and subsidies, in: Gaines/Olsen/So¨rensen (ed.), Liberalising Trade in the EU and the WTO (2014).

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The GATT recognised quite early the need to regulate the granting of subsidies on an international level. Article VI of the GATT 1947 provided that, under certain preconditions, subsidies may be countered with countervailing measures. As a Treaty that aimed at fostering the trade in goods, the rules of the GATT address the subsidisation of products. The corresponding trade policy instrument of the European Union that is meant to address certain subsidies is the anti-subsidy regulation. 98 By contrast, Article 107 TFEU prevents the granting of State aid to certain companies or economic sectors. This difference at the outset is of great relevance: if a State aid under Article 107 TFEU is granted to a company, all of its activity is affected, and not only the production of specific products. By contrast, in order to challenge the subsidisation of a specific product under Article VI GATT, it must be shown that the subsidisation has actually benefited that very product,99 for instance by means of a ‘passing through’ of the subsidy. The target of the WTO rules is thus different from the goal of Article 107, 108 TFEU. Whereas the WTO rules merely allow the WTO members to take action against subsidies in respect of which the Member State was able to show that it deteriorated the trade flows to its disadvantage, the TFEU aims at achieving the internal market and at preventing any distortion of competition as well as a subsidy race among the EU members.100 The measures that can be taken in defence against a subsidy of State aid are also quite different. The WTO rules merely allow trade measures, such as countervailing duties to be imposed on the imports of the subsidised goods. They do not allow ordering the recovery of the subsidy. By contrast, the EU rules on State aids require that the status prior to the granting of the subsidy is re-established, which has to be achieved by means of recovery of the aid. The anti-subsidy regulation being part of the external trade policy instruments of the EU, it does not contradict the principles of the competition law; rather, the State aid rules of the TFEU as well as the anti-subsidy regulation aim at countering measures, which have a subsidy of State aid as their basis, that distort competition and the markets.101 A third area in which the treatment of subsidies under WTO rules and State aid rules according to Article 107 TFEU differs is the general prohibition of subsidies under the WTO, which merely distinguishes between ‘actionable’ and ‘countervailable’ subsidies; 98

Regulation 597/2009, OJ 2009 L 188/93. WT/DS 257/AB/R – US Softwood Lumber IV. 100 Cf. Flett/Jessen/Talaber-Ritz 441, 446. 101 Sanchez Rydelski 193 et seq. 99

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the term and special treatment of ‘non-actionable’ subsidies have been abolished in 1999. EU law, by contrast, though also providing for a general prohibition of State aid, allows to treat a State aid as compatible with the internal market, or to have the Commission declare it compatible with the internal market under Article 107(2) TFEU. This means that a State aid that is considered compatible with the internal market under Article 107(2) or (3) TFEU may very well constitute an ‘actionable’ or even ‘countervailable’ subsidy under the WTO rules. Having a State aid declared by the Commission does not, therefore, exclude the risk that other WTO Member States may take trade policy measures against the subsidisation of the products that the beneficiary of the aid produces. Flett/Jessen/Talaber-Ritz thus conclude that, due to the differences, the EU State aid 68 law does need to be in conformity with WTO rules102 – a claim also raised by Luengo Herna´ndez de Madrid.103 Of course, one would not require that every measure under EU law should be scrutinised as to its compatibility with WTO rules. As long as there is no distorting effect on the trade flows, the scope of the WTO rules is not affected, but the EU rules apply. An aid measure that is compatible with the internal market may lead to a conflict with WTO rules, but this is not necessarily so. The WTO does not aim at introducing a unified control of subsidies in all WTO 69 members, and the WTO does not have an institution to monitor and control the granting of subsidies. Its Committee on Subsidies and Countervailing Measures does not have any powers of enforcement.104 Rather, WTO rules are only invoked when a member raises a complaint against the negative effects of the subsidisation by another member. Within the EU, however, the Commission, as the guardian of the Treaty, is the institution 105 that will independently – and not only based upon complaints106 – control the granting of subsidies, and verify whether these are compatible with the internal market.

1. The development of the WTO anti-subsidy rules The GATT 1947 contained three rules relating to the granting of subsidies: firstly, 70 Article VI provided for compensatory measures against subsidised goods under certain conditions, secondly, members had to notify, according to Article XVI, to the GATT the subsidies granted by them, and thirdly, Article II(4) GATT provided for a general obligation not to use subsidisation in such a way that they would hamper imports into the subsidising country, if that country had bound its tariff for the respective products. Export subsidies have always been considered as particularly harmful, and they allowed for the most far-reaching countervailing measures. In the course of the Tokyo Round (1979), a first Subsidies Code was adopted, 71 containing multilateral rules against subsidies. This Code only applied to those members that had adopted the Code; there was no automatic application to other members, it did not apply to all GATT members. The Subsidies Code dealt with both domestic and export subsidies, and introduced two possibilities to counter the granting of subsidies by a GATT partner: ‘Track 1’ allowed the imposition of countervailing duties, whereas ‘Track 2’ allowed to bring a complaint against the violation of the prohibition of introducing new subsidies. Unfortunately, the Subsidies Code lacked a precise definition of what constitutes a subsidy, so that the members kept a rather large room to manoeuvre in deciding what measures to take. 102

Flett/Jessen/Talaber-Ritz 467. Luengo Herna´ndez de Madrid, 13 European Foreign Affairs Review (2008) 1, 29. 104 Wegener Jessen 305. 105 Cf. Flett/Jessen/Talaber-Ritz 449. 106 Slocock 2 EStAL (2007), 249 et seq., promotes a State aid control merely based on complaints. 103

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In the Uruguay Round (1986–1994), the Agreement on Subsidies and Countervailing Measures (‘ASCM’) was introduced. Just as importantly, the ‘single undertaking’ principle applied, so that the ASCM became binding on all GATT- and later WTO Member States, and not only those signatory states that wanted to apply the rules, as was the case with the Subsidies Code. The ASCM initially introduced a ‘traffic light’ system for subsidies – ‘green’ for good subsidies, yellow for ‘actionable’ subsidies and ‘red’ for prohibited subsidies that were considered as ‘countervailable’ and against which the members could introduce countervailing duties. Subsidies that would distort international trade, and thus lead to an inefficient allocation of resources, were to be avoided by means of the ASCM107. The discipline of the members was to be improved, both as regards the subsidisation and the respective countermeasures 108. The ASCM Part I contains rules defining the notion of subsidies, Part II deals with ‘prohibited subsidies’, Part III governs the ‘actionable subsidies’ and Part IV contains rules relating to ‘non-actionable’ subsidies. Part V deals in more detail with countervailing duties that may be imposed against prohibited subsidies. 73 The ASCM continues to apply with minor modifications; merely the rules on ‘nonactionable subsidies’ have not been extended beyond 1999 and thus no longer apply. Consequently, the ‘traffic light’ system no longer applies. Rather, all subsidies are considered as undesirable or even prohibited. 74 The ASCM has been interpreted in numerous Panel Reports and Appellate Body Reports of the WTO109, that cannot be elaborated upon at this point. Very few of these concern State aids that had been declared compatible with the internal market under EU rules110. 72

2. The notion of subsidy under the WTO rules 75

Article 1 ASCM considers a subsidy to exist if a government or a public entity in the territory of a Member State grants a financial contribution or supports prices or revenues, and this measure confers a benefit to the beneficiary, irrespective of the amount111. The term financial contribution of a government or a public entity is defined further, and comprises (i) a government practice involving a direct transfer of funds (e. g. grants, loans, and equity infusion), or potential direct transfers of funds or liabilities (e. g. loan guarantees), or (ii) government revenue that is otherwise due is foregone or not collected (e. g. fiscal incentives such as tax credits), or a government 107

Cf. WT/DS 70/R, mn. 9.119 – Canada Aircraft. Cf. WT/DS 213/AB/R mn. 73 – US Carbon Steel. 109 WT/DS 22 – Brazil Desiccated Coconut; WT/DS 46 – Brazil Aircraft; WT/DS 54, WT/DS 55, WT/ DS 59, WT/DS 64 – Indonesia Autos; WT/DS 70 Canada Aircraft; WT/DS 103, WT/DS 113 – Canada Dairy; WT/DS 108 – US FS C; WT/DS 126 – Australia Automotive Leather; WT/DS 138 – US Lead and Bismuth II; WT/DS 139 – Canada Autos; WT/DS 194 – US Export Restraints; WT/DS 206 – US Steel Plate; WT/DS 212 – US CVDs on Certain EC Products; WT/DS 213 – US Carbon Steel; WT/DS 217, WT/ DS 234 – US Offset Act (Byrd Amendment); WT/DS 222 – Canada Aircraft Credits and Guarantees; WT/ DS 236 – US Softwood Lumber III; WT/DS 257 – US Softwood Lumber IV; WT/DS 267 – US Upland Cotton; WT/DS 265, WT/DS 266, WT/DS 286 – EC Export Subsidies on Sugar; WT/DS 273 – Korea Commercial Vessels; WT/DS 277 – US Softwood Lumber VI; WT/DS 296 – US DRAMs; WT/DS 299 – EC DRAMs; WT/DS 301 – EC Commercial Vessels; WT/DS 316 – EC Large Civil Aircraft (Airbus); WT/ DS 317 – US Large Civil Aircraft; WT/DS 336 – Japan DRAMs; WT/DS 353 – US Large Civil Aircraft (Boeing). 110 WT/DS 265, WT/DS 266, WT/DS 286 – EC Export Subsidies on Sugar, WT/DS 301 – EC Commercial Vessels; WT/DS 316 – EC Large Civil Aircraft. Cf. also WT/DS 212 – US CVDs on certain EC Products, concerning subsidies to British Steel plc that were not passed on to the purchaser in the context of the privatisation. 111 WT/DS 213/AB/R, mn. 80 et seq. – US Carbon Steel. See also Rubini 143 et seq. 108

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provides goods112 or services other than general infrastructure, or purchases goods or (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments. It is noteworthy that the notion of subsidy is wide, including seemingly normal 76 purchases or supplies from the State, and not requiring a cost to the government; a crucial limitation is of course the requirement of Article 1.1 b that provides that a benefit must be conferred thereby. It should also be noted that any measures that can be taken under the ASCM are limited to subsidies that are considered as ‘specific’ under Article 2 ASCM113. The term specificity is defined further in Article 2 ASCM (cf. mn. 84 et seq. below). a) Financial contribution by the government. Art. 107 TFEU requires the benefit to 77 involve, in some way, State resources, and be attributable to the State. The ASCM, first and foremost, addresses the acting by the State itself, as well as by ‘public bodies’. This term comprises institutions that are controlled by the State, which also includes public companies114. Companies not controlled by the State are not caught by lit. (i) to (iii) of Article 1 ASCM. However, lit. (iv) does extend the granting of a financial contribution to those private bodies that have been ‘entrusted or directed’ by the State to make the respective financial contribution in lieu of the State. The four measures listed in Article 1.1(a)(1) ASCM are to be considered as exhaus- 78 tive. Not all State measures that convey a benefit to the beneficiary (e. g. regulatory measures that convey a benefit) can be considered as a financial contribution and thus a subsidy within the meaning of the ASCM. This was explicitly confirmed by the Appellate Body in United States – Softwood Lumber IV.115 The measures listed in Article 1(i) to (iii) would certainly be considered as a State aid 79 under Article 107 TFEU. To the extent that a measure is carried out under normal market conditions, the Commission applies the market economy investor principle116 and does not consider the measure to be a State aid, for lack of an undue benefit. Under WTO rules, a similar principle normally applies, the ‘commercial reasonableness test’, which is considered not to confer the benefit required by Article 1.2 ASCM.117 The term financial contribution in Article 1.1 is wide, it does not only apply to direct measures by the State or the government as such, but also by any public body. The filter that distinguishes between normal commercially reasonable behaviour and actual subsidisation is applied at the level of finding a benefit to the beneficiary, not at the level of the notion of the financial contribution.118 b) Indirect subsidies – ‘entrusted or directed’. Apart from the measures carried out 80 directly by the government or public bodies, which are usually rather easy to spot, 112 The term goods or products has to be interpreted widely, et seq. WT/DS 257/AB/R, mn. 60 – US Softwood Lumber IV, and is not limited to the goods that can be traded directly. This case concerned the question whether the right to grow and harvest trees is the making available of goods. This was answered affirmatively by the AB. 113 WT/DS 296/AB/R, mn. 280 – US DRAMs. 114 WT/DS 273/R, mn. 7.50 – Korea Commercial Vessels; WT/DS 299/R, mn. 7.49 et seq. – EC DRAMs. 115 WT/DS/257/AB/R, mn. 52, fn. 355 – US Softwood Lumber IV, which states – referring to the panel report WT/DS/R mn. 8.65 – US Export Restraints that not all measures of the government that provide a benefit can be considered as a subsidy. 116 Cf. mn. 143 et seq. below. 117 Specifically WT/DS 336/R, mn. 7.66 – Japan DRAMs; the ‘commercial reasonableness’ test was examined in detail by the Appellate Body, WT/DS 336/AB/R, mn. 143–164 – Japan DRAMs. 118 WT/DS 273/R, mn. 7.28 – Korea Commercial Vessels.

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subsidies can also be granted by other institutions, in particular private parties. These subsidies can be countered with the instruments permitted by the WTO rules if the respective body has been ‘entrusted or directed’ by the government or a public body. The rationale of Article 1.1 (a)(1)(iv) is to prevent circumvention. For instance, if a private bank grants a loan to a bankrupt company because it has been so directed by the government or a public body (even without the State taking over the financial risk), the WTO rules allow to counter such a measure under the ASCM. In this respect, there are differences to the EU State aid law 119, where the benefit must stem from State resources and must be attributable to the State. A mere ordering of transfers among private parties – without involving State resources – does not fulfil the notion of State aid120 under the PreussenElektra121 judgment of the ECJ, as long as there is no cost to the government.122 For a subsidy to exist under WTO rules, it is not decisive whether State resources are actually used, or whether there is a cost to the government123, rather, it is sufficient that the measure that benefits the recipient was issued upon entrustment or direction by the government or a public body. In those cases in which a measure is not granted by a private body but by a public body, it is not required to show that the measure was effected as a consequence of State influence (entrustment or direction), which is different to EU law under the Stardustjudgment that contains rules as to when the measure is attributable to the State. 124 Consequently, it is not necessary to show that the measure is actually imputable to the State125 under WTO rules, as long as a public body has granted the benefit. For measures carried out by private bodies, clear evidence is necessary that there has been entrustment or direction by the government or a public body, because their actions are not considered as financial contributions by the government under Article 1.1(a)(1) ASCM. The terms ‘entrusted’ and ‘directed’ are interpreted in such a way that the private body appears as acting in lieu of the State, because either the State has conferred a specific task to them or even directed them to act in a certain manner, forcing the private body to act as the government or public body has entrusted or directed them. Consequently, the private body does act in lieu of the State,126 which justifies the application of the anti-subsidy rules. It is necessary to show that the ‘entrustment’ or ‘direction’ was done by an ‘affirmative act’, which need not be explicit, but can also be implied. A mere ‘encouragement’ of a private body by the government, however, will not be sufficient to find entrustment or direction.127 The proof of entrustment or direction can be provided by means of indicia. In the Hynix-case, it was held that the Korean government had an obvious interest to maintain the bankrupt company in business, and that measures were taken that comprised the entrustment or direction of private bodies. The rescue and restructuring aid (as they would be called under EU terminology) to Hynix were challenged by the USA, the EU and Japan; the DRAMs produced by Hynix were subjected to countervailing duties in all three cases. All three measures were based on the same economic facts. Certain documents and pieces of evidence, however, were evaluated differently by the authorities 119

See also Wegener Jessen 300 et seq. ECJ Case C-379/98 PreussenElektra [2001] ECR I-2099. 121 Flett/Jessen/Talaber-Ritz 465, do not believe that the PreussenElektra should be interpreted so as to require, for a State aid to be present, the finding of a cost to the government. 122 ECJ Case C-345/02 Pearle BV [2004] ECR I-7139, mn. 36. 123 WT/DS/70/R mn. 9.115 – Canada Aircraft; cf. also WT/DS/194/R, fn. 167 – US Export Restraints. 124 ECJ Case C-482/99 Stardust Marine [2002] ECR I-4397. 125 WT/DS 299/R, mn. 7.49 – EC Countervailing Measures on DRAM Chips. 126 WT/DS 299/R, mn. 7.50–7.52 – EC Countervailing Measures on DRAM Chips. 127 WT/DS 299/R, mn. 7.59 – EC Countervailing Measures on DRAM Chips. 120

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in the USA, the EU and Japan. This led to different results in the WTO dispute settlement procedures initiated by Korea: the procedure against the USA128 left the countervailing duties unchanged, the procedure against the EU129 led to a minimal adaptation of the countervailing duty, and only the procedure against Japan130 led to an annulment of the measures. The question whether the Korean government had entrusted or directed private banks and bodies had been considered as plausibly proven in the USA and EU cases, whereas the panel in the Japan case came to the conclusion that the facts did not support the conclusions drawn by Japan. The decisive element in this respect were the conclusions by the Japanese authorities that had given great weight to a report by Deutsche Bank AG on the viability of Hynix; this report by a private bank was considered as sufficient counter-evidence allowing the conclusion that the behaviour of private bodies – that were considered as having been entrusted or directed – was actually normal market behaviour and not necessarily the result of entrustment or direction. 131 The EU and the US authorities had given little weight to the report by Deutsche Bank, and concluded from other circumstances that the behaviour of private bodies was not normal market behaviour but could only be interpreted as the result of entrustment or direction by the government. In this respect, it is noted that the WTO panels do not carry out their own assessment of the facts; rather, they only analyse whether the conclusions by the authority that imposed the countervailing duty were plausible. This explains why, despite the same set of facts, the panels in the three procedures could arrive at different results. c) Specificity. Just as Article 107 TFEU only applies to measures that benefit ‘certain’ companies or economic sectors, and thus are ‘selective’, Article 2 of the ASCM requires that the financial contribution by the government must be specific. The requirement of specificity is often referred to as a selectivity criterion, 132 even though the two terms are not identical. Prohibited subsidies, such as export subsidies in particular, are always considered as being specific, Article 2.3 ASCM. Measures that are considered selective under EU law, such as State aid to assist specific regions, are not considered as specific subsidies under WTO rules, since these are available to all companies and do not lead to support specific products. The exclusion of certain industries that cannot receive regional aid or are subject to stricter rules does not make this type of State aid a specific subsidy under WTO rules. 133 Article 2 ASCM distinguishes between de jure specific subsidies, where the specificity is derived directly from the measure itself, and others where the specificity can be shown de facto. The latter category can lead to making a measure which is construed as a general measure (which would not normally fall under the notion of subsidy, similar to general measures which are not considered a State aid under Article 107 TFEU) can become a subsidy under the ASCM when the specificity is proven, and can then be countered by measures under the ASCM. Article 2.1(c) ASCM lists several factors that may lead to the conclusion of a de facto specific subsidy. Not all factors have to be fulfilled. 134 The basic principles are comparable to those of State aid law, by verifying whether the general scheme is de facto only applicable to a limited number of companies or can in fact only be used by very few companies. In European Communities – DRAMs, a sole company – Hynix – had 128

WT/DS 296/AB/R – US Countervailing Duty Investigation on DRAMs. WT/DS 299/R – EC Countervailing Measures on DRAM Chips. 130 WT/DS 336/AB/R – Japan DRAMs (Korea). 131 WT/DS 336/AB/R – Japan DRAMs (Korea). 132 Cf. Sanchez Rydelski 215 and 286; Wegener Jessen 303 considers the two concepts “very similar”. 133 Cf. Luengo Herna ´ ndez De Madrid, European Foreign Affairs Review 13(2008), 14. 134 WT/DS 275/R, mn. 7.123 – US Softwood Lumber IV. 129

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received 41 % of a certain scheme that was allegedly ‘general’ – this was sufficient to allow it to be considered as de facto specific under the ASCM.135 d) Benefit. An essential requirement for the finding of a subsidy under the ASCM is the benefit that is conferred by the financial contribution of the government or the public body. The amount of the subsidy is determined on the basis of the benefit to the recipient, Article 14 ASCM. The criteria for assessing the benefit are similar to EU law. 136 The related costs to the government is irrelevant.137 The beneficiary must be ‘better off’ by means of the financial contribution of the government than without such intervention. 138 This is often determined by means of a market comparison. 139 A market comparison is often used under EU law as well.140 However, the practice of the Commission is inconsistent in this respect. In some cases, the Commission determines the amount of the aid simply on the basis of the costs to the State. For instance, in the Scott case, the Commission used the costs incurred by the De´partement de Loiret as the relevant amount of State aid, since these were allegedly the costs that Scott would have had to bear, absent the measure; the beneficiary, by contrast, would have only acquired the piece of land at the market price. The market price was lower than the total cost that the State had incurred for the acquisition and preparation of the land. The General Court considered that the market price was relevant.141 However, on appeal by the Commission, that judgment was lifted.142 Similarly, in KAHLA/Thu¨ringen Porzellan GmbH, the Commission had assessed the aid amount of a measure under a certain scheme on the basis of the actual costs incurred. The argument of the company that, absent the scheme (that required the inefficient use of unemployed people) it would have carried out the work by means of an independent contractor so that the benefit it obtained was lower than the actual costs incurred by applying the scheme was not accepted by the Commission nor by the General Court.143 90 Article 14 ASCM lists some examples how to determine the amount of the benefit. The market comparison plays an important role. As regards the contribution of equity to a company, the private investor test is applied (Article 14(a) ASCM). As regards the granting of loans, the difference between the interest paid to the State and the interest that could have been obtained in the market defines the benefit (Article 14(b) ASCM). A loan guarantee by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial loan absent the government guarantee. In this case the benefit shall be the difference between these two amounts adjusted for any differences in fees (Article 14(c) ASCM). If the company were to be considered as not creditworthy, because it is a ‘firm in difficulty’ (to use a EU term), the benefit does not consist of the total amount of the loan, but of the difference between the actual interest and the interest that would normally be payable, taking into account the additional risks from the lack of 89

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WT/DS 299/R, mn. 7.226, 7.232 – EC Countervailing Measures on DRAM Chips. Sanchez Rydelski 214 et seq. and 285. 137 WT/DS 70/AB/R, mn. 155 et seq. – Canada Aircraft. 138 WT/DS 70/AB/R, mn. 157 – Canada Aircraft. 139 WT/DS/70/R, mn. 9.112 et seq. – Canada Aircraft; WT/DS/139/AB/R und WT/DS 142/AB/R, mn. 10.165 – Canada Autos; WT/DS/46/AB/R, mn. 165–187 – Brazil Aircraft. 140 Cf. ECJ, Case C-241/94 France v Commission [1996] ECR I-4551; ECJ Case C-34/94 SFEI [1996] ECR I-685; ECJ Case C-261/89 Italy v Commission [1991] ECR I-4437. 141 GC Case T-366/00 Scott Paper v Commission [2007] ECR II-797. 142 ECJ Case C-290/07 P Commission v Scott [2010] ECR I-7763. 143 Commission, OJ 2003 L 227/12 – KAHLA v Thu ¨ ringen Porzellan GmbH; GC Case T-20/03 KAHLA v Thu¨ringen Porzellan GmbH [2008] ECR II-2305. 136

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creditworthiness.144 In European Communities – DRAMs, the panel underlined that the benefit must be determined from the perspective of the recipient, not from the perspective of the grantor.145 If the provision of goods or services by the State is at stake, the relevant criterion – different from the approach by the Commission in the Scott-case – is the adequate remuneration, which has to be determined by means of a market comparison, Article 14(d) ASCM. e) Passing on of the benefit. A subsidy that is passed on by the beneficiary, and 91 which thus benefits the product further down the production line, can be caught by Article 1.1 ASCM if there is an explicit finding of an indirect benefit. Article 1 ASCM mainly applies to financial contributions that have a direct benefit for the recipient – this requires that the beneficiary has actually obtained a benefit. 146 If the direct recipient of the subsidy and the indirect beneficiary have normal, arm’s length business relationships, then it must be found specifically that the benefit has been passed through to the beneficiary. The AB has held: ‘Where the input producers and producers of the processed products operate at arm’s length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product.’147 If it is actually found that there has been a passing through of the benefit, the 92 consequences of an actionable or countervailable subsidy will hit the final product. In this respect, the WTO rules do not really differ from EU State aid law, where an indirect benefit can be the basis of the recovery of the State aid.148 In practice, it may be difficult to determine what part of the benefit has been passed through; consequently, despite the finding of an indirect benefit, the EU sometimes does not order the recovery of the indirect aid.149 In certain sectors, the indirect benefit has been made the direct subject of the investigation, for instance, in case of development aid in shipbuilding, which is granted to the shipowner in a developing country; there, the possible indirect benefit to the shipyard in the EU has been investigated, by checking whether the price for the vessel corresponds to the market price.150 Similarly, in the Mediaset case, the Commission considered that the subsidy granted to consumers when acquiring a set-top box to decode digital television signals indirectly benefited Mediaset. Consequently, the recovery of the aid was ordered. 151 f) Affecting trade and distorting competition v injury. Whereas the State aid rules of 93 the TFEU require only a minimal effect on trade and the possibility of distorting 144

WT/DS 299/R, mn. 211 et seq. – EC Countervailing Measures on DRAM Chips. WT/DS 299/R, mn. 212 – EC Countervailing Measures on DRAM Chips. 146 WT/DS 70/AB/R, mn. 155 – Canada Aircraft. 147 WT/DS 257/AB/R, mn. 143 – US Softwood Lumber IV. 148 GC Case T-177/07 Mediaset v Commission [2010] ECR II-2341. 149 For instance, in Commission OJ 2006 L 200/14 – medienanstalt berlin-brandenburg – the Commission found an indirect benefit in favour of T-Mobile, the operator of the digital terrestrial transmission of the television signals. A recovery was ordered only from the TV stations that were considered to be direct beneficiaries, but not against the ‘real’ winner T-Mobile that was making the new broadcasting channels available. 150 Development aid is no longer available for shipbuilding, cf. below, Sectors mn. 896 et seq. 151 Cf. GC Case T-177/07 Mediaset v Commission [2010] ECR II-2341, upheld upon appeal in Case C403/10 P Mediaset v Commission [2011] ECR I-117. Since the Commission had not determined the exact amount of the aid to be recovered, the Italian authorities made the determination and arrived at the conclusion that the amount to be recovered was Zero; the Court of Justice considered that the determination of a Zero amount to be recovered would be possible if the facts clearly supported it, Case C-69/13 Mediaset SpA v Ministero dello Sviluppo economico, ECLI:EU:2014:71. 145

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competition so as to lead to a finding of a State aid (after the finding of a benefit for certain companies from the State or State resources), the ASCM considers various forms of negative effects of a subsidy that may justify different compensatory measures. 152 This comprises three different variants: injury to a domestic industry, that may justify countervailing duties, the annulment or impairment of benefits resulting from the GATT or the serious prejudice that usually refers to third country markets.

3. Possible measures against subsidies The WTO rules do not provide for a control of the subsidy rules by an institution. Member states must inform the WTO secretariat about subsidies that they introduce, but the secretariat has no authority to take any action against the subsidies. In this respect, the WTO system is fundamentally different from the control of State aid by the Commission, which can initiate procedures on its own initiative, as the guardian of the Treaty, and that can order the recovery of unlawful State aid. If a WTO member finds that another WTO member has granted a subsidy to a company, the member has various possibilities to act against such subsidies. If the subsidy is a ‘prohibited subsidy’ under Article 3 ASCM, the WTO member can initiate the consultation under Article 4 ASCM, without having to prove that its interests are negatively affected. This procedure provides for consultations. If these lead to no satisfactory result, then the member can invoke the dispute settlement system. If it is found that the subsidy is a prohibited subsidy, the granting member is requested to remove such subsidy (Article 4.7). If the subsidy is not a prohibited subsidy, but an actionable subsidy, and if these lead to negative effects under Article 5 ASCM, the WTO member can initiate the procedure under Article 7 ASCM, which is similar to the consultation process under Article 4. 95 If the subsidy leads to injury to the domestic industry, because specific goods are being subsidized, a countervailing duty may be imposed on the imports of the respective products benefiting from the subsidies, respecting the requirements of Article VI GATT and Article 10 et seq. ASCM. The procedure to impose countervailing duties and the procedures under Article 4 or Article 7 are mutually exclusive. 153 94

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a) Track 1 – Imposition of countervailing duties. A WTO member can impose countervailing duties on the imports of subsidised products that benefit from prohibited or actionable subsidies. The WTO member must respect the requirements of Article VI GATT and Article 10 et seq. ASCM. The countervailing duties must be imposed as long as there is still a benefit from the subsidisation; if the subsidisation ceases (determined by allocating the benefit over several years), it is no longer possible to impose a countervailing duty,154 even though the injury from the subsidisation may still persist. In case of recurring subsidies, such as tax advantages or direct credits for exports, this does not usually lead to any practical difficulties. This is different when the subsidy is granted in a one-time financial contribution. WTO members who wish to countervail such subsidies must calculate how this amount can reasonably be distributed over several years; on that basis, the subsidy amount per year is determined, and it can be assessed what amount of countervailing duties is appropriate to countervail the subsidy in that year.155 When making that calculation, it is necessary to take into account the 152

Explained in detail by Sanchez Rydelski 291. Fn. 35 on Article 10 ASCM. 154 WT/DS 336/R, mn. 7.355 – Japan DRAMs. 155 The DRAM-cases WT/DS 296/AB/R – US Countervailing Duty Investigation on DRAMs, WT/ DS 299/R – EC Countervailing Measures on DRAM Chips and WT/DS 336/R – Japan DRAMs (Korea) are good illustrations. 153

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years during which the subsidy had its effect, i. e. the years from the actual grant of the subsidy until the countervailing duty is imposed. Consequently, a significant part of the subsidisation will remain without any sanction, since the procedure to introduce countervailing duties takes some time (from becoming aware of the subsidy to the (substantiated) complaint of the affected industry through the administrative procedure until the imposition of the CVD). Once the time period over which the WTO member has calculated the benefit of the subsidy has expired, the countervailing duties must be terminated.156 This ‘amortisation’ of the benefit of the subsidy is entirely alien to the EU State aid rules, which require to re-establish the status prior to the granting of the unlawful aid. A State aid that has been granted years ago has to be recovered with interest, increasing the amount to be recovered substantially. b) Track 2 – Dispute settlement. If it is not possible to introduce countervailing 97 duties so as to counter the prohibited subsidy – for instance, because the products that benefit from the subsidy are not ‘imported’, like ships or aircraft, or if a WTO member prefers the route of Article 4 or 7 ASCM, this can lead to the dispute settlement procedure under the DSU. As a rule, the WTO rules require the elimination of the violation – the prohibited or 98 actionable subsidy – without undue delay, but only with effect for the future, which would seem to exclude the recovery of the subsidy. This approach is not shared by everyone, however. In Australia – Automotive Leather, even the complainant USA was of the opinion that an ‘annulment of the subsidy’ would only have effects ex nunc, and not lead to a recovery. The EU as an interested party agreed with this approach, even though the ordering of the recovery would have been closer to the effects under the EU State aid rules and would avoid different rules for fighting subsidies among the different countries. The panel under Article 21.5 DSU came to the conclusion, somewhat to the surprise of the parties, that the annulment of the subsidy would also require the recovery of the subsidies, so that a member would only comply with the action required by the DSB if it was actually effecting the recovery of the subsidy. 157 The Article 21.5 panel did not go so far as to order a recovery of interest (which would be the normal consequence under EU State aid rules).158 As a consequence of the ruling, the USA and Australia agreed on a partial recovery of the subsidy by the recipient and abolishing the subsidy ex nunc. This case seems to be a rather isolated case, a similar consequence has not been ordered in other disputes on subsidies.

4. Compatible EU State aid may violate WTO rules By contrast to the EU State aid law, the WTO rules foresee no preventive control of 99 subsidies. WTO members do notify the WTO secretariat of the subsidies that they grant.159 Moreover, following the abolishing of ‘non-actionable’ subsidies in 1999, subsidies can no longer be seen as ‘compatible’ with WTO rules. 160 As a consequence thereof, State aid that is considered compatible with the EU internal market may not be compatible with the ASCM.161 The Commission does take into account the obligations of the EU and the Member States under WTO rules when assessing the compatibility of 156

Cf. Regulation 321/2008, OJ 2008 L 96/1, mn. 77 et seq. WT/DS 126/RW, mn. 6.46 et seq. – Australia Automotive Leather. WT/DS 126/RW, mn. 6.49 – Australia Automotive Leather. 159 Article XVI:1 GATT 1994 and Article 25 ASCM; cf. the report by the EU, G/SCM/N/155/EEC – New and Full Notification pursuant to Article XVI:1 GATT 1994 and Article 25 ASCM, plus Addenda. 160 Flett/Jessen/Talaber-Ritz 447 et seq. 161 Wegener Jessen 308; Gross 30 takes the opposite view. 157 158

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State aid.162 However, the declaration of compatibility under Article 107(3) TFEU is based only on considerations relating to the internal market. 100 Under EU law, one can easily imagine that a restructuring aid to a company is declared compatible with the internal market, taking into account all relevant aspects. Under WTO rules, the products produced by that company will, however, be considered as being subsidised. The restructuring aid would be seen as a prohibited subsidy, allowing a WTO member that considers its industry injured to impose countervailing duties on the products. This is illustrated by the DRAM case, in which Korea assisted the firm in difficulty, Hynix, with massive rescue and restructuring subsidies. In view of the importance of that company for the Korean economy, it is safe to assume that – in the EU – a comparable firm in difficulty would have been able to receive rescue and restructuring aid.163 Even if under EU state aid law, compensatory measures are required, reducing the market presence,164 a substantial benefit remains for the company, and which would be deemed to subsidise the products that are being exported by the assisted company. Consequently, other WTO members could countervail such subsidies 165, as the EU imposed countervailing duties against the main products that were subsidised in the Hynix case.166 When assessing the benefit from the restructuring aid, it will be necessary to carry out an allocation to specific products, and to determine the quota of that product that is being exported, compared to the total production. Consequently, only a portion or even a fraction of the subsidy will actually be countervailed. 101 For other types of State aid, such as investment aid, research and development and innovation aid or employment or training aid, the effects of the subsidisation on the export of specific products will be difficult to quantify, or may be less important. Some of these types of State aid fell under the ‘green’ subsidies that were considered nonactionable prior to 1999. The availability of such subsidies to subsidiaries of companies from other WTO members and the fact that these subsidies are less likely to negatively affect the trade may have led to no complaints being filed against the EU. The dispute concerning the granting of State aid to Airbus167 shows, however, that certain State aid that are compatible under EU law – like launch aid for the development for components for aircraft168 – may be considered by other WTO members as prohibited or actionable subsidies impairing the trade.

B. The definition of State aid I. Preliminary remarks 102

Article 107(1) TFEU establishes a general prohibition of State aid, subject to approval by the European Commission. The classification of a measure as ‘State aid’ takes therefore centre of EU State aid law. According to consistent case law of the EU Courts 162 In the general block exemption regulation, Article 1(2) Reg 800/2008, OJ 2008 L 214/3, “State aid for export oriented activities’, which would be considered as a prohibited export subsidy under WTO rules, are specifically excluded. 163 Cf. for instance Commission OJ 2005 L 150/24 (Alstom). 164 See below Part IV. Rescue and restructuring aid, mn. 180 et seq. 165 Ehlermann/Goyette 705. 166 Regulation 1480/2003, OJ 2003 L 212/1. 167 WT/DS 316 – EC and certain member States Large Civil Aircraft. The dispute led to a panel report and an Appellate Body report partly in favour of the USA. Similarly, in the procedure brought by the EC against the USA concerning alleged subsidies in favour of Boeing, actionable subsidies were found to exist. 168 Loans to support the development that are only to be repaid in case of success of the project, cf. Commission, State Aid N 165/2003 – ITP.

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this classification requires that all the criteria set out in Article 107(1) TFEU are fulfilled.169 The ECJ often uses the following formula: ‘Thus, first, there must be an intervention by the State or through State resources. Second, the intervention must be liable to affect trade between Member States. Third, it must confer an advantage on the recipient. Fourth, it must distort or threaten to distort competition’.170 This formula does not, however, provide more value than that of the wording used in 103 the Treaty. It does not mirror the complexity of the prevailing case law outlining the concept of State aid. A closer examination of the relevant case law reveals that the definition of State aid must include at least five constituent elements 171, each of which must be fulfilled in order to classify a measure as State aid within the meaning of EU law: – Through a transfer of State resources which can be imputed to the State (‘aid granted by a Member State or through State resources’)172 – an economic advantage is granted (‘favouring’)173 – to ‘certain undertakings or the production of certain goods’ (selectivity)174 – thereby creating at least a threat of distortion of competition,175 – and affecting trade between the Member States (inter-state clause).176 Failure to satisfy even one of these criteria means that the measure concerned does 104 not fall within the scope of Article 107(1) TFEU.177 For each potential aid recipient this has to be assessed separately (relativeness of the State aid quality). It would have been fair to assume that the requirement that all these constituent elements have to be fulfilled cumulatively would have led to a limited application of Article 107(1) TFEU, so that only measures with particular relevance to the Internal Market could constitute State aid. That has, however, not been the case. From the very outset the Union courts favoured a broad interpretation of Article 107(1) TFEU based on the wording ‘in any form whatsoever’. This approach is in line with the ‘effet-utile’ principle which implies that the TFEU provisions must be interpreted in a way that ensures they can achieve their objectives as effectively as possible.178 An example for the application of the effet utile principle is the ‘effects doctrine’, which is used in interpreting the constituting elements of the notion of State aid, and is applied especially with respect to the concept of economic advantage (‘effects’ doctrine).179 The extensive interpretation of the concept of State aid has contributed to the 105 significance of the European Commission’s State aid control policy, empowering it to 169 See for example ECJ, Cases C-280/00 Altmark Trans [2003] ECR I-7747, para. 74; C-428/99 France v Commission (Stardust Marine) [2002] ECR I-4397, para. 68; C-142/87 Tubemeuse [1990] ECR I-959, para. 85. 170 GC, Case T-266/02 Deutsche Post v Commission [2008] ECR II-1233, para. 70; ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, paras. 74 and 75 as well as the case-law cited there. 171 See e. g. Commission Decision, State aid SA.29864 Czech Airlines a.s. OJ 2012, L 289/56 para. 40. 172 See further Solte ´sz in this chapter in section 3, paras. (263 et seq.). 173 See further Arhold in this chapter below in section 2, paras. (107 et seq.). 174 See further Arhold in this chapter below in section 4, paras. (338 et seq.). 175 See further Solte ´sz in this chapter below in section 5, paras. (453 et seq.). 176 See further Solte ´sz in this chapter below in section 6, paras. (489 et seq.). 177 See GC, Case T-34/02 Le Leval v Commission [2006] ECR II-267, para. 109 – as well as paras. 135 et seq. concerning indirect advantages. 178 In older cases the ECJ often used ‘effet utile’ as an overarching term, in addition to terms such as ‘effectiveness’ (ECJ, Case 9/70 Grad [1970] ECR 825, para. 5) or ‘useful effect’ (ECJ, Case 41/74 Van Duyn [1974] ECR 1337, para. 12); or ‘effective functioning’ (ECJ, Case 48/75 Royer [1976] ECR 497, para. 69/73). Today the ECJ normally uses the term ‘principle of effectiveness’ without mentioning the French term. For details on the different terms used in the German versions of the ECJ judgments and a critique of this interpretative principle and its application see Potacs EuR 2009, p. 465. 179 For more on this see paras. (108 et seq.) below.

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influence the Member States’ economic policies in areas where the EU has no or little competence.180 The broader the concept of State aid, the more State measures fall within the general prohibition of State aid and thus have to comply with the conditions of one of the exemption rules provided by the TFEU. Since the Commission normally has broad discretion in applying these exemption rules, it may harmonize the Member State measures through case-by-case assessments as well as framework legislation in the form of regulations and soft law (communications, guidelines and frameworks). This has allowed the Commission to exert considerable influence on the respective policies of the Member States, for instance in the fields of environmental policy, taxation, regional development and research; more recently even in fields typically remaining in the Member States’ competence such as media policy, sports and infrastructure policy. However, State aid control policy is neither an appropriate tool nor has it been included in the Rome Treaties to dictate the Member States’ general economic policy. In the new millennium the EU Courts have therefore started to retract from what had become an exuberantly extensive interpretation of the concept of State aid. In the judgment in PreussenElektra181 for example, the Court restricted the definition of transfer of State resources – much to the disappointment of the Commission. The decisions in the cases Stardust Marine,182 Olympic Airways,183 Pearle184 and Deutsche Bahn185 developed the unwritten element of imputability to the State. The judgment in Linde186 clarified the broad concept of the Market Economy Operator Test (‘MEOT’) and the judgment in Altmark Trans187 made clear that even compensation of costs for rendering services of general economic interest (SGEI) may fall outside the scope of Article 107(1) TFEU. In the BAA-case188 the GC narrowed the element of selectivity, although in the meantime the ECJ has annulled that judgment.189 In the recent judgments in Ryanair190 and EDF191 the Courts further broadened the MEOT and thus narrowed the concept of State aid. 106 Within the ongoing State aid modernisation process (SAM), the Commission has recently published its first draft Notice on the notion of State aid pursuant to Article 107(1) TFEU.192 Even though the interpretation of Article 107(1) TFEU lays with the sole competence of the EU Courts, the notice reflects the current Commission’s understanding of the case law and will therefore be taken into account by Member States and undertakings alike. We will therefore refer to it wherever useful. 107 The case law defining Article 107(1) TFEU is underlined by two contradictory objectives. On the one hand, the definition of State aid has to be as broad as possible in order to prevent Member States from distorting competition for the benefit of their own undertakings or major industrial sectors. On the other hand the definition has to 180 For example, in the area of direct business taxation, as a constant obstacle for further harmonisation the Council even under the Treaty of Lisbon still has to decide unanimously. Further on this and on aid policy in the area of business taxation see Jaeger in part VI of this commentary. 181 ECJ, Case C-379/98 PreussenElektra [2001] ECR I-2099. 182 ECJ, Case C-482/99 France v Commission (Stardust Marine) [2002] ECR I-4397. 183 GC, Case T-68/03 Olympic Airways v Commission [2007] ECR II-2911. 184 ECJ, Case C-345/02 Pearle [2004] ECR I-7139. 185 GC, Case T-351/02 Deutsche Bahn [2006] ECR II-1047. 186 GC, Case T-98/00 Linde v Commission [2002] ECR II-3961. 187 GC, Case C-280/00 Altmark Trans [2003] ECR I-7747. 188 GC, Case T-210/02 BAA v Commission [2006] ECR II-2789; ECJ, Case C-487/06 P BAA v Commission [2008] I-10505. 189 See below with regard to the effects doctrine and section III. 190 GC, Case T-196/04 Ryanair [2008] ECR II-3643. 191 ECJ, Case C-124/10 P Commission v EDF [2012] ECR. 192 Consultation on the Notice on the notion of State aid available at http://ec.europa.eu/competition/ consultations/2014_state_aid_notion/index_en.html.

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leave the Member States with enough authority to pursue their own economic policies, thus accepting political competition between the national systems. 193 This permanent conflict abets an incoherent, unclear and casuistic case law. By their very nature only few economic policy decisions will not have any impact on competition at all. Granting a range of generous exemptions therefore seems to be the best approach. In practice, however, such exemptions have to be granted by the Commission, which in its role as the guardian of undistorted competition primarily pursues a strict State aid control (and Member States indeed continuously urge it to uphold that role). This political and structural background plays a more or less obvious part in almost all cases dealing with the constituent elements of State aid.

II. Advantage Bibliography: Anestis/Mavroghenis, The Market Investor Test, in Sa´nchez-Rydelski (Ed.), The EC State aid Regime, 2006, 109 et seqq.; Arhold, The Case Law of the European Court of Justice and the Court of First Instance on State Aids in 1998–2008, EStAL 2002, 2; 2003, 145; 2004, 167; 2005, 175; 2006, 215 & 465; 2007, 151 & 435; 2008, 441; Arhold, Beihilfenru¨ckforderung nach Unternehmensvera¨ußerung – Zugleich Anmerkung zum Urteil des Gerichts erster Instanz in der Sache T-324/00 – CDA, EuZW 2006, 42; Bacon, European Community law of State aid, 2009; Baeten/Gam, Tax Measures and the Private Investor Test: The Court of Justice Endorses a Level Playing Field, EStAL, 2013, 546; Bartosch, EU-Beihilfenrecht, 2009; Bartosch, Verscha¨rft sich die Spruchpraxis zum Europa¨ischen Beihilfenrecht?, EuZW 2000, 2010; Bartosch, Schranken-Schranken in der EG-Beihilfenkontrolle – Tendenzen der ju¨ngsten Rechtsprechung der Gemeinschaftsgerichte, NJW 2002, 3588; Bartosch, Sozialer Wohnungsbau und europa¨ische Beihilfenkontrolle EuZW 2007, 559; Bartosch, Die Kommissionspraxis nach dem Urteil des EuGH in der Rechtssache Altmark – Worin liegt das Neue?, EuZW 2004, 295; Bartosch, Vergabefremde Kriterien und Article 87 I EG: Sitzt das o¨ffentliche Beschaffungswesen in Europa auf einem beihilferechtlichen Pulverfass?, EuZW 2001, 229; Bartosch, Why did the Court of Justice respond in Ferring?, EStAL 2002, 1; Bartosch, How to reconcile the ECJ’s rulings in Altmark and Chronopost, EStAL 2003, 375; Bauer, Rechtssicherheit bei der Finanzierung gemeinwirtschaftlicher Leistungen? – Zum Verha¨ltnis zwischen Article 87 I EG und Article 86 II EG nach der Altmark-Entscheidung des EuGH, EuZW 2006, 7; Bovis, Public procurement, State aid and public services: between symbiotic correlation and asymmetric geometry, EStAL 2003, 543; Biondi, Anmerkung zum BUPA Urteil, EstAL 2008, 401; Che´rot, Le TPICE se prononce pour la premie`re fois sur les conditions d’application de la notion d’aide d’Etat aux e´le´ments des re´gimes de permis ne´gociables, Concurrences, Revue des droits de la concurrence 2008, 148; Che´rot, La Cour se prononce sur un cas particulier ou` l’institution d’une taxe constitue elle-meˆme l’instauration d’un re´gime d’aide, Concurrences: Revue des droits de la concurrence 2006, 104; Debroux, State aid and tax measures, Competition Law Insight 2012, ¨ ffentliche Finanzierung von Infrastrukturanlagen und europa¨isches Vol. 11, Issue 8, p. 6; Dolde/Porsch, O Wettbewerbsrecht – dargestellt am Beispiel von Flugpla¨tzen, ZLW 2004, 1; Do¨rr, Infrastrukturfo¨rderung (nur) nach Ausschreibung? NZBau 2005, 617; Flynn, Grand Chamber Ruling in the France Te´le´com Case: The concept of ‘offer’ of a State aid, Journal of European Competition Law & Practice, 2012, 413; Friederiszick/Tro¨ge, Applying the Market Economy Investor Principle to State owned companies – lessons learned from the German Landesbanken Cases, Competition Policy Newspaper 2006, 105; Gaal/Papadias/ Riedl, Citynet Amsterdam: an application of the market economy investor principle in the electronic communications sector, Competition Policy Newsletter 2008, 82; Geburtig, Die Abgabenerhebung im Visier des europa¨ischen Beihilferechts – eine kritische Anmerkung zur van Calster – Rechtsprechung des EuGH, EuZW 2005, 716; Giesberts/Kleve,’Private Investor Test’ im EG-Beihilfenrecht – Das Ryanair-Urteil des EuG, EuZW 2009, 287; Giesberts/Kleve, Die Anwendbarkeit des EU-Beihilfenrechts auf Finanzierungen von Infrastrukturanlagen, ZLW 2013, 62; Gisberts/Streit, Anforderungen an den ‘Private Investor Test’ im Beihilfenrecht, EuZW 2009, 484; Grabitz/Hilf (Eds.), Das Recht der Europa¨ischen Union, Stand: April 2009; v.d.Groeben/Schwarze (Eds.), EU/EG Vertrag, 6.Auflage, 2003; Hancher, Anmerkungen zum Combus-Urteil, EStAL, 2004, 455; Hancher, Is there a new concept of State aid emerging?, EStAL 2003, 365; Hancher, Case C-124/10 P EDF v Commission: Putting the market investor test to the test?, Ars aequi 2013, 201; Hancher/ Ottervanger/Slot, EU State aids, Fourth Edition, 2012; Haslinger, Tender Procedures in State Aid Law: The Bank Burgenland Case before the General Court, EstAL 2013, 589; Heidenhain, Handbuch des Europa¨193 Competition between the Member States relating to measures of general economic policy falls within the scope of Article 113, 114–117 and 119 et seq. TFEU. See also von der Groeben/Schwarze/ Mederer Article 87 (1) TEC, para. 30.

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ischen Beihilfenrechts, 2003; Heidenhain, European State aid law, 2010; Heidenhain, Mittelbare Beihilfen, EuZW 2007, 623; Heidenhain, Verwendung des Aufkommens parafiskalischer Abgaben, EuZW 2005, 6; Jaeger, Fehlstellungen im Verha¨ltnis von Steuern und Beihilferecht: Ein Pla¨doyer fu¨r mehr Ausgewogenheit, EuZW 2012, 92; Jennert, Die Beru¨cksichtigung des Empfa¨ngerverhaltens im europa¨ischen Beihilfenrecht, EuR 2003,343; Jennert, Finanzierung und Wettbewerb in der Daseinsvorsorge nach Altmark Trans NVwZ 2004, 425; Jaeger, Rechtsfolgen beihilfenrechtlicher Abgabenbefreiungen – Zugleich eine Besprechung der ¨ sterreichischer Altlastenbefreiung (VwGH), WirtschaftsrechUrteile Laboratoires Boiron (EuGH) und O tliche Bla¨tter 2006, 541; Jungnickel/Dulce, Die Zula¨ssigkeit der (teilweisen) Versteigerung von Emissionsberechtigungen aus europarechtlicher Sicht, NVwZ 2009, 623; Kaczmarek, Judgement of 13 September 2010 in France, France Te´le´com a.o. v Commission, EstAL 2012, 691; Kekelekis, ‘Driving’ Altmark in Land Transport, EstAL 2012, 73; Kekelekis, Recent Developments in Infrastructure Funding: When does It Not Constitute State Aid?, EstAL 2011, 433; Ko¨hler, New Trends Concerning the Application of the Private Investor Test, EstAL 2011, 21; Koenig, Scheitern nun Privatisierungen unterhalb des Ho¨ chstgebots an Bru¨ssel, Luxemburg und Karlsruhe?, EuZW 2012, 241; Koenig/Haratsch, The licence-fee based financing of public service broadcasting in Germany after the Altmark Trans judgment, EStAL 2003, 569; Koenig/ Ku¨hling/Ritter, EG-Beihilfenrecht, 2. Aufklage, 2005; Koenig/Paul, Die Krankenhausfinanzierung im Kreuzfeuer der EG-Beihilfenkontrolle, EuZW 2008, 359; Koenig/Paul, Ist die Krankenhausfinanzierung ein pathologischer Fall fu¨r EG-beihilfenrechtliche Transparenz- oder sogar fu¨r Entflechtungsmaßnahmen? EuZW 2009, 844; Koenig/Sander, Die verbrauchervermittelte Unternehmensbegu¨nstigung auf dem Pru¨fstand des EG-Beihilfenrechts EuR 2000, 743; Ko¨nings, Emission trading – why State aid is involved: NOx trading scheme, Competition Policy Newsletter 2003, 77; Ko¨ster, Europa¨isches Beihilfenrecht und mitgliedstaatliche Finanzierung von Anreizen zur Fo¨rderung des Flugverkehrs an Regionalflugha¨fen – Anmerkung zur Entscheidung der Kommission vom 12. Februar 2004, C(2004) 516 – Ryanair/Charleroi, EuR 2005, 554; Ko¨ster/Molle, Gilt das Privatgla¨ubigerprinzip bei der Beihilfenru¨ckforderung? – Zur Frage der Anwendbarkeit des Privatgla¨ubigerprinzips (‘Private Creditor Test’) im Verfahren zur Ru¨ckforderung einer staatlichen Beihilfe, EuZW 2007, 534; Lu¨bbig, Anmerkung zu EuG, u. v. 28. Januar 1999, Rs. T-14/96, Bretagne Angleterre Irlande (BAI)/Kommission, EuZW 1999, 665; Lu¨bbig/Martin-Ehlers, Beihilfenrecht der EU, 2. Auflage, 2009; Lykotrafiti, Low-Cost Carriers and State aids: A paradox? Reflections on the Ryanair/ Charleroi Case, EStAL 2008, 214; Martini, Der Markt als Instrument hoheitlicher Verteilungslenkung, Habil Tu¨bingen 2008; Mederer/Pesaresi/Van Hoof (Eds.), EU Competition law, Volume IV, State aid, Book One; Melcher, Der Staat als Anteilseigner in Ausu¨bung hoheitlicher Befugnisse – Der Private Investor Test nach dem Urteil EDF, EuZW 2012, 576; Nicolaides, State Aid, Advantage and Competitive Selection: What Is a Normal Market Transaction?, EStAL 2010, 65; Nicolaides, Taxes, the Cost of Capital and the Private Investor Principle, EstAL 2013, 243; Nitsche/Milde/Solte´sz, Eigentu¨mereffekt und versunkene Investitionen – Der Private Investor Test im Lichte fru¨herer Kapitalzufu¨hrungen, EuZW 2012, 408; Oswell/Metaxas/ Vahida, CFI judgement in Charleroi case T-196/04, EStAL 2009, 549; Otting/Solte´sz/Melcher, Verkehrsvertra¨ge vor dem Hintergrund des Europa¨ischen Beihilferechts – Verwaltungsrichter weisen Bru¨ssel in die Schranken EuZW 2009, 444; Lambros Papadias/Riedl/Westerhof, Public funding for broadband networks — recent developments, Competition Policy Newletter, 2006, 13; Papsch, Die Vera¨ußerung o¨ffentlicher Unternehmen im Beihilferecht, ELR 2012, 70; Pautsch, Die beihilferechtliche Relevanz der UMTS-Vergabe im Ausschreibungsverfahren, MMR 2001, 423; Potacs, Effet utile als Auslegungsgrundsatz, EuR 2009, 465; Pu¨nder, Die Vergabe o¨ffentlicher Auftra¨ge unter den Vorgaben des europa¨ischen Beihilferechts NZBau 2003, 530; Purnhagen, VG Trier: Mitgliedstaaten haben grundsa¨tzlich ein weites Ermessen bei der Definition der ‘Dienstleistungen von allgemeinem wirtschaftlichem Interesse’, EuZW 2009, 198; Quardt, Zur Abschaffung von Anstaltslast und Gewa¨hrtra¨gerhaftung EuZW 2002, 424; Quigley, European State aid law and policy, 2009; Qvist Fog Lund/Sandberg Pettersson, The ING-Case – The First Court Ruling on Bank Bailouts and the Market Economy Investor Principle, EstAL 2013, 561; Renner-Loquenz, State aid aspects in the implementation of the Emission Trading Scheme, Competition Policy Newsletter 2005, 16; Reuter/ Busch, Einfu¨hrung eines EU-weiten Emissionshandels – Die Richtlinie 2003/87/EG, EuZW 2004, 39; Reuter/ Kindereit, EG Emissionshandelsrichtlinie und Beihilfenrecht am Beispiel prozessbedingter Emissionen, DVBL 2004, 537; Santamato/Pesaresi, Compensation for services of general economic interest: some thoughts on the Altmark ruling, Competition Policy Newsletter 2004, 17; Schwarze (Edt.), EU-Kommentar, 2. Auflage, 2009; Seinen, State aid aspects of the EU Emission Trading Scheme: the second trading period, Competition Policy Newsletter 2007, 100; Simon, The Application of the Market Economy Investor Principle in the German Landesbanken cases, EStAL 2007, 499; Sinnaeve, State financing of public services: the Court’s dilemma in the Altmark case, EStAL 2003, 351; Solte´sz, Non-Enforcement of public debts, the application of the ‘Private Creditor Test’, in Sa´nchez-Rydelski, The EC State aid Regime, 2006, 129; Solte´sz, Die Rechtsprechung der Unionsgerichte zum Beihilferecht im Jahr 2011, 2010, EuZW 2011, 541; Solte´sz/ Makowski, Die Nichtdurchsetzung von Forderungen der o¨ffentlichen Hand als staatliche Beihilfe i. S. von Article 87 I EG, EuZW 2003, 73; Sto¨ckl, Neue Erkenntnisse bei der Anwendung des Private Investor Test im Rahmen des EG-Beihilferechts?, European Law Reporter 2003, 156; Su¨hnel, ‘Der Private Investor Test’ im Beihilfenrecht, EWS 2007, 115; Thomas, Die Bindungswirkung von Mitteilungen, Bekanntmachungen und

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Leitlinien der EG-Kommission, EuR 2009, 423; Tigchelaar, State aid to public broadcasting, EStAL 2003, 169; Tosics/Ga´a´l, Public procurement and State aid control — the issue of economic advantage, Competition Policy Newsletter 2007, 15; Tosics/Van de Ven/Riedl, Funding of public service broadcasting and State aid rules — two recent cases in Belgium and Ireland, Competition Policy Newsletter 2008, 81; Travers, Public service obligations and State aid: Is all really clear after Altmark?, EStAL 2003, 387; van der Woude/ Moreno, Overview of the Case Law in State Aid Matters June 2011 to June 2012, EstAL, 2013, 246; Vesterdorf/Nielsen, State aid law of the European Union, 2009; Wimmer/Schirmer, Marketingzuschu¨sse und Flughafenentgelte nach dem Charleroi-Urteil des EuG, in Bar/Hellwege/Mo¨ ssner/Winkeljohann (Eds.), Recht und Wirtschaft, Geda¨chtnisschrift fu¨r Malte Schindhelm, 2009; Winter, Re(de)fining the notion of State aid in Article 87(1) of the EC Treaty, C.M.L.R., 2004, 475; Wissel/Becker, Review of Judgment Laboratoires Boiron, Case C-526/04, EStAL 2007, 101; Zanettin, The Award of UMTS Licences: some Clarifications, EStAL 2008, 79.

1. General aspects – The effects doctrine The broad interpretation of the notion of State aid is based on the so called ‘effects 108 doctrine’ and applies in particular to the element of ‘economic advantage’. Ever since 1961 the Court has continuously held that ‘the concept of an aid is […] wider than that of a subsidy because it embraces not only positive benefits, such as subsidies themselves, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without, therefore being subsidies in the strict meaning of the word, are similar in character and have the same effect.’194 With respect to Article 107(1) TFEU this doctrine was first applied with regard to an Italian law drafted to partially exempt undertakings in the textiles sector from social contributions. The Court rejected Italy’s argument that because of its social objective the measure could not be considered State aid: Article 107(1) TFEU ‘does not distinguish between the measures of State intervention concerned by reference to their causes or aims but defines them in relation to their effects. Consequently, the alleged fiscal nature or social aim of the measure in issue cannot suffice to shield it from the application of [that Article]’.195 Nevertheless, the Member States have repeatedly argued that specific measures did 109 not fall within the definition of aid because they fulfilled a social function or did not pursue economic goals.196 The EU courts have always rejected such arguments, referring to the effect of the measure as the sole decisive criterion. 197 In a few rare cases the ‘effects doctrine’ has, however, been applied in favour of a Member State. Once it has been proven that a specific measure does not favour certain undertakings or sectors because the State has been acting just as a market economic operator would have in the 194 With regard to the ECSC see the early decision of the ECJ in Case 30/59 Steenkolenmijnen v High Authority [1961] ECR 1, 19. 195 Settled case-law since ECJ, Case 173/73 Italy v Commission [1974] ECR 709, para. 13. For a differentiated view see: Winter CMLR 2004, 475. 196 ECJ, Cases 310/85 Deufil v Commission [1987] ECR 901; C-75/97 Belgium v Commission (Maribel) [1999] ECR. I-3671. Further examples: with regard to State support for an animal carcase disposal firm: ECJ, Case C-126/01 GEMO SA [2003] ECR I-13769, para. 34: ‘the argument of the French Government that the measure in question is part of a health and safety policy’; GC, Case T-109/01 Fleuren Compost v Commission [2004] ECR II-127, para. 54: ‘the objective of that scheme is to assist undertakings to meet their legal obligations as regards protection of the environment’; T-152/99 Hijos de Andre´s Molina (HAMSA) v Commission [2002] ECR II-3049, para. 158: ‘the debt remissions at issue here were granted in the course of judicial proceedings and in accordance with the applicable Spanish law’; T-55/99 ~ola de Transporte de Mercancı´as (CETM) v Commission [2000] ECR II-3207, Confederacio´n Espan para. 53: ‘in the interest of environmental protection and improving road safety’; ECJ, Case C-241/94 France v Commission [1996] ECR I-4551, para. 16: ‘a purely social objective’. 197 See judgments referred to in footnote 196 above. For a judgment which does not follow the same strict approach with regard to the element of selectivity see GC, Case T-210/02 BAA v Commission [2006] ECR II-2789, which was, however, overruled by ECJ, Case C-487/06 P [2008] ECR I-10505.

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same situation, it does not matter if the State was at the same time pursuing political goals. As explained above, Article 107(1) TFEU does not distinguish between the causes or aims of the measures of State intervention in question but defines them only according to their effects.198

2. Economic advantage as (non-)cash benefit without adequate consideration 110

Strictly speaking, the test of whether a measure constitutes an advantage within the meaning of the concept of State aid, consists of two steps: First, one has to investigate whether the (favoured) undertaking has received a (non-)cash benefit. Second, it must be ascertained whether that benefit was balanced by an adequate consideration. If so, the company cannot be regarded as having received an economic advantage. 199

111

a) (Non-)cash benefit. In the case of classic subsidies – such as non-refundable grants, loans, guarantees, etc. – it is obvious that the measures constitute a (non-)cash benefit. They are directly linked to actual transfers of cash or (non-)cash benefits. Classification is more difficult where the measures concerned are not directly linked to a transfer of funds but have advantageous effects consisting in a mitigation of charges.

112

aa) Mitigation of charges normally included in the budget of an undertaking. (1) Principle. The case law on the effects doctrine referred to above shows that ‘the concept of aid is wider than the concept of subsidy because it embraces not only positive benefits such as subsidies themselves, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without, therefore, being subsidies in the strict meaning of the word, are similar in character and have the same effect’.200 Accordingly, one has to compare the economic situation of the undertaking concerned before and after the measure. If the economic situation has improved following the measure, the second question to ask is whether the advantage results from a reduction of charges the undertaking would normally have had to bear from its budget.

113

(2) Specific cases. In certain cases the latter question may be difficult to answer, as the following examples demonstrate.

114

(a) Reduction in social contributions or taxes. Reduction of social contributions in favour of undertakings from industrial sectors in difficulties was one of the earliest types of measure deployed by the Member States to protect their own industry against competition from low labour-cost countries. For instance, a number of aid measures were introduced in the textile sector in the late 1960s, which led to the first major wave of ECJ judgments in this area of law. In one of those cases Italy alleged that the particularly personnel-intensive nature of the textile sector and the circumstance that it especially employed women (with corresponding high levels of family allowances) made specific arrangements for the textile industry necessary. The Court did not agree and ruled that the motive for the Italian family allowance scheme (as in the case of similar schemes) was to ensure that workers obtained a salary which would ‘enable them to meet the needs of their families’.201 It went on to state that the scheme had to be applied equally to all undertakings regardless of industrial sector. ‘The unilateral modification of a particular factor of the cost of production in a given sector of the economy of a Member State might have a disturbing effect on 198

See for example ECJ, Case C-56/93 Belgium v Commission [1996] ECR I-723, paras. 78–79. See Koenig/Ku¨hling/Ritter para. 67; Schwarze/Ba¨r-Bouyssiere Article 87 TEC, para. 27. ~a SA [1994] ECR I-877, para. 13; C-308/01 GIL 200 ECJ, Cases C-387/92 Banco Exterior de Espan Insurance [2004] ECR I-4777, 69; C-295/97 Piaggio [1999] ECR I-3735, para. 34. 201 ECJ, Case 173/73 Italy v Commission [1974] 709, para. 14. 199

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the existing equilibrium.’202 Member States are therefore prohibited from having systems of social contributions or taxes that distinguish between particular sectors. 203 Social contributions are part of the charges enterprises normally bear from their budgets regardless of the burden level existing in other Member States. Nevertheless, as long as Member States do not favour individual sectors they are not prevented from abolishing social contributions or taxes completely or from setting them at levels in line with the nature or the logic of their social or tax system. The case ilustrated that the question of whether a tax system confers an advantage in any form whatsoever is inextricably linked to the question of the constituent element of ‘selectivity’.204 (b) The imposition of asymmetrical tax burdens as economic advantage. In the ECJ 115 judgment in Ferring,205 which has played a particular part in the debate on Services of General Economic Interest (SGEI), the subject-matter was a French tax on direct sales of pharmaceutical products from producers to pharmacies (‘tax on direct sales’). Sales by wholesale distributors to pharmacies were not subject to these taxes, since the wholesale distributors were subject to certain SGEI related obligations, such as the requirement to have a certain range of medicinal products permanently available. The tax on direct sales had been introduced to restore undistorted competition between the different distribution channels, which had been unbalanced due to the aforementioned SGEI obligation imposed on the wholesale distributors. Individual pharmaceutical laboratories brought actions against this tax, arguing that the exemption from the tax on direct sales constituted aid for the benefit of the wholesale distributors. The Court agreed only insofar as the amount of the tax exemption exceeded the additional costs the wholesale distributors had to bear because of their public service obligations The primary objective of the national legal actions brought by Ferring and other 116 pharmaceutical laboratories such as Laboratoires Boiron SA (‘Boiron’) was the reimbursement of the tax they had already paid. They referred to the direct effect of Article 108(3) TFEU, according to which ‘it is for the national courts to uphold the rights of the persons concerned in the event of a possible breach by the national authorities of the prohibition on putting aid into effect, taking all the consequential measures under national law as regards both the validity of decisions giving effect to aid measures and the recovery of the financial support granted.’206 However, the Court has consistently ruled that those liable to pay a charge cannot rely on the argument that the exemption enjoyed by other businesses constitutes State aid in order to avoid payment of that contribution or to obtain reimbursement. 207 In order to plead the invalidity of the tax which the undertaking is liable to pay, it can only rely on Article 108(3) TFEU, if the relevant national rules contain a link hypothecating the tax to an aid measure, in the sense that the revenue from the tax is necessarily allocated for the financing of the aid. Only if that link exists, will the tax be regarded as forming an integral part of the aid measure.208 In the matter of the French direct sales tax no such hypothecation existed. 202

ECJ, Case 173/73 Italy v Commission [1974] 709, para. 17. In that respect see also Case C-75/97 Belgium v Commission (‘Maribel’) [1999] ECR I-3671. 204 For more on this see below Arhold in section B. IV, especially paras 433–438. 205 ECJ, Case C-53/00 Ferring [2001] ECR I-9067. 206 For cases relating to tax see for example: ECJ, Joined Cases C-266/04 to C-270/04, C-276/04 and C321/04 to C-325/04 Distribution Casino France [2005] ECR I-9481, para. 30 and the judgments referred to there. 207 See for example the ECJ judgments: Case C 390/98 H.J. Banks [2001] ECR I 6117, para. 80; Joined Cases C-266/04 to C-270/04, C-276/04 and C-321/04 to C-325/04 Distribution Casino France [2005] ECR I-9481, paras. 42–44; as well as Cases C-393/04 and C-41/05 Air Liquide [2006] ECR I-5293, para. 43. 208 See ECJ, Case C-174/02 Streekgewest Westelijk Noord-Brabant (SWNB) [2005] ECR I-85, paras. 25– 26; Joined Cases C-266/04 to C-270/04, C-276/04 and C-321/04 to C-325/04 Distribution Casino France 203

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The revenue from the tax was to be allocated without any earmarking to the Sickness Insurance Fund. 117 Regarding the action brought by Boiron, the French Cour de Cassation had expressed doubts as to whether this strict interpretation by the Court could be applied to the case of the tax on direct sales. It stressed the fact that the Court in Ferring had admitted the question referred for a preliminary ruling, even though the main proceedings were not concerned with the repayment of the aid by the wholesale distributors but rather with the tax debt of the pharmaceutical laboratories; and therefore France had claimed that the reference to the ECJ was inadmissible.209 The Court found itself in a dilemma. It quite obviously did still want to insist on the requirement of hypothecation settled by the case law, but this approach would have forced the Court to conclude that it was the tax exemption that had to be regarded as unlawful, since it selectively benefited the wholesale distributors, and that this unlawfulness would not extend to the higher tax burden of the applicants. This would, however, not have provided the legal protection sought by them. Accordingly, the ECJ would have had to reject the questions referred in Ferring as inadmissible. In order to avoid coming into conflict with its previous doctrine the ECJ resorted to a sleight of hand: ‘In this case, the measure alleged to constitute an aid is the tax on direct sales itself and not some exemption which is separable from that tax’.210 Because the tax on direct sales amounted to an aid measure in itself, Boiron could invoke the breach of the standstill clause in order to get rid of its tax liabilities. The Court justified this surprising statement by pointing out the limited anti-competitive effects of the tax concerned. The tax on direct sales was said to be special because ‘the imposition of the charge on pharmaceutical laboratories and the non-liability of wholesale distributors are the two inseparable aspects of the French measure brought about by the charge’.211 The Court thus openly departed from the judgment in Ferring by holding that the State aid was the tax itself.212 118 According to the Opinion of Advocate General Tizzano213 the new approach is limited to those quite specific cases in which the tax is not levied as a (lawfully introduced) general tax from which certain undertakings are exempted. Instead the tax must be levied ‘asymmetrically’ i. e. the tax is imposed only on certain specific economic operators while excluding others. The approach thus applies only to the specific situation, in which a tax is only introduced in order to offset an alleged asymmetry by means of different tax treatment of two categories of business. The legal provision introducing the tax is unlawful, as it confers a competitive advantage on those undertakings not subject to the tax.

[2005] ECR I-9481, paras. 45–47; Joined Cases C-393/04 and C-41/05 Air Liquide Industries [2006] ECR I-5293, paras. 45–46. See also the critical comments by Geburtig EuZW 2005, p. 716, as well as those by Heidenhain EuZW 2005, p. 6. 209 See, Opinion of Advocate General Tizzano in ECJ, Case C-53/00 Ferring [2001] ECR I-9067, para. 20. It was in fact for this reason that the Court rejected a reference just seven months after the judgment in Ferring, see Joined Cases C-430/99 and C-431/99 Sea-Land Service and Nedlloyd Lijnen [2002] ECR I-5235, paras. 46–48. Advocate General Tizzano nevertheless stated in his Opinion in Ferring that the question was admissible and that the French court could take account of the applicant’s request in the main proceedings. The ECJ did not address the question of admissibility further in Ferring. In that respect see also Bartosch EStAL 2002, p. 1, and Che´rot Revue des droits de la concurrence 2008, 148. 210 ECJ, Case C-526/04 Laboratoires Boiron. [2006] I-7529, para. 39. 211 ECJ, Case C-526/04 Laboratoires Boiron [2006] ECR I-7529, paras. 44–47. 212 The literature on the subject frequently argues that the case related to advantages granted in the form of exemptions from State taxation, for example: Quigley 104, Heidenhain/Heidenhain, European State Aid Law section 4, para. 27. Similarly, the Opinion of Advocate General Kokott dated 4 September 2008 in ECJ, Case C-222/07, UTECA [2008] ECR I-1407, para. 126. 213 Opinion of Advocate General Tizzano in ECJ, Case C-53/00 Ferring [2001] ECR I-9067, paras. 38–41.

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Given such a special situation the Court regarded the whole of the legislation 119 introducing the asymmetrically levied tax as unlawful aid. It reasoned that the resulting right to refuse tax payment and to demand reimbursement would lead neither to an erosion of tax revenues nor to an uncontrolled enlargement of the circle of beneficiaries. It would even lead to a more rapid and simple restoration of undistorted competition than was possible though actions aimed at declaring the tax exemptions unlawful. It was probably not enough to simply establish that the persons liable to pay the tax had the right to refuse payment pursuant to Article 108(3) TFEU, because this could have created a reverse distortion of competition: The undertakings exempted from paying the charge would have to repay the benefits from the tax exemption while at the same time those liable to pay the charge would have had a refund claim. The situation was different from the hypothecation cases, where the aid is linked to the tax in such a way that the undertaking charged to pay the tax can simply invoke the unlawfulness of the law in order to refuse payment, whereas the aid beneficiary remains obliged to pay back any aid it has already received. From a dogmatic point of view the construction remains questionable, since the tax 120 as such does not consitute a transfer of State resources.214 One may therefore assume that in future the Court will apply this approach with caution. 215 (c) Costs for compliance with collective labour agreements, social plans and other 121 agreements between social partners. Up till the 1990s, the remnants of Europe’s textile industry were facing economic problems. France attempted to safeguard jobs in this sector by creating incentives for the reorganisation of working time schemes (in particular for more part-time work) in the form of reductions in social welfare charges. France argued that due to these reductions, undertakings committed themselves to more generous sectoral collective agreements regarding overtime pay and compensatory rest periods than they had agreed to without them. This, on the other hand, made it easier for employees to consent to a reorganization of working time. According to France, the reduction in social security contributions did not constitute a financial advantage in favour of the undertakings but only in favour of the employees. France argued that the amount granted to the undertakings in return for a voluntary action in favour of its employees did not exceed the costs arising from that action. The ECJ rejected the argument, stating that the costs ‘arise from collective agreements, concluded between employers and trade unions, which undertakings are bound to observe, either because they have acceded to those agreements or because those agreements have been extended by regulation. Such costs are included, by their nature, in the budgets of undertakings.’216 Furthermore, the recitals of the collective labour agreements showed that they were designed to improve the undertakings’ competitiveness.217 The ECJ held that as a matter of principle the State was prohibited from offsetting costs resulting from collective agreements: ‘Agreements concluded by both sides of industry form a whole and cannot be evaluated by taking account, out of context, of only some of their positive or negative aspects for one or other party. In view of the variety of considerations which induce the two sides of industry to negotiate, and of the fact that the result of their negotiations is the fruit of a compromise for which each party makes concessions in certain areas in exchange for advantages in other areas, See also Che´rot, Revue des droits de la concurrence 2006, p. 104. As regards the limits of the applicability of Laboratoires Boiron see also the Opinion of Advocate General Tizzano in ECJ, Case C-393/04 and C-41/05 Air Liquide Industries [2006] ECR I-5293, paras. 73– 75. For more on the issues see Wisssel/Becker EStAL 2007, p. 101. 216 ECJ, Case C-251/97 France v Commission [1999] ECR I-6639, para. 40. 217 ECJ, Case C-251/97 France v Commission [1999] ECR I-6639, paras. 41–44. 214 215

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which are not necessarily related, it is in principle impossible to evaluate with the required accuracy the final cost of such agreements for undertakings.’ 218 122 In Kimberly Clark219 the Court had to address the question of whether financial State support for measures laid down in social plans of undertakings in redundancy situations constitutes an economic advantage not just for the laid-off employees but also for the undertaking concerned if the social plan exceeds the statutory minimum. The Commission had taken the view that financial assistance provided to support obligations voluntarily assumed in a social plan constituted an economic advantage for the undertaking. The Court did however not have to decide on that matter, since France had failed to prove that the costs of the social plan had exceeded the costs that would have arisen if the obligations had been limited to the statutory minimum.220 123 In the Belgian case Cockerill221 the employees and employers set up a social plan for the undertaking’s restructuring, including a reduction in working time. This social plan was agreed upon under the condition of financial support by the State. The intention was to make sure that the State could not argue that the social plan had been agreed only between the social partners and to make clear that the charges went well beyond what Cockerill would normally have had to bear in labour costs. The financial support would thus have been for the sole benefit of the employees. The Court did not follow this line of argument and ruled that an undertaking commonly acquires the labour factor of production for the (regulated) market price and that the collective agreement mirrors that market price. 222 The costs linked to employee pay naturally place a burden on the budgets of undertakings, irrespective of whether or not those costs stem from legal obligations or collective agreements. The fact that the collective agreement linked the envisaged reduction in working time to the securing of public funds, by excluding from the outset any salary increase to be borne by Cockerill Sambre, does not prevent the transitional supplement from being a salary cost which would normally be incurred by that undertaking.’223 The assumption of production costs by public authorities falls within the scope of Article 107(1) TFEU even if the collective agreement was from the outset concluded on the understanding that costs would be borne by the State.224 124 In the French case Corsica Ferries225, the agreement on the privatisation of a public company provided for redundancy payments over and above any statutory obligations or obligations from collective agreements. The court held that these payments created an inducement for the company’s employees to leave the company or, at least, to leave it without negotiating their departure, which created an indirect economic advantage for the undertaking.226 The redundancy paments would only have escaped Article 107(1) TFEU if a private vendor had agreed to them as well. That was not the case.227 218

ECJ, Case C-251/97 France v Commission [1999] ECR I-6639, para. 46. ECJ, Case C-241/94 France v Commission (Kimberly Clark) [1996] ECR I-4551, paras. 33–38. 220 ECJ, Case C-241/94 France v Commission (Kimberly Clark) [1996] ECR I-4551, paras. 33–38. 221 ECJ, Case C-5/01 Belgium v Commission (Cockerill) [2002] ECR I-11991, paras. 39–40. 222 Opinion of Advocate General Stix-Hackl dated 12 September 2002 in ECJ, C-5/01 Belgium v Commission [2002] ECR I-11991, paras. 50–76. As regards current Commission policy on job promotion see Commission OJ 2009 C 188/6 – Communication from the Commission — Criteria for the analysis of the compatibility of State aid for the employment of disadvantaged and disabled workers subject to individual notification. 223 ECJ, Case C-5/01 Belgium v Commission [2002] ECR I-11991, paras. 39–40. 224 Opinion of Advocate General Stix-Hackl dated 12 September 2002 ECJ, Case C-5/01 Belgium v Commission [2002] ECR I-11 991, paras. 50–76. 225 GC, Case T-565/08 Corsica Ferries v Commission ECLI:EU:T:2012:415. 226 GC, Case T-565/08 Corsica Ferries v Commission ECLI:EU:T:2012:415, paras. 137–145. 227 According to the Private Vendor Test; for more details Arhold in this commentary below paras. 227–229 and part V, chapter C. 219

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(d) Costs for the acquisition of public prerogatives, licences, concessions or permits. 125 Does Article 107(1) TFEU compel the State to demand a market rate of compensation for the award of public prerogatives, licences, concessions, permits or similar rights, meaning that granting such rights free of charge or below market rates would relieve the undertakings concerned from financial burdens they would normally have to bear and thus would grant an economic advantage within the meaning of Article 107(1) TFEU? When a Member State grants such rights, must it act in the same manner as a market operator seeking to maximize profits and to realize the market value of these rights? 228 It may be argued that where the number of existing rights is sufficient for all (potential) 126 applicants, i. e. where there is no scarcity, the Member State should be free to decide on pricing, as long as it does not discriminate.229 This point of view might be challenged by asking whether a private market operator would not strive to get the highest obtainable price on the market. This counterargument does, however, ignore the fact that the State does not necessarily engage in licensing in order to make a profit but might be motivated by public policy considerations. It is submitted that in such situations the licensing is not an economic activity and that therefore the Market Economy Operator Test does not apply. According to that same concept, where the number of available licenses is limited, a tender procedure similar to the tender procedures used in privatization 230 or alternatively an appraisal of the licence’s market value is needed.231 This approach seems to be too strict. It has the potential to negatively impact just 127 another pillar of the Member States’ general economic policy on all levels right down to municipal regulatory policy by restricting the use of trade licenses and permits, at least in cases where it turns out to be impossible to evade the other constituent elements of selectivity. For example, municipalities pursue very diverse concepts when it comes to licensing taxi firms. Where there is no danger of destructive competition, 232 the municipality will make the grant of a license subject only to the fulfillment of proportional and appropriate eligibility criteria.233 For the fundamental right to choose and engage in a profession the municipalities are neither allowed to create an artificial scarcity of licenses nor to demand a fee higher than necessary to cover the administrative costs. Even where capacity limits are reached and licenses should therefore be rationalized, the municipality is normally not obliged by national law to resort to a sale of licenses by auction. In a market where competition is limited by the number of obstainable licenses, creating an upfront competition by introducing auctions seems to be in line with the fundamental freedom to chose an occupation by supporting the concept of competition inherent in that fundamental freedom and State aid law. On the other hand, the auction might exert such a degree of pressure to amortize the costs that the very aim of rationalising licences (to avoid destructive competition and ensure quality) could be jeapardized. 234 Therefore, in practice alternative allocation mechanisms (such as allocation by lottery or the application of more rigorous eligibility criteria) have proven appropriate even in situations of scarcity. These options should not be prohibited by State aid law. Any possible discriminatory practices could be dealt with on the basis of the TFEU provisions concerning the fundamental freedoms. 228 In this sense: Pautsch MMR 2001, 423, p. 426. Against it: Mederer/Pesaresi/Van Hoof/Van de Castele/Grespan para. 2.77. 229 Bartosch, EU State Aid Law, Article 87(1) TEC, para. 80. 230 For more opinions, see Jungnickel/Dulce NVwZ 2009, p. 623; as regards bidding procedures in the context of privatization see Arhold in this commentary part VII, chapter D. 231 Bartosch, EU State Aid Law, Article 87(1) TEC, para. 80. 232 See German Constitutional Court, BVerfGE 82, p. 295, 302. 233 See German Constitutional Court, BVerfGE 11, p. 168, 188. 234 See Martini, p. 678.

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So far the courts have had only few opportunities to comment on this issue. In the Bouygues ruling relating to a reduction in the fee for French UMTS licenses the General Court ruled that telecommunications licences have an economic value. 235 It observed that even when exercising State functions economic facts have to be taken into account. An economic view has to be taken when managing the right of access to a scarce public resource such as the radio frequencies of public airwaves. ‘Hence, the Member States simultaneously perform the roles of telecommunications regulator and manager of the public assets that constitute the wireless airwaves.’ 236 The fact that private managers cannot grant similar licenses is not sufficient to preclude such assets from constituting a State resource.237 For that reason, it could not be ruled out that the French authorities had waived their right to a significant part of State resources, 238 and that the reduction of licence fees constituted an economic advantage. 239 However, the GC took the view that there was no selective advantage, as the applicable EU Directives set out clear requirements for the procedures which Member States had to observe and with regard to the scope of their discretion in that respect. 240 The measure was thus held not to be within the scope of Article 107(1) TFEU because of a lack of the element of selectivity, and not simply because no advantage had been granted. 241 129 The General Courts had to address this issue again in a judgment relating to the Dutch emission trading scheme for nitrogen oxides (NOx).242 The measure provided a so-called ‘dynamic cap’ system under which the undertakings taking part in the scheme were allocated emission allowances free of charge in an amount corresponding to the legal emission standard laid down for their respective facilities. The undertakings complied with the emission standards by taking steps to either reduce NOx emissions in their own facilities, or by buying emission allowances from other undertakings, or by combining those two options. The Netherlands argued that the scheme did not constitute an economic advantage for the undertakings concerned. However, in its decision on the British emission trading scheme (‘ETS’) the Commission had earlier decided that distributing tradable emission allowances free of charge always constituted an economic advantage.243 In its NOx decision the Commission again pointed out that it strictly distinguishes between two types of systems: – Systems where a tradable emission or pollution document is considered as intangible asset representing a market value which the authorities could have sold or auctioned 128

235 GC, Case T-475/04 Bouygues SA and Bouygues Telecoms v Commission [2007] ECR II-2097, para. 100, with reference to Case C-462/99, Connect Austria [2003] ECR I-5197, para. 93. 236 ECJ, Case T-475/04 Bouygues v Commission [2007] ECR II-2097, para. 104. 237 ECJ, Case T-475/04 Bouygues v Commission [2007] ECR II-2097, para. 105. 238 ECJ, Case T-475/04 Bouygues v Commission [2007] ECR II-2097, paras. 107–111. 239 Confirmed by ECJ, Case C-431/07 Bouygues v Commission [2009] ECR I-2665. 240 See Pautsch MMR 2001, p. 423, and Zanettin EStAL 2008, p. 79. Also Commission, State aid NN 76/ 2006 – Czech UMTS Licenses. 241 The ECJ did not follow the GC’s reasoning but ruled that the measure was not imputable to the State and therefore escaped Article 107(1) TFEU, see case C-431/07 Bouygues v Commission [2009] ECR I-2165. For more on this see Arhold below under section D.IV, especially para. (451). For a different opinion see Bartosch, EU State Aid Law Article 87(1) TEC, para. 79: ‘The statements in this judgment clarify […] that in cases where there are requirements of EU law relating to the award of rights compliance with such requirements is sufficient to rule out the presence of an economic advantage which would be relevant for the notion of State aid.’ 242 GC, Case T-233/04 Netherlands v Commission (NOx) [2008] ECR II-591; for more on this see Che´rot, Revue des droits de la concurrence 2008, p. 148. 243 Commission, State aid N 416/2001 – United Kingdom ETS.

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as well, so that granting them for free leads to foregone revenues (or a loss of State resources), hence State aid within the meaning of Article 107(1) TFEU; 244 – Systems where a tradable document is considered as authorised proof of a certain production (for instance green energy generations), so that they cannot be sold to any companies independent from their actual productions. Therefore, granting them for free does not lead to foregone revenues, hence no State aid within the meaning of Article 107(1) TFEU.245 As the Dutch ETS was a scheme belonging to the first category, the Commission 130 concluded that there was an advantage246 and hence also aid. The measure was however considered to be compatible with the Internal Market in accordance with Article 107(3) TFEU.247 The Netherlands brought an action challenging the classification of the scheme as aid. Indeed, at that time there was already a broad debate about whether an allocation of emission allowances free of charge in a national ETS248 could actually confer an advantage within the meaning of State aid law.249 Germany, which was supporting the Netherlands as intervener, argued that unless the undertakings had previously reduced their emission standard by taking appropriate measures at their own expense they could not sell their emission allowances. The advantage was therefore said not to result from a free allocation but rather from the undertakings’ own investments to reduce emissions.250 The Court acknowledged that the tradable emission credits resulting from the reduction in emissions were the fruit of the undertakings’ efforts. It added ‘however, in the absence of the possibility, provided for in the scheme, to trade those credits, they would be worthless on the market. The undertakings could not, by selling them, thus recover, even partially, the expenses incurred in order to reduce their NOx emissions.’251 It therefore ruled that the measure constitutes an advantage, but because of the lack of selectivity it did not classify the measure as State aid. 252 On appeal, the ECJ also confirmed that the measure was selective, which the GC had denied, and thus dismissed the Dutch action.253 The case law seems to indicate that granting for free tradable emission allowances 131 constitutes an economic advantage for the undertakings concerned254 regardless of whether in the absence of the scheme the undertaking concerned would have been legally obliged to comply with the set standards.255 That is not entirely convincing. It would be 244 Commission, State aid N 35/2003 – Netherlands emission trading scheme for nitrogen oxides; Commission, State aid N 653/1999 – Denmark: CO2-quota System; Commission, State aid N 416/2001 – United Kingdom ETS, p. 16. 245 For example: Commission, State aid N 550/2000 – Belgium: green electricity certificates. 246 In these cases the Commission does no more than ascertain that a transfer of State resources took place. It further stated that the transfer was made free of charge. Those two statements led it to the conclusion that the undertaking received an advantage. In that respect see also Ko¨ nings CPN 2003, p. 77. As is shown below, this approach may be too simplistic. 247 Commission, State aid N 35/2003 – Netherlands emission trading scheme for nitrogen oxides. 248 As regards the question of possible aid in connection with the implementation of European CO2 emissions trading, see Renner-Loquenz, CPN 2005, p. 16; Seinen CPN 2007, p. 100. 249 See for example, Renner-Loquenz CPN 2005, p. 16; Reuter/Busch EuZW 2004, p. 39; Reuter/ Kindereit DVBL 2004, p. 537; Seinen CPN 2007, p. 100. 250 ECJ, Case T-233/04 Netherlands v Commission (NOx) [2008] ECR II-591, para. 56. 251 ECJ, Case T-233/04 Netherland v Commission (NOx) [2008] ECR II-591, para. 72. 252 For more on this see Arhold in chapter B. IV, para. (443). 253 ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7714 paras. 86–96. 254 Opinion of Advocate General Mengozzi in ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7677 para. 47; ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7714 paras. 88–90. 255 In favour of this approach Opinion of Advocate General Mengozzi in ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7677 paras. 73–74.

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more appropriate to apply the general principle that there is an economic advantage only where there is a reduction in the charges which are normally included in the budget of an undertaking. According to this principle, an advantage could only occur if the system compensated for costs which were actually needed to reduce the emissions of a facility to the legally required level. According to the Netherlands’ argument, in the Dutch NOx scheme the only tradable emission allowances were those still held by the undertaking after having reduced emissions to below the statutory threshold. Costs for achieving environmental standards that are higher than legally required are not costs which undertakings normally have to bear as part of their budgets. It appears that the Court implicitly based its approach on the polluter pays principle of environmental law (Article 191(2) TFEU).256 The polluter pays principle can, however, only be applied if the relevant thresholds are established under EU or national legislation. There is of course a public policy interest in considering emission certificates free of charge to be an advantage in order to avoid windfall profits. It is not uncommon for revenues from selling emission allowances to exceed the costs for the necessary reduction in emissions. This circumstance makes participation in such schemes attractive for modern and solvent undertakings or undertakings which are in a position to pass the extra costs on to their customers. That is why Advocate General Mengozzi as well as the ECJ based their assessment in the NOx case on the further fact that the emission allowances were tradable even before reduced emissions were achieved, thus conferring on the undertakings concerned an additional advantage of liquidity.257 These judgments show that in emission trading cases it is no longer sufficient to ask whether the certificate scheme reduces a burden normally borne by undertakings as part of their budgets.258 132 With respect to public preragtives, recently the ECJ had to render a preliminary judgment concerning the question of whether the permission for London Black Cabs (in contrast to minicabs) to use bus lanes for free may constitute State aid in favour of the Black Cabs. The ECJ denied this. It is not totally clear whether Article 107(1) TFEU was not fulfilled because the permission did not confer an economic advantage or because the advantage was not selective. The ECJ did confirm that the right of privileged access to bus lanes has an economic value. However, the Court also confirmed that the Member State is not automatically obliged to realise that value: “where the State, in order to pursue the realisation of an objective laid down by that State’s legislation, grants a right of privileged access to public infrastructure which is not operated commercially by the public authorities to users of that infrastructure, the State does not necessarily confer an economic advantage for the purposes of Article 107(1) TFEU. Further, it must be stated that the identification of the objective pursued is, in principle, a matter within the prerogative of the competent national public authorities alone and they must have a degree of discretion both as regards whether it is necessary, in order to achieve the regulatory objective pursued, to forgo possible revenue and also as regards how the appropriate criteria for the granting of the right, which must be determined in advance in a transparent and non-discriminatory manner, are to be identified.” 259 For the assessment of whether the right was granted in a non-discriminatroy manner, the Court then 256 In that respect see also the former Community guidelines on State aid for environmental protection, OJ 2001 C 37/3, para. 20. 257 Opinion of Advocate General Mengozzi in ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7677 para. 74; ECJ, Case C-279/08 P – Commission v Netherlands (NOx) [2011] ECR I-7714 para. 90. 258 In that respect see also Mederer/Pesaresi/Van Hoof/Van de Casteele/Grespan paras. 2.80–2.82 (unfortunately without making a clear distinction between advantage and selectivity). 259 Case C-518/13 The Queen, on the application of Eventech Ltd v Parking Adjudicator, ECLI:EU:C:2015:9, paras. 48–49.

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assessed whether the measure granted a selective advantage, which it denied, since the Black Cabs and the minicabs were in factually and legally different situations. 260 (e) Compensation, damages and repayments. If an undertaking has a legally justified 133 claim to compensation or damages against the State, the settlement of such a claim should not be considered an advantage within the meaning of Article 107(1) TFEU. Such a payment would not change the asset positions of the undertaking. Insofar as the damage or situation triggering compensation can be imputed to the State, the compensation for damage will not constitute a reduction in the burden which the undertaking would normally have had to bear as part of its budget but will be the logical consequence of the injury committed by the State. That is undisputed, as long as the damage to be compensated is not hailing from a situation where the State was granting an unlawful State aid or had to recover such an aid. In a case where lawful State aid is not paid, or not paid in full, due to mistakes 134 committed by the Member State, a claim for damages is possible without this claim itself having to be considered State aid.261 In its Asteris ruling262 relating to State aid measures to be granted under the Common Agricultural Policy which Greece unlawfully failed to pay because of a technical error in the EU regulations, the ECJ decided that State aid ‘is fundamentally different in its legal nature from damages which the competent national authorities may be ordered to pay to individuals in compensation for the damage they have caused to those individuals.’263 However, in Asteris the damage arose as a result of an error in the Commission’s legislation, meaning that actions for damages had to be brought primarily against the EU. The Greek tomato farmers had indeed first sought to do so. Due to a lack of a sufficiently serious and clear breach of EU law their success was limited, so that they then decided to sue the Greek authorities implementing the EU regulations as well. Given these circumstances the action for damages against the Greek State had to be based on grounds other than those underlying the actions against the EU already dismissed by the ECJ.264 The ECJ did not confirm the Commission’s general point of view in Asteris, according to which damages a court has ordered to be paid can never be State aid within the meaning of Article 107(1) TFEU. Advocate General Slynn gave the example of a situation where a Member State promises aid to an undertaking which, on examination by the Commission, turns out to be a measure incompatible with the Internal Market. The provisions on State aid would be undermined if the undertaking would then receive an equivalent sum by suing the State on the grounds of the given promise. A similar situation would arise if an aid beneficiary sues the State for damages following a previous Commission decision ordering the State to recover illegal aid.265 Damages which merely compensate for the recovery of unlawful aid should themselves be regarded as aid.266 260 Case C-518/13 The Queen, on the application of Eventech Ltd v Parking Adjudicator, ECLI:EU:C:2015:9, paras. 53–61. 261 For a contrary opinion see, Opinion of Advocate General Sir Gordon Slynn in Joined Cases 106 to 120/87 Asteris [1988] ECR 5515: ‘Does production aid, if it is not paid pursuant to the regulation, cease to be aid subject to Articles [107–109 TFEU] solely because paid by court order as the Commission contends? It remains ‘aid granted by a Member State or through State resources’ and the questions whether it distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and affects trade between Member States are for the Commission upon notification […]’. 262 ECJ, Joined Cases 106 to 120/87 Asteris [1988] ECR 5515. 263 ECJ, Joined Cases 106 to 120/87 Asteris [1988] ECR 5515, paras. 22–24. 264 ECJ, Joined Cases 106 to 120/87 Asteris [1988] ECT 5515, para. 29. 265 Opinion of Mr Advocate General Sir Gordon Slynn in ECJ, Joined Cases 106 to 120/87 Asteris [1988] ECR 5515. 266 Commission, OJ 1991 C 227/22 – Hytasa, and the Opinion of Advocate General Jacobs in ECJ, Joined Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-4103; see Vesterdorf/ Nielsen 21; Schwarze/Ba¨r-Bouyssie`re Article 87 TEC, para. 27.

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Art. 107 TFEU

Thus, claims for damages caused by a non-fulfilment of the State’s (contractual or otherwise) obligation to grant incompatible State aid, are not in line with EU State aid law. The remaining question is whether a claim for compensation could exist against a Member State promising an incompatible aid and limited to the amount of damage caused by reliance on the promised aid (‘damages for breach of faith’). However, it appears that even that would come into conflict with the rulings on State aid recovery, according to which legitimate expectations in the lawfulness of the aid can only be based on actions taken by the Commission.267 Exemptions may be possible, though, if the person relying on the lawfulness of the aid and claiming damages is not the beneficiary undertaking itself but a third party. One example would be the guarantee of a beneficiary’s shareholder given to the cofinancing private banks in a restructuring aid case. If the restructuring fails because the undertaking has to pay back the aid and the cofinancing banks invoke the guarantee vis-a´-vis the shareholder, the latter might be able to approach the State for compensation.268 136 These principles also apply if the claim for damages was mistakenly awarded by a national court. According to settled case law of the Court it is irrelevant which public authority of the Member State failed to comply with EU law.269 The independence of the judiciary does not mean that national judges are not bound by EU law.270 The same is true if a national court rules – in disregard of the EU State aid rules – that an undertaking is entitled to certain subsidies and orders the State to pay them. EU law precludes the application of national law provisions which seek to lay down the principle of res judicata in so fas as this application prevents the recovery of unlawful and incompatible State aid.271 137 In its decision on the German Indemnification and Compensation Act [Ausgleichsleistungsgesetz] concerning compensation for expropriation of property in the former GDR,272 the Commission too was of the opinion that it did not constitute State aid within the meaning of Article 107(1) TFEU ‘if the State simply returned to an economic operator something that it had previously expropriated (illegally). This may typically be compensation for losses suffered by the operator as a result of expropriation or similar action (compensation in kind or monetary compensation).’ Such compensation reflects the legal principles relating to protection of property which are common to all Member States. In the Akzo-Nobel273 and Steenbergen274 decisions the Commission expressly confirmed that approach, as it did in the ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche275 decision, in which it examined precisely whether the undertaking had a claim for damages according to the general national law relating to expropriation, and whether the indemnification concerned could in fact be regarded as a compensation for expropriation. The Commission closely examines such cases in order to prevent possible 135

267 See for example ECJ, Cases C-5/89 Germany v Commission [1990] ECR I-3437, para. 14; C-148/04 Unicredito Italiano [2005] ECR I-11137, para. 104. 268 The highest German Civil Court has ruled that the State can only claim against the shareholder who had provided a security for subsidy repayments, if the State has explicitly informed the shareholder about the breach of Article 108(3) TFEU, thus effectively ring-fencing the recovery to the beneficiary undertaking, BGH 2008 III ZR 279/07. 269 Case C-302/97 Konle [1999] ECR I-3099, para. 62 with further references. 270 Case C-224/01 Ko ¨ bler [2003] ECR I-10 239, para. 31. 271 Case C-119/05 Lucchini [2007] ECR I-6199, para. 63. 272 Commission, OJ 1999 L 107/21 – Acquisition of land under the German Indemnification and Compensation Act. 273 Commission, State aid N 304/2003 – Akzo-Nobel. 274 Commission, State aid N 575/2005, paras. 25, 26 – Steenbergen. 275 Commission, OJ 2008 L 144/37, para. 70 – ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche.

98

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B. The definition of State aid

138–139

II

attempts to circumvent the prohibition of State aid by converting State aid into artificial and selective damage claims.276 By referring to the general national rules the Commission is ruling out Member States’ attempts to provide economic advantages by creating selective indemnity regulations. Indeed, legal rules on damages relieving individual undertakings or sectors from the burdens which other undertakings in a comparable situation would have to bear as part of their budgets fall within the notion of State aid. In such situations, in which the criteria of advantage and of selectivity are inextricably interlinked,277 the question of whether the actual financial benefit was provided by the public authority voluntarily or whether the authority was bound by national law is irrelevant.278 According to the general principles, which are also recognized in the case law of the European Court of Human Rights, the amount of compensation has to be reasonably related to the market value of the expropriated property. 279 Measures intended to compensate for other administrative injustice, for example in 138 the form of tax refunds, are unquestionably outside the definition of State aid, provided they compensate only for losses undertakings had to bear due to unlawful actions by the State.280 However, in that context there is an assumption that the national tax system is lawful. Thus, a tax debtor who has been granted a tax relief in breach of the tax law can normally not challenge the recovery of the benefit by arguing that the relevant national tax law was unlawful in any case.281 bb) Reduction of charges not normally included in an undertaking’s budget – Release 139 from structural disadvantages. The EU Courts originally used the concept of ‘charges which are normally included in the budget of an undertaking’ solely in order to extend the criterion of advantage to measures other than classic transfers of State resources such as direct grants.282 In the meantime, the courts have on occasion taken the logical step of applying the concept also to explain why a specific measure does not constitute an advantage within the definition of State aid. In the Combus judgment283 the General Court applied the concept stating that it does not constitute an advantage if a State measure only releases or helps releasing from the structural disadvantages of a (meanwhile privatized) State-owned undertaking, which it had in comparison to its private-sector competitors. The case involved the financial support the Danish State provided to the employees of the former public bus transport sector monopolist Combus in form of one-time payments made if they consented to their status being changed from that of a public official to normal employment. The Commission took the view that the payment did not constitute an advantage for the undertaking. In response to an action brought by a Danish trade 276 Cf. Greece’s arguments in ECJ, Case C-369/07 Commission v Greece [2009] ECR I-5703, paras. 17– 18, in which Greece claimed that it had (in part) implemented the recovery of aid at issue, by offsetting the recovery against damages awarded to Olympic Airlines under an arbitration award. 277 Insofar as the laws governing claims for damages are of a general nature, not only will the measure have no element of advantage, it will also not be selective; see Mederer/Pesaresi/Van Hoof/Grespan/ Santamato, paras. 2.307–2.309. 278 In that respect confusing, von der Groeben/Schwarze/Mederer Article 87 TEC, para. 6, who argues that one of the essential elements of State aid is that the advantage is granted despite the State having no legal obligation in that respect; in agreement with that view, Schwarze/Ba¨ r-Bouyssie`re Article 87 TEC, para. 27. For the (correct) opposing view see Koenig/Ku¨hling/Ritter para. 71, fn. 15. 279 GC, Case T-62/08 Thyssenkrupp Acciai Speciali Terni SpA v Commission [2010] ECR II-3229, paras. 133–139. See also Case T-64/08 Nuova Terni Industrie Chimiche SpA v Commission [2010] ECR II-125, paras. 59 to 63 and 140 to 141. 280 See, for example ECJ, Cases 61/79 Denkavit [1980] ECR 1205, para. 31; 826/79 MIRECO [1980] ECR 2259, para. 15; 811/79 Ariete [1980] ECR 2445, para. 15. 281 ECJ, Case C-172/03 Heiser [2005] ECR I-1627, paras. 37 et seq. 282 Especially in the area of taxes and social welfare charges. 283 GC, Case T-157/01 Danske Busvognmænd v Commission [2004] ECR II-917.

Arhold

99

II

140–141

Art. 107 TFEU

association representing private bus companies the General Court confirmed that view, ruling that the measure was intended ‘to free Combus from a structural disadvantage it had in relation to its private-sector competitors. Article [107(1) TFEU] is aimed merely at prohibiting advantages for certain undertakings and the concept of aid covers only measures which lighten the burdens normally assumed in an undertaking’s budget and which are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions ([…]).’284 The judgment seemed likely to facilitate privatisations and to potentially limit the definition of aid for the benefit of public undertakings. There is certainly a need for further clarification of what is precisely meant by ‘structural disadvantages’285 and of whether these disadvantages are not balanced by the advantages deriving from the public control of the undertaking. The Commission has applied the Combus judgment very restrictively. There is only one single case in which the Commission left open the question of whether a measure has to be classified as aid due to a similarity with the situation in Combus.286 When considering the aid measures granted with respect to the pension funds of British Telecom, the General Court confirmed the narrow interpretation of the Commission by stating that the State measure must either lead to an abolishment of the structural advantage (as in the Combus case), or, if it only compensates for the financial costs following from the structural disadvantage, there must be at least an indivisible link between the State measure and the structural disadvantage.287 140 The ECJ used the concept in its Enirisorse judgment concerning an Italian law that limited the right of shareholders in Sotacarbo SpA to redeem their shares in the event of their extraordinary withdrawal from the company, and thus mitigated charges which would otherwise have had to be included in the budget of Sotacarbo, by pointing out that the law merely limited an advantage that had previously been granted to Sotacarbo’s shareholders in derogation from the general law. The new law merely prevented Sotacarbo’s budget from being burdened with a charge which, in a normal situation, would not have existed. Consequently, it was held that the law merely sought to regulate the exceptional right to withdraw granted to Sotacarbo shareholders by the earlier law and did not seek to reduce a charge which Sotacarbo would normally have had to bear.288 141 The General Court casted some more light on this concept in its Hotel Cipriani judgment, which concerned a regulation that exempted Venetian undertakings from the duty to pay social contributions. The hotels argued that the regulation did not give them a competitive advantage, but merely compensated them in part for an unfavourable market situation: in Venice they had to cope with high rents and purchase prices, the city’s dampness and seasonal flooding, the obligations imposed to protect the historic heritage and landscape, plus additional costs for the difficult transport and transshipment of stock and goods. The Court gave the following clarification with regard to the concept of ‘structural disadvantages’ confirmed by the ECJ on appeal 289: 284

GC, Case T-157/01 Danske Busvognmænd v Commission [2004] ECR II-917, para. 57. See also Hancher EStAL 2004, p. 455. 286 Commission, OJ 2008 L 243/7 – OTE. In contrast to that, rejected in Commission, OJ 2008 L 63/16 – La Poste; OJ 2008 L 270/1 – Tieliikelaitos/Destia; OJ 2009 L 327/21 – RATP fonds de pension, Commission, SA.14588 – Belgium, De Post, OJ 2012 L 170/1; For a critical opinion see Mederer/Pesaresi/ Van Hoof/Grespan/Santamato, paras. 2.282–2.287. 287 Joined Cases T-226/09 and T-230/09, British Telecommunications plc and BT Pension Scheme Trustees v Commission, ECLI:EU:T:2013:466, paras. 69–75. Appeal pending under C-620/13 P. For more details see Arhold, in this commentary, chapter V chapter C, paras. 170 et seq. 288 ECJ, Case C-237/04 Enirisorse [2006] ECR I-2843, para. 48. 289 Joined Cases C-71/09 P, C-73/09 P and C-76/09 P. ‘Comitato ‘Venezia vuole vivere’ and others v Commission [2011] ECR I-4727, para. 100. 285

100

Arhold

B. The definition of State aid

142

II

– The fact that a Member State seeks to approximate, by unilateral measures, the conditions of competition in a particular sector of the economy to those prevailing in other Member States cannot deprive the measures in question of their character as (State) aid: the compensation for structural disadvantages in comparison with other Member States are not per se State aid free.290 – Like all the rules of EU competition law, the Treaty rules on State aid are intended to ensure, not perfect competition, but effective or efficient competition. 291 – Compensation for structural disadvantages can be excluded from categorisation as State aid only in certain specific situations: – Firstly: in situations which are justified according to the Market Economy Operator Test.292 – Secondly: as further clarified by the General Court in BT293, as compensation of costs related to a service in the general economic interest if the Altmark criteria are fulfilled.294 – Thirdy: mitigation of additional costs the beneficiary undertaking has to bear due to a special rule which is not applied to competing undertakings subjected to the ordinary law and normal market conditions.295 In that respect there must be a direct connection between the mitigation scheme at issue and its objective of balancing the additional costs deriving from the specific structural problems. 296 In BT, the General Court used the term “indivisible link”297. The connection between the State measure and the particular charge is manifest if – as in Combus – the measure releases the company from that charge, i. e. it is rather an abolishment than a compensation. It is for the case law to former concretise the concept of ‘indivisible link’. cc) Indirect advantage. In order to fall under Article 107(1) TFEU it is not necessary 142 that the State measure benefits the direct recipient of the State resources. It is sufficient that the advantage is indirectly granted to another undertaking (indirect advantage), which would then have to be seen as the aid beneficiary (possibly in addition to the direct recipient).298 Article 107(1) TFEU prohibits aid granted by a State or through State resources in any form whatsoever, without drawing a distinction as to whether the aid-

290 GC, Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani [2008] ECR II-3269, para. 182, with further references. 291 GC, Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani [2008] ECR II-3269, para. 184. 292 GC, Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani [2008] ECR II-3269, para. 185, with reference to ECJ, Case C-67/85, van der Kooy v Commission [1988] ECR 219, para. 30. For details see below paras. 150 et seq. 293 Joined Cases T-226/09 and T-230/09, British Telecommunications plc and BT Pension Scheme Trustees v Commission ECLI:EU:T:2013:466, paras. 69–75. 294 For the Altmark criteria see below paras. 164 et seq. 295 GC, Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani [2008] ECR II-3269, para. 187, with reference to the judgments in Combus and Enirisorse. 296 GC, Joined Cases T-254/00, T-270/00 and T-277/00 Hotel Cipriani [2008] ECR II-3269, para. 189, with reference to the judgments in Combus and Enirisorse. 297 Joined Cases T-226/09 and T-230/09, British Telecommunications plc and BT Pension Scheme Trustees v Commission ECLI:EU:T:2013:466, paras. 69–75 explicitly referring to Case C-81/10 P, France Te´le´com v Commission [2011] ECR I-12899, para. 43, upholding joined Cases T-427/04 and T-17/05 France and France Te´le´com v Commission [2009] ECR II 4315, para. 207, where the General Court while recognising that the Commission when examining a measure, is entitled to take account of specific charges affecting on advantage, had none the less hold that a measure cannot be saved from categorisation as State aid only because the beneficiary of the measure is subject to a specific charge which is different from and unconnected with the aid in question. 298 Thus also von der Groeben/Schwarze/Mederer Article 87(1) TEC, para. 7.

Arhold

101

II

142

Art. 107 TFEU

related advantages are granted directly or indirectly. 299 The case law has thus acknowledged that an advantage granted directly to certain natural or legal persons who are not necessarily undertakings may constitute an indirect advantage, hence State aid, for other natural or legal persons who are undertakings.300 For instance, public financial support granted directly to the employees of an undertaking may be indirect State aid to their employer301, if it relieves the undertaking of a burden coming under its ‘day-to-day management’ and thus a burden it normally has to bear.302 The concept of indirect aid may be gathered from the existence of Article 107(2) (a) TFEU regarding State aid for consumers according to which ‘aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned’ is compatible with the Internal Market. 303 One example is the subsidy paid to car owners for scrapping their old cars in Germany known as the ‘Abwrackpra¨mie’ (scrapping premium) and introduced during the financial and economic crisis in 2009.304 Such product-linked aid granted to consumers does in fact constitute an indirect advantage to the respective production sector (in this case an economic boost for the automotive industry). Even if the direct recipients of the aid are end consumers, the measure indirectly benefits the industry. It is irelevant whether the direct recipients of State resources are undertakings or not.305 An advantage exists even if the measure is granted in a non-discriminatory way regardless of the origin of the goods concerned. Because the measure is intended to benefit a specific sector alone, it is also selective and thus fulfils a second element in the definition of State aid (sectoral selectivity). 306 The only remaining question is whether competition is distorted and trade between Member States affected if the measure is designed in a neutral way as to the origin of the products concerned.307 Considering the very broad interpretation of these constituent elements the answer is at least not evident.308 The criticism which has been voiced with respect to the concept of indirect State aid in the literature309 fails to recognize that consumer aid can significantly distort competition.310 For example, it is possible to use purchasing incentives in order to promote certain new technologies at the expense of others (breach of 299 GC, Case T-177/07 Mediaset v Commission [2010] ECR II-2341, para. 75. Confirmed by ECJ, Case C-403/108 Mediaset v Commission [2011] I-117. 300 See ECJ, Cases C-156/98 Germany v Commission [2000] ECR I-6857, paras. 22–35; C-382/99 Netherlands v Commission [2002] ECR I-5163, paras. 38 and 60–66; GC, Case T-424/05 Italy v Commission [2009] ECR II-23, para. 108. 301 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR para. 137. 302 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR para. 140. 303 GC, Case T-177/07 Mediaset v Commission [2010] ECR II-2341, para. 76. Comfirmed by ECJ, Case C-403/10 P Mediaset v Commission [2011] I-117, para. 81. See also Mederer/Pesaresi/Van Hoof/Grespan/ Santamato, para. 2.467. 304 Not considered State aid by the Commission according to the Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis, OJ 2009 C 16/1; agreable because it was designed in a non-discriminatory way and thus did not disturb competition and affect trade between Member States. 305 See Commission, OJ 2007 L 147/1, paras. 81 et seq. – Italian digital decoders. 306 For more on this see Arhold in this chapter para. 476 et seq. 307 See Mederer/Pesaresi/Van Hoof/Grespan/Santamato, para. 2.538. 308 Under certain circumstances, sectoral aid can distort competition, even when it is awarded without discrimination. Thus, an incentive to buy products in a specific industrial sector can be capable of influencing consumer behaviour to the detriment of other sectors and thus also of distorting competition with (potential) substitutes. In that respect State aid law has a broad understanding of the term competition since it is also aimed at subsidies to domestic key industries. The Commission calls that ‘a distortion in the allocation of resources in the economy‘, see Commission, OJ 2007 L 147/1, para. 122 – Italian digital decoders. 309 For more on this see Bartosch Article 87(1) TEC, para. 82; Heidenhain/Heidenhain, European State Aid Law Section 4, para. 20; Heidenhain EuZW 2007, p. 623. Brevern/Grafunder, EStAL 2012, p. 201. 310 Similarly Grabitz/Hilf/Nettesheim/v. Wallenberg Article 87 TEC, para. 14.

102

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143

II

technology neutrality),311– which is particularly distorting in rapidly developing markets and especially in situations where various technologies are still competing to become standard technology in the future. In such situations the Member States need to pay careful attention to ensuring that any consumer aid measure will be as free from discrimination as possible, i. e. in particular as technology neutral312 as possible. It is thus necessary to include indirect advantages in order to achieve an efficient State aid control policy. The concerns raised against such an approach with a view to the feasibility of distinguishing between the different indirect beneficiaries 313 are unconvincing. The question of how to identify precisely the (indirect) beneficiaries and the amount of the advantage actually received, which may indeed pose difficulties in individual cases 314, only arises in the event of a potential recovery of the aid. As long as the Member States observe their duty to notify State aid projects to the Commission, there is no need for subsequent recovery. An approach of generally permitting certain forms of State aid just to avoid potential problems at the stage of recovery is neither suitable nor necessary. Unproblematic cases can be dealt with either in the context of assessing the possible distortion of competition or the measure’s compatibility with the Internal Market in line with Article 107(2) lit. a TFEU. Apart from the consumer aid cases, the question of who the actual beneficiary of aid 143 is has played a practical role mainly in Court cases concerning recovery decisions in which the Commission deliberately left open the question of whom the Member State should recover the aid from.315 The concept of granting an indirect advantage has also played an important part in all those cases where the direct recipient of aid could not be the aid beneficiary because one of the constituent elements of the State Aid definition was not given. For example, in the case of social consumer aid, natural persons as consumers cannot be the beneficiary since they are not undertakings. But there are also – exceptional – cases where the undertakings which actually received State resources cannot be considered the aid beneficiary. For instance, according to Article 6 b of the German Income Tax Act (Einkommenssteuergesetz) tax concessions were granted to all undertakings reinvesting their profits in SMEs in the new German Bundesla¨nder. The measure could not be considered State aid granted in favour of the investors as the benefit was not selective: ‘[A] tax concession in favour of taxpayers who sell certain financial assets and can offset the resulting profit when they acquire other financial assets confers on them an advantage which, as a general measure applicable without distinction to all economically active persons, does not constitute aid to those 311

See Commission, OJ 2007 L 147/1 – Italian digital decoders. See GC, Case T-21/06 Germany v Commission (DVB-T) [2009] ECR II-197, para. 6; as well as GC, Case T-8/06 FAB v Commission [2009] ECR II-196, para. 55. The judgments relate to subsidies paid by the Berlin/ Brandenburg State media authority to private television broadcasters. It was granted to motivate them to switch over to digital terrestrial television simultaneously. In its decision the Commission found that the subsidies also constituted indirect aid for the benefit of T-Systems, the undertaking providing the infrastructure for digital transmission, although it did not specify the aid amount. Recovery claims were made only against the private television broadcasters; see Commission, OJ 2006 L 200/14 – DVB-T Berlin-Brandenburg. The Court confirmed the distortion of competition at network level as well. The Court held that the sum paid to the private operators for the changeover to DVB-T strengthened the competitive position of the internationally active operator of a terrestrial network, T-Systems. By thus favouring terrestrial transmission the two other forms of transmission, cable and satellite, were disadvantaged. As regards technology neutrality, see also GC, Case T-177/07 Mediaset v Commission [2010] ECR II-2341, paras. 95–111. 313 For example: Heidenhain EuZW 2007, p. 623, 624; in agreement Bartosch Article 87(1) TEC, para. 82. 314 The Commission has sometimes not decided on the amount, see for example Commission, OJ 1999 L 32/18, para. 30 – Sicilian promotion of tourism; or else provided the Member State with abstract calculation methods, see Commission, OJ 2007 L 147/1 – para. 205 – Italian digital decoders. 315 For more on this see Arhold EuZW 2006, p. 42. 312

Arhold

103

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144–145

Art. 107 TFEU

taxpayers within the meaning of (Article 107(1) TFEU).’316 However, it was the SMEs located in the new La¨nder, which benefited from the scheme. They were able to obtain equity funding on more advantageous terms than would have been the case in the absence of that provision. The advantage was also selective, as the only element required to establish selectivity is that the beneficiary undertaking is located in a part of the territory of a Member State (so-called ‘regional selectivity’).317 Selectivity was also given with regard to the size of the benefitting undertakings (only SMEs). Accordingly, the investors were the direct recipients of the State resources (foregone of tax revenue), whereas the investors’ target enterprises (the SMEs) were the aid beneficiaries. The Court took the view that the independent decision taken by the investors did not mean that the connection between the tax concession and the advantage for the SMEs had been eliminated since, in economic terms, the alteration of the market conditions giving rise to the advantage was the consequence of the public authorities’ loss of tax revenue.318 The causal link is even clearer in situations where the passing on of State resources has been contractually agreed in advance. 319 144 The Commission takes the same view in its risk capital guidelines.320 State support to risk capital measures may be considered State aid at three different levels: at the level of the investors, insofar as they are undertakings, 321 at the level of the risk capital funds and at the level of the undertakings invested in.322 Thus, in a decision relating to Italian investment companies the Commission argued that ‘even if the specialised investment vehicles did not benefit directly from the tax reduction granted to their investors, they nonetheless did receive an indirect economic benefit in so far as the tax reduction on investments in specialised vehicles prompted investors to buy shares in such vehicles, thereby providing additional liquidity and extra income in terms of entry and management fees.’323 The Commission has occasionally applied the same approach to special purpose companies.324 145 The judgment in GEMO concerned payments to private undertakings which collected and disposed of hazardous animal carcasses and waste from farmers and slaughterhouses on behalf of the State. It was alleged to be in the general economic interest for slaughterhouses and farmers to use the service, which was made available to them free of charge. The services were mainly financed from a special tax on meat purchases in supermarkets. The Court ruled that the State payments to the operators of the disposal services were State aid granted indirectly in favour of the undertakings in the meat production sector. As waste producers these undertakings were relieved of a burden they would normally have had to bear. The intermediary role played by the private 316

ECJ, Case C-156/98 Germany v Commission [2000] ECR I-6857, para. 22. For more on this see Arhold in this chapter paras. (452 et seq.). 318 ECJ, Case C-156/98 Germany v Commission [2000] ECR I-6857, para. 27. In that respect see also Bartosch, EuZW 2000, p. 2010. 319 ECJ, Case C-457/00 Belgium v Commission (Verlipack) [2002] ECR I-6931, paras. 52–61. 320 Commission, OJ 2014, C 19/4 – Community guidelines on State aid to promote risk finance investments. See Zuleger in this commentary (part III, Art. 28 et seq.). 321 As regards the question of whether the State’s claim to a return on investment should, under certain circumstances, take second place to the claims of other investors, see Commission, OJ 2001 L 144/23 – Viridian Growth Fund. 322 In that respect see also the decisions: Commission, OJ 2001 L 144/23 – Viridian Growth Fund; Commission, OJ 2001 L 263/23 – Regional risk capital funds. 323 Commission, OJ 2006 L 268/1, paras. 36–41 – Aid scheme implemented by Italy for certain undertakings for collective investment in transferable securities specialised in shares of small- and medium-capitalisation companies listed on regulated markets. The decision has been confirmed by the GC, Case T-424/05 Italy v Commission [2009] ECR II-23, para. 108. 324 For example: Commission, OJ 1999 L 260/1 – InfraLeuna. 317

104

Arhold

B. The definition of State aid

146–148

II

disposal operators could not affect the fact that the arrangement conferred an advantage on the meat producers who were indirect beneficiaries, as long as those services were imputable to the State and were funded from State resources.325 Another case related to compensation granted by the Netherlands to Dutch service 146 stations for economic disadvantages they had to suffer because of their proximity to the German border. Some of the service stations already had a contractual right to compensation from their oil companies for the same economic disadvantages. Thus the State’s payments did not relieve the budgets of the individual service stations from costs they would normally have had to bear but instead relieved the oil companies behind the service stations. That was also found to affect the lawfulness of the aid because the individual service stations would have been able to rely on the de minimis rule, insofar as they were independent from the oil companies, depending on the contractual status between them and the oil company. The oil companies themselves could not do so because of the cumulated amounts of State aid they benefited from. 326 Common to all the cases described above is that in each case at least one constituent 147 element of the notion of State aid was missing at the level of the direct recipient of State resources.327 In the German income tax case the investors lacked the element of selectivity; in the slaughterhouse case the private waste disposal operators lacked the element of advantage (since the State paid a market rate for their services); in the service stations case there was also no advantage (the service stations were contractually entitled to demand compensation from their oil companies). In the two last cases, however, the indirect beneficiaries were granted an advantage of approximately the same amount as the transferred State resources. The same cannot necessarily be said about the case of the East German SMEs. The tax scheme cannot have been more than a potential incentive for the investors. It is practically impossible to determine for every individual case to what extent it had an impact on the conditions for the investment. In situations involving indirect regional selectivity it may therefore be more appropriate to impute the regional selectivity of the second level (SME) to the first level (investors), thus making the investor the direct beneficiary. The principle of the relativity of the State aid notion328, according to which the aid beneficiaries concerned would have to meet all the criteria of aid cumulatively, does not really militate against this approach, since in the German income tax case even the SMEs lacked one of the constituent elements, namely the transfer of State resources. 329 Although it is true that the transfer of State resources (the tax concession) only occurs in the event of an actual investment in the SMEs, the used resources are however not identical. There should thus be no reason why the regional selectivity of the measure should not be attributed to the level of the tax incentives so that the investors could be considered aid beneficiaries. The advantages are obviously the possibility of clearly ascertaining the amount of aid as well as raising the investors’ awareness of State aid law. As described above, in many cases, the concept of indirect advantage has been used in 148 order to be able to extend the State aid recovery to the real aid beneficiary, who was not identical to the direct receiver of the State resources. There may, however, be constella325 ECJ, Case C-126/01 GEMO [2003] I-13 769, paras. 28–29, referring to Case C-379/98 PreussenElektra [2001] ECR I-2099, para. 58. See also Opinion of Advocate General Jacobs in Case C-482/99 France v Commission (Stardust Marine) [2002] ECR I-4397, paras. 53 et seq. 326 ECJ, Case C-382/99 Netherlands v Commission [2002] ECR I- 5163, para. 62. 327 There may also be cases where both, the direct recipient undertaking, and another undertaking, operating, for instance, on subsequent levels of activity, could be considered State aid beneficiary, see Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 75. 328 GC, Case T-34/02 Le Leval [2006] ECR II-267, para. 109. 329 Mederer/Pesaresi/Van Hoof/Grespan/Santamato, para. 2.527.

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Art. 107 TFEU

tions in which the real beneficiaries can not be subject to State aid recovery, since, for instance, they are not undertakings, and the recipients of the State resources are not beneficiaries, because, for instance, they have to transfer the benefit to the real beneficiaries in full. An example might be the pass-through of public grants or low interest loans through a private financial institution to individuals for non-economic activities330. The problem gets more complex in case of (selective reductions in) indirect taxes, intended to be passed on to the consumers. In Air Lingus331, the General Court annulled the decision of the European Commission ordering Ireland to recover from certain airlines the State aid amounting to the difference between the lower rate (EUR 2) of the air travel tax [ATT] they had to pay for every passenger departing from an Irish airport to a destination within a range of 300 km from Dublin airport and the standard rate of EUR 10 to be paid for departures in all other cases. The Commission had considered the lower rate to be a State aid due to the selective advantage to the air carriers which served mainly intra-national destinations. Neither the applicant nor the court disputed that the reduced tax rate could confer an advantage to the air carriers concerned, but contested the extent of that advantage. 332 The General Court hold that, “in a situation such as that in the present case, where the ATT was intended to be passed on to the passengers and where the economic advantage arising from the application of the reduced tax could also have been passed on to the passengers, the Commission cannot presume that the advantage actually obtained and retained by the airlines amounted, in all cases, to EUR 8 per passenger. In such a case, the advantage actually obtained by the airlines does not necessarily consist in the difference between the two rates, but rather in the possibility of offering more attractive prices to their customers and thereby increasing their turnover [...]. Accordingly, for airlines such as the applicant which paid the ATT at the lower rate of EUR 2, the Commission should have determined the extent to which they had actually passed on to their passengers the economic benefit resulting from the application of the ATT at the lower rate, in order to be able to quantify precisely the advantage which the airlines actually enjoyed, unless it decided to confer that task to the national authorities and provided the necessary information in that respect.”333 According to the General Court, it was only if the applicant had systematically increased the price of its tickets excluding tax by EUR 8 per ticket for flights subject to the ATT at the rate of EUR 2 that it would have been possible to consider that the economic advantage resulting from the application of the differentiated rates amounted to EUR 8 per passenger for the applicant, since that advantage could not have been passed on, even partially, to the passengers.” 334 Even though dealt with in the scope of Article 14 of the Procedural Regulation, the judgment concerns the question of the real beneficiary of the State measure: the airlines or the passengers. The Commission has appealed the judgment to the ECJ.335 According to the Commission, the standard rate was a charge, which normally had to be included in the 330 The financial institution as first receiver of the State resources would fully pass-through the benefit. Depending on the conditions linked to the public or loan, there might be, however, other beneficiaries than the individuals, for instance the manufactures of goods to be bought by these individuals. This may raise delicate questions with respect to the correct differentiation between indirect aid and mere positive economic reflexes; see para. 149 below. 331 GC, Case T-473/12 Aer Lingus Ltd v Commission, ECLI:EU:T:2015:78. 332 GC, Case T-473/12 Aer Lingus Ltd v Commission, ECLI:EU:T:2015:78, para. 87. Unfortunately and very unusually, paras. 20–78 of the judgment, which discuss the qualification of the reduced tax rate under Article 107(1) TFEU, are omitted in the published version, which only covers the third and fourth pleas dealing with recovery according to Article 14 of the Procedural Regulation. 333 GC, Case T-473/12 Aer Lingus Ltd v Commission, ECLI:EU:T:2015:78, para. 97–99. 334 GC, Case T-473/12 Aer Lingus Ltd v Commission, ECLI:EU:T:2015:78, para. 100. 335 Pending under C-164/15 P.

106

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II

budget of the undertaking. The question whether or not to include that charge (or any other charge) in the ticket price and thus pass it on to the customers was a subsequent independent decision of the airlines concerned (there was no legal pass-on obligation), which can not have an impact on the calculation of the economic advantage following from that tax relief.336 These cases of indirect advantage have to be distinguished from cases where the State 149 aid results in a mere positive economic reflex for the benefit of economic operators other than the aid recipient.337 For example, the restructuring aid granted to an undertaking in difficulty also positively impacts its creditors.338 A precise distinction is not always passible. The relevant parameters should be the main purpose and general context of the measure. For example, the German scrapping premium (Abwrackpra¨ mie) for motor vehicles was not primarily intended to reduce car prices for consumers. It was created primarily to stabilize the car industry during a period of economic crisis. At first glance this approach seems to clash with the effects doctrine, according to which aid has to be judged not in terms of its aims but solely in terms of its effect. 339 The case law, however, frequently distinguishes between the general political aims of a measure (which it considers irrelevant) and the actual primary economic purpose of a measure (relevant). The ECJ has from time to time separated the main economic purpose from the merely incidental but not primarily intended effects.340 In indirect aid cases, the Commission also frequently focuses on the aims and purposes of the measure concerned. 341 b) No adequate consideration. Once it has been established that a company has 150 received a (cash or non-cash) benefit, the next step is to ascertain whether that advantage in fact only constitutes a reasonable consideration for the performance of the undertaking’s contractual obligations vis-a`-vis the State. Where that is the case the company cannot be regarded as having received an economic advantage within the meaning of Article 107(1) TFEU. Two main issues have to be distinguished: Firstly, one has to decide on how to assess what constitutes a reasonable level of compensation. 342 Secondly, States do not only pursue their own interests, they also entrust enterprises with the task of performing certain services in the general economic interest (‘SGEI’). In that respect it 336 The Commission had invoked in particular the Unicredito case, in order to demonstrate that it did not hove to take account of the question whether or not the higher tax had been passed on to the customers in form of higher ticket prices, since according to that case calculating the amount of the actual advantage granted by the measure concerned does “not imply reconstructing past events differently on the basis of hypothetical elements such as choices, often numerous, which could have been made by the operators concerned since the choice actually made with the aid might prove to be irreversible. Reestablishing the status quo ante merely enables account to be taken, at the stage of recovery of the aid by the national authorities, of tax treatment which may be more favorable than the ordinary treatment which, in the absence of unlawful aid and in accordance with domestic rules which are compatible with EU law, would have been granted on the basis of the operation actually carried out” (ECJ, Case C-148/04 Unicredito [2005] ECR I-11137, ECLI:EU:C:2005:774, 114–117). 337 In that respect see also Koenig/Ku ¨ hling/Ritter. para. 70. 338 Good examples were the extreme cases involving the rescue and restructuring of systemic banks and financial institutions, undertaken pursuant to Article 107(3) (b) TFEU precisely because of such positive reactions. See also: Commission, OJ 2004 L 61/1, para. 69 – Thu¨ringer Konsolidierungsprogramm. 339 See above paras. 107–108. 340 For example in the scope of the interpretation of the constituent element of ‘transfer of State resources’, see ECJ, Case C-241/94 France v Commission (Kimberly Clark) [1996] ECR I-4551, para. 24; see also Case C-72–7391 Sloman Neptun [1993] ECR I-887, para. 21. Thus also Mederer/Pesaresi/Van Hoof/Grespan/Santamato, paras. 2.307–2.309. 341 For more on this see Mederer/Pesaresi/Van Hoof/Grespan/Santamato, paras. 2.528–2.532, with references to the practice of the Commission. See also State aid N 543/2001, paras. 10, 17 – Ireland, Capital Allowances for Hospitals. 342 For more on this see below para. 150 et seq.

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Art. 107 TFEU

has long been debated whether and under which conditions the provision of SGEI may commercially justify a State payment, neutralising the economic advantage, or whether the remuneration for such services always constitutes a State aid, which should be examined in the light of Article 106(2) TFEU.343 aa) Market Economy Operator Test (‘MEOT’) – principles. According to settled case law, in order to answer the question of whether there is a proper balance between performance and consideration one has to ask whether the undertaking received an economic advantage which it would not have obtained under normal market conditions.344 This question has to be answered from the State’s perspective and thus one has to ask whether a private undertaking of comparable size to the public entity in question and in the same or similar situation would have taken the same measures to the same extent and on the same terms. According to the so-called Market Economy Operator Test (‘MEOT’), it may be assumed that no State aid is given if the measure can be qualified as a normal commercial transaction in the course of which the State behaved like a rational operator in a market economy and thus did not have regard to any economic or social policy objectives.345 However, as long as a measure can be objectively justified on commercial grounds, according to the effects doctrine it is irrelevant if it turns out that the Member State was at the same time also pursuing political objectives. 346 152 If a private undertaking in the same position as the State would not have entered into the transaction in question on the same terms there is a presumption that State aid is given in the amount of the difference between that which has been provided by the State and that which would have been paid or performed by a market economy operator in the same or similar position to that of the State.347 Nevertheless, the undertaking may still demonstrate that it did not receive an advantage, or at least not in the amount of the difference because the objective market value of its services or goods was actually higher, for instance, because it could have sold the goods and services provided to the State at a higher price on the market and that the MEOT failed only because of a special situation on the part of the State.348 When assessing whether a transaction was conducted according to normal market economy conditions, it is, however, not enough to focus exclusively on the State as investor or on the undertaking benefitting from the investment, since one of the characteristic features of a market economy is the interaction between various economic operators. Thus, the Commission is obliged to make a complete analysis of all factors that are relevant to the transaction and its context, including the situation of the beneficiary undertaking and of the relevant market, in order to assess whether the undertaking concerned enjoys an advantage which it would not have been able to obtain under normal market conditions.349 Since a measure cannot constitute State aid if it does not place an undertaking in a more advantageous position than it would 151

343

For this reason discussed separately below at para. (238 et seq.). See for example ECJ, Cases C-39/94 SFEI [1996] ECR I-3547, para. 60; C-342/96 Spain v Commission [1999] ECR I-2459, para. 41; C-73/11 P Frucona Kosˇice v Commission [2013] ECR, para. 72. 345 ECJ, Case T-98/00 Linde v Commission [2002] ECR II-3961, para. 49. 346 See for example ECJ, Case C-56/93 Belgium v Commission [1996] ECR I-723, paras. 78–79. 347 ECJ, Case T-16/96 Cityflyer v Commission [1998] ECR II-757, paras. 51–53. As regards the precise calculation according to the Net Present Value Method see the decisions: Commission, OJ 2008 L 247/27 – Citynet Amsterdam; and Commission, State aid NN 34/2007 – Nord/LB. 348 Koenig/Ritter/Ku ¨ hling, para. 76, even deny a presumption of the existence of State aid, so that the Commission must prove that the State has paid above market value even if it is clear that a MEO in the position of the State would have acted differently. 349 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, para. 251; joined Cases T-186/13, T-190/13 and T-193/13 Netherlands and Others v Commission ECLI:EU:T:2015:447, paras. 87–88. 344

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have been in if the public authority had not intervened, the Commission can examine whether the undertaking would have been able to procure funds entailing the same advantages from other investors and, if necessary, under what conditions. 350 A synallagmatic connection between performance and consideration is not required. The decisive factor is the economic assessment of the overall situation. 351 The MEOT is a consequence of the European Union’s principle of neutrality towards private and public ownership laid down in Article 345 TFEU.352 The EU institutions are obliged to treat public and private undertakings in the same way, i. e. to allow public undertakings to operate on the market according to the same conditions that apply to private undertakings.353 However, Article 345 TFEU does not allow public undertakings to disregard Article 107(1) TFEU or to act according to any criteria other than those of the market economy. That is only possible within the scope of exemptions to Article 107(1) TFEU, especially the ones laid down in Article 106(2) TFEU.354 The first Commission decisions and Court rulings establishing these principles dealt with State capital holdings. The so-called Private Investor Test was developed for the assessment of the State aid questions involved, and is still frequently used as a generic name for such tests.355 Since then the Courts have developed further tests to match the various economic activities Member States are engaged in, such as a Private Creditor Test in cases of debt waivers and rescheduling; or a Private Vendor Test for privatisations and sales, for example of real estate and other public assets. Other sub-categories can be developed, such as a Private Purchaser Test (for the public procurement sector) or a Private Supplier Test (for cases in which a public undertaking supplies goods or services, often in the energy sector). The requirements to be fulfilled by the State differ according to the type of transaction concerned. The Commission and the Courts created a series of custom fit analytical tools to tackle various groups of cases. Ultimately all these various tests are no more than variations of one underlying MEOT: did the Member State in the specific situation act in the same way as a market economy operator would have? When considering this question, all the special circumstances of the individual case have to be taken into consideration. It is not enough to simply rely on the typologies set out in the Commission’s Communications or on other analytical tools developed by the Commission.356 The question of whether or not a measure is qualified as State aid is ultimately defined by the Courts. The Commission has no discretion in that respect, meaning that its communications are not binding for the Member States or the Courts of the European Union or indeed the Commission itself. Unlike the Commission’s communications regarding the excep350 See GC, Case T-163/05, Bundesverband deutscher Banken v Commission [2010] ECR II-387, paras. 36–37. 351 See Koenig/Ritter/Ku ¨ hling para. 71 with reference to Commission, OJ 1998 C 147/3 – Casa di cura reunite; Commission, Report on Competition Policy 1999, para. 197. 352 Cf. also Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ 2008 C 155/10, para. 1.5: ‘This Notice applies without prejudice to Article [345] and thus does not prejudice the rules in Member States governing the system of property ownership. The Commission is neutral as regards public and private ownership. 353 ECJ, Case C-303/88 Italy v Commission [1991] ECR I-1433, paras. 20–22. 354 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, paras. 192–196, referring to ECJ, Cases 182/83 Fearon [1984], 3677, para. 7; C-302/97 Konle [1999] ECR I-3099, para. 38; C-367/98 Commission v Portugal [2002] ECR I-4756, para. 48. 355 E. g., Koenig/Ku ¨ hling/Ritter, para. 74, Schwarze/Ba¨r-Bouyssie`re Article 87 TEC, para. 28 et seq.; differentiating for example Hancher/Ottervanger/Slot, para. 3–065 et seq., Bacon, para. 2.33; Sa´ nchez-Rydelski/ Anestis/Mavroghenis, para. 109 et seq. 356 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, para. 251.

Arhold

109

153 154

155

156

II

157

Art. 107 TFEU

tions pursuant to Art 107(3) TFEU, communications relating to the definition of State aid are merely non-binding indications for assessment criteria the Commission is likely to apply.357 The Commission is allowed to establish its own guidelines for orientation, provided that they contain directions on the approach to be followed and do not depart from the Treaty rules.358 However, where Member States and the enterprises concerned use such guidelines in order to classify a State measure as not being State aid, it may be argued that these guidelines should normally cause legitimate expectations with respect to the compatibility with State aid law so that the Commission should be prevented from ordering recovery if later on the courts come to a different classification.359 157 The Commission’s economic assessment to decide whether an investment does meet the criteria of the MEOT may be complex,360 but is not always so. There is no need to give – a priori – a broad discretion to the Commission when deciding whether to classify a measure as State aid under the MEOT. 361 The Commission does, however, have a broad discretion when its decision includes a particularly complex economic assessment. Even though the question of whether a measure is covered by Article 107(1) TFEU does have to be assessed thoroughly by the EU Courts362, judicial review of such a decision including a complex economic assessment is confined to examining compliance with the relevant rules governing procedure and the statement of reasons, whether the facts on which the contested finding was based were accurately stated and whether there was any manifest error of assessment or misuse of power. 363 In particular, the Courts must not replace the economic assessment of the Commission with their own. 364 In view of the Commission’s broad discretion with regard to assessing economic facts, it is not for the Court to order an expert report to establish that, in similar circumstances, a private investor would have granted the measures in question. 365 However, within those limits the General Court exercises its control function with an increasing degree of precision. The Court frequently annulls Commission decisions because of flaws in the respective reasoning.366 The recognition of a margin of discretion with regard to economic matters does not mean that the judges of the EU Courts have to refrain from reviewing the Commission’s interpretation of the economic facts.367 According to 357 Commission, OJ 1993 C 307/3, para. 34 – Commission communication to the Member States – Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/ EEC to public undertakings in the manufacturing sector: ‘These factors are given as a guide to Member States of the likely Commission attitude in individual cases.’ 358 cf. GC, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, para. 99 and the decisions cited there. 359 Apparently, this question has not been dealt with by the EU Courts, yet. As regards the effect of communications and guidelines in general see, Thomas, EuR 2009, p. 423. 360 ECJ, Case C-56/93 Belgium v Commission [1996] ECR I-723, paras. 10 et seq.; GC, Case T-358/94 Air France v Commission [1996] ECR II-2109, para. 71; Joined Cases T-126/96 and T-127/96 BFM and EFIM v Commission [1998] ECR II-3437, para. 81. 361 GC, Case T-266/02 Deutsche Post v Commission [2008] ECR II-1233, para. 90. 362 ECJ, Case C-83/98 P France v Ladbroke Racing and Commission [2000] ECR I-3271, para. 25. 363 cf. ECJ, Case C-56/93 Belgium v Commission [1996] ECR I-723, para. 11 and the decisions cited there. 364 GC, Case T-380/94 AIUFFASS and AKT v Commission [1996] ECR II-2169, para. 56; Joined Cases T-126/96 and T-127/96 BFM and EFIM v Commission [1998] ECR II-3437, para. 81; Cases T-371/94 and T-394/94 British Airways v Commission [1998] ECR II-2405, para. 79; Joined Cases T-129/95, T-2/96 and T-97/96 Neue Maxhu¨tte Stahlwerke GmbH and Lech-Stahlwerke GmbH v Commission [1999] ECR II-17, para. 106. The same applies with regard to sub-categories such as the Private Creditor Test, see GC, Case T-36/99 Lenzing v Commission [2004] ECR II-3597, para. 150. 365 GC, Case T-234/95 DSG Dradenauer Stahlgesellschaft v Commission [2000] ECR II-2603, para. 168. 366 The tendency has become especially noticeable since GC, Case T-11/95 BP Chemicals v Commission [1998] II-3235. 367 ECJ, Cases C-525/04 P Spain v Lenzing [2007] ECR I-2107, para. 56; C-12/03 P Commission v Tetra Laval [2005] ECR I-987, para. 39.

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158

II

settled case law, the EU judicature must not only establish whether the evidence relied on is factually accurate, reliable and consistent but also whether that evidence contains all the information which must be taken into account in order to assess a complex situation and whether it is capable of substantiating the conclusions drawn from it. 368 However, when conducting such a review, the Court must not substitute its own economic assessment for that of the Commission.369 Conversely, the Commission has a heightened obligation to observe certain procedural guarantees, and in particular to examine carefully and impartially all the relevant elements of the individual case and to give a precise statement of the reasons for its decision. 370 A correspondingly high proportion of judgments by the General Court annul Commission decisions on the grounds of procedural errors, especially insufficient reasoning. In proceedings before the EU Courts, it is the applicant who bears the burden of proof 158 that the contract between the public authorities and its competitor was not a normal commercial transaction between rational market economy operators; especially if the Commission concluded in its decision that the transaction was at market rate. 371 When applying the MEOT the decisive moment is the conclusion of the business transaction. Any subsequent developments, unforeseeable at that time must not be taken into account. The relevant context is the period when the financial support measures were taken. 372 This applies without restrictions to a situation where the actual economic development falls short of justified forecasts, as this constitutes a risk inherent in any commercial decision. If the measure has meanwhile proven to be actually profitable it would be difficult for the Commission to demonstrate that the decision was not compatible with the MEOT at the time the transaction was entered into. This would probably trigger a presumption in favour of the public operator.373 However, in case of doubt the Member State may be obliged to produce evidence showing that the decision is based on economic evaluations comparable to those which, in the circumstances, a rational private investor in a situation as close as possible to that of the Member State would have had carried out, before making the investment, in order to determine its future profitability. 374 In particular in cases where the State has taken a public authority measure – for instance a tax measure – and argues that this measure was justified by the MEOT, for instance because the tax measure was a capital increase by the State as a shareholder of the undertaking concerned, the ECJ has observed that it is not enough to rely on economic evaluations made after the advantage was conferred, on a retrospective finding that the investment made by the Member State concerned was actually profitable, or on subsequent justifications of the course of action 368 ECJ, Cases C-525/04 P Spain v Lenzing [2007] ECR I-2107, para. 57; 98/78 Racke [1979] ECR 69, para. 5; C-16/90 No¨lle [1991] ECR I-5163, para. 12; C-12/03 P Commission v Tetra Laval [2005] ECR I987, para. 39. 369 ECJ, Cases C-525/04 P Spain v Lenzing [2007] ECR I-2107, para. 57; C-323/00 P DSG Dradenauer Stahlgesellschaft v Commission [2002] ECR I-3919, para. 43. 370 ECJ, Cases C-525/04 P Spain v Lenzing [2007] ECR I-2107, para. 58; C-269/90 Technische Universita¨t Mu¨nchen [1991] ECR I-5469, para. 14, as well as ECJ, Joined Cases C-258/90 and C-259/90 Pesquerias De Bermeo and Naviera Laida v Commission [1992] ECR I-2901, para. 2. 371 GC, Case T-158/99 Thermenhotel Stoiser v Commission [2004] ECR II-1, paras. 111, 112. 372 ECJ, Case C-482/99 France v Commission (Stardust Marine) [2002] ECR I-4397, para. 71. For the first time in respect of capital injections and loans: Commission Communication to the Member States – Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/ EEC to public undertakings in the manufacturing sector, OJ 1993 C 307/3, paras. 28, 37 and 42. With regard to guarantees see point 2.1 of the Guarantee Notice: ‘Whether or not a guarantee constitutes State aid, and, if so, what the amount of that State aid may be, must be assessed at the moment when the guarantee is given’, OJ 2008 C 155/10. 373 Mederer/Pesaresi/Van Hoof/Grespan/Santamato, para. 2.369. Thus also v. Wallenberg, in: Grabitz/ Hilf/Nettesheim, Article 87 TEC, para. 34. 374 Case C-124/10 P Commission v EDF, ECLI:EU:C:2012:318, para. 84.

Arhold

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Art. 107 TFEU

actually chosen.375 The Commission deduces from that case law the general irrelevance of subsequent justifications of the economic rationale.376 159 Within the MEOT an objective standard applies.377 If it has been proven that a particular measure does not confer an advantage because the State concerned acted in the same way as a rational operator in a market economy, it is irrelevant if the State also had a political agenda. Article 107(1) TFEU does not distinguish between the causes or aims of the measures of the State intervention concerned but defines them only according to their effects.378 160 When assessing conduct of a Member State, no account may be taken of any compensations or reductions of costs and/or risks that stem from a past decision that was not rendered under market terms and therefore had to be considered State aid. 379 The Commission has taken this point of view for instance in cases concerning capital holdings,380 State guarantees381 and company privatizations.382 According to that view, the risks and economic disadvantages resulting from earlier aid measures must on principle not be used for the MEOT. This helps to avoid confusion between the public authorities’ role as the body granting aid on the one hand and their role as rational market economy operator on the other. The Commission explicitly takes the view that it is ‘not relevant whether aid is illegal or existing. As long as the measure qualifies as aid, no private vendor would have granted it and would not therefore have taken such a measure into consideration’.383 The Court confirmed this view not only with regard to unlawful aid384 but meanwhile also for existing aid.385 Since, by granting aid, a Member State pursues, by definition, objectives other than that of making a profit from resources granted to an undertaking belonging to it, it must be held that those resources are, in principle, granted by the State exercising its prerogatives as a public authority. 386 161 The correctness of this approach is doubtful, however, with regard to burdens possibly resulting from lawful aid. The Member State could lose the power to minimize risks to its budget resulting from lawful actions and avoiding costs to taxpayers. Accordingly, in its judgment in Linde387 the General Court did take the burden on the 375

Case C-124/10 P Commission v EDF, ECLI:EU:C:2012:318, para. 85. See Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 82. 377 Doubtful in that respect, given the Commission’s not always coherent practice: Gisberts/Streit, EuZW 2009, p. 484. 378 See for example ECJ, Case C-56/93 Belgium v Commission [1996] ECR I-723, paras. 78–79; GC, Case T-196/04 Ryanair v Commission [2008] ECR II-3643, para. 40. 379 ECJ, Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission (Bank Burgenland) [2013] ECR, paras. 48–50, 52, 56 confirming GC, Joined Cases T-268/ 08 and T-281/08 Land Burgenland and others v Commission [2012] ECR paras. 157–158. 380 If a capital increase is approved even though the proper course to take would have been liquidation, any further subsequent investments cannot escape the scope of Article 107(1) TFEU by arguing that liquidation now would be more expensive than liquidation would have been, as it would lead to the loss of all the capital meanwhile contributed. 381 The costs for guarantor liability/institutional liability (Gewa ¨hrtra¨gerhaftung/Anstaltslast)) should not be recognized in the liquidation scenario, as no private investor would have given such guarantees. 382 See Arhold in this commentary chapter VC, para. (139). 383 Commission, OJ 2008 L 239/32, para. 137 – Bank Burgenland, referring to GC, Case T-11/95 BP Chemicals [1998] ECR II-3235, paras. 170 et seq., 179–180. 384 ECJ, Case C-334/99 Germany v Commission (Gro ¨ ditzer Stahlwerke) [2003] ECR I-1139, para. 138; see also the earlier Opinion of Advocate General Jacobs in ECJ, Joined Cases C-278/92, C-279/92 and C280/92 Spain v Commission [1994] ECR I-4103, para. 140. 385 ECJ, Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission (Bank Burgenland) [2013] ECR, paras. 48–50, 52, 56. 386 ECJ, Joined Cases C-214/12 P, C-215/12 P and C-223/12 P Land Burgenland and others v Commission (Bank Burgenland) [2013] ECR, para. 56. 387 GC, Case T-98/00 Linde v Commission [2002] ECR II-3961. 376

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treasury resulting from earlier (lawfully granted) aid into account when applying the MEOT. In the case of the privatization of UCB in Leuna, the former public sector owner BvS as owner of carbon monoxide producer LWG committed to supply UCB with carbon monoxide at a specified price over a period of ten years. The supply price did not, however, cover the costs of carbon monoxide produced by LWG, which resulted in annual losses. Later, BvS, LWG, UCB and the private undertaking Linde therefore entered into an agreement, under which Linde promised to build a modern carbon monoxide production facility and to supply UCB with carbon monoxide. The contract set out that BvS and LWG would pay an investment subsidy to Linde. LWG was to be released from its supply obligations following completion of the facility. Germany argued that the measure did not constitute aid, as the burden on BvS/LWG was limited, because the investment subsidy was lower than the cumulative losses under the supply contract would have been. The Commission did not accept this argument, and said that the charges resulting from the contractual supply obligation had themselves been aid and therefore had to be disregarded. It also demanded recovery of the subsidy paid to Linde. The General Court annulled the aid recovery decision, arguing that the agreement ‘represents a normal commercial transaction in the course of which the BvS and LWG behaved as rational operators in a market economy. It is evident that they were motivated primarily by commercial considerations and did not have regard to any economic or social policy objectives.’388 The General Court thereby implicitly acknowledged that charges resulting from previous, lawfully granted aid can be taken into account when applying the Private Investor Test.389 Furthermore, the EU Courts have ruled that it may be possible to justify the 162 amendment of the repayment terms of a temporarily lawfully granted aid in the form of a capital injection in the light of the MEOT. In a case regarding restructuring aid to the Dutch private banking group ING, the Netherlands notified to the Commission an amendment in the repayment terms of securities temporarily approved by the Commission. At this time the formal investigation procedure regarding the securities was still ongoing. As the State aid character of the initial capital injection was undisputed the Commission did not apply the Private Investor Test to the amendment.390 The General Court annulled the Commission’s decision arguing that by not applying the Private Investor Test to the amendments and by stating merely that the characterisation as State aid followed directly from the capital injection’s characterisation the Commission failed to assess the measure sufficiently. 391 The Commission appealed this judgment arguing that as the capital injection was undisputedly State aid there cannot be any private investor in a situation similar to that of the Member State considering whether to amend or not the repayment terms.392 Advocate General Sharpston took the view that the State aid character of the initial capital injection was of no relevance for the assessment of the repayment terms’ amendment if the amendment could be viewed as a separate measure.393 Even though ‘it is true that the initial capital injection was State aid and that a private investor can by definition never be in 388

GC, Case T-98/00 Linde v Commission [2002] ECR II-3961, para. 49. For a critical view see Solte´sz EuZW 2008, p. 353, as well as Ja¨ger EuZW 2007, p. 499, 501 and EuZW 2008, p. 686, 688. 390 Commission, State aid SA.27991 – Netherlands, ING’s Illiquid Assets Back-up facility and restructuring plan OJ 2010 L274/139, para. 98. 391 GC, Joined Cases T-29/10 and T-33/10 Netherlands and ING Groep NV v Commission [2012] ECR paras. 119, 122, 125. 392 ECJ, appeal brought on 11 May 2012 OJ 2012 C 258/8. 393 Opinion of Advocate General Sharpston in ECJ, Case C-224/12 P – Commission v Netherlands and others, paras. 38, 39. 389

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the position of having granted State aid. However, by its initial grant, the State became a holder of securities to be redeemed on specified terms. A private investor could also be in such a position. If the value of the securities held by the State was higher than would be usual for any private investor, that does not seem […] to be a decisive consideration. Nor does the question whether the securities were of an unusual nature […]. Any holder of securities, in whatever amount and of whatever nature, may wish or agree to renegotiate the conditions of their redemption. It is, consequently, meaningful to compare the behaviour of the State in that regard with that of a hypothetical private investor in a comparable position. […] If the capital injection as a whole used State resources to confer an advantage with no adequate economic compensation or return on the specific transaction (as opposed to a general benefit to the national economy), it would presumably not have satisfied the private investor test. However, that assessment was not made, and the question of the applicability of the test in those circumstances did not arise. In fact, the amendment to the repayment terms was assessed as a separate measure and there was therefore no reason not to apply the private investor test.’ 394 The ECJ explicitly followed the reasoning of the Advocate General and observed that ‘what is decisive in the context of that comparison is whether the amendment to the repayment terms of the capital injection has satisfied an economic rationality test, so that a private investor might also be in a position to accept such an amendment, in particular by increasing the prospects of obtaining the repayment of that injection’. 395 It seems that the Courts accept at least that amending an existing State aid measure in the economic favour of (at least also) the State may escape Article 107(1) TFEU. In its subsequent final decision the Commission reaffirmed that there could not be any private investor comparable to the Member State as the initial repayment terms had already been not in line with market economy behaviour. 396 However, taking into account the Court’s judgment, the Commission assessed in addition whether the amendment agreement was at least economically more advantageous for the Member State than the initial terms.397 Since in the Commission’s view this was not the case, it decided that the amendment agreement constituted additional State aid. 398 This decision was initially challenged again by ING, which withdrew the action later on.399 163 The MEOT will probably be not applicable or will at least fail if the measure at stake is combined with other State measures, which constitute State aid, or if because of their overall assessment a market operator would never have taken them all together. This has been repeatetly confirmed by the Commission for capital increases in restructuring cases.400 However, this principle also applies to other measures than capital increases, for instance the guarantee of the public seller in a privatisation agreement, which is combined with other State aid measures in favour of the privatised undertaking. 401 Thus, in cases where several public measures are involved, it has to be carefully examined whether they can be considered seperately or have to be assessed together. Even consecutive State measures may be regarded as a single intervention, if they are so closely linked to each other, especially having regard to their chronology, their purpose and the circumstances of 394 Opinion of Advocate General Sharpston in ECJ, Case C-224/12 P – Commission v Netherlands and others, paras. 41, 42. 395 ECJ C-224/12 P, Commission v Kingdom of Netherlands, ECLI:EU:C:2014:213, para. 36. 396 Commission, State aid SA.28855 – Netherlands, ING – restructuring aid paras. 119–122. 397 Commission, State aid SA.28855 – Netherlands, ING – restructuring aid paras. 123–153. 398 Commission, State aid SA.28855 – Netherlands, ING – restructuring aid para. 154–156. 399 Order in Case T-323/12 ING v Commission, ECLI:EU:T:2012:657. 400 See for instance joined cases NN 42/2008 Belgium, NN 46/2008 – Luxemburg, NN 53/A/2008 – Netherlands. Restructuring aid to Fortis Bank and Fortis Bank Luxemburg, para. 62. 401 Case T-384/08 Elliniki and others, ECLI:EU:T:2011:650, paras. 99/104.

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the undertaking at the time of those interventions, that they are inseparable from one another.402 This will be the case, for instance, if subsequent State interventions which take place in relation to the same undertaking in a relatively short period of time, are linked with each other, or were all planned or foreseeable at the time of the first intervention. 403 On the other hand, if the subsequent measure was a result of unforeseeable events at the time of the earlier intervention, the two measures should normally be assessed separately.404 Another question that has not been finally decided is that of the extent to which 164 measures of State intervention carried out in exercise of public authority can be assessed under the MEOT. The question can have a bearing on, for example, tax schemes and special charges, tax exemptions or the fixing of tariffs and charges by means of decrees or statute. Normally the MEOT can only be sensibly applied in situations where the State engages in economic activity, but not where the Member State acts as a public body.405 The rationale is that in such a situation the behaviour of the State is not comparable with that of a private operator or investor in a market economy. It is highly controversial whether that distinction means that acts of public authority must be disregarded from the outset when applying the MEOT. Those opposing the applicability of the MEOT to acts of public authority primarily argue that as a private market operator can never have the same power; this makes a comparison meaningless406 given that the MEOT is meant to guarantee equality of treatment of public and private enterprises. Two judgments by the Court show, however, that also measures taken by the State as 165 a public authority can be assessed in light of the MEOT, if taken in connection with an economic activity of the State. The first judgment concerned contractual arrangements between low-cost carrier Ryanair on the one hand and the public Charleroi airport and the Walloon Region of Belgium responsible for fixing charges for landing on the other. The airport had given certain incentives aimed at persuading Ryanair to operate flights to and from Charleroi, including marketing contributions. The Walloon Region – which was also the main shareholder in the company managing and operating the airport – agreed to additionally grant Ryanair a reduction of landing charges and agreed to compensate Ryanair in the event of a change in airport opening hours or airport charges. The Commission took the view that the agreements were State aid. Its decision was based above all on the assumption that when reducing landing charges the Walloon Region was acting within the scope of its public authority powers and that the reductions could thus not be assessed by applying the MEOT, since that test was only applicable in relation to economic activities and never when exercising public powers. The Walloon Region was said to have circumvented the regulatory obstacles by entering into a contract which provided discounts on airport charges for the exclusive benefit of 402 See Joined Cases C-399/10 P and C-401/10 P Bouygues SA, Bouygues Te ´le´com SA v Commission [2013] ECR I-0000, para. 104; Joined Cases T-415/05, T-416/05 and T-423/05 Greece and Others v Commission [2010] ECR II-4749, para. 177 and Case T-11/95 BP Chemicals v Commission [1998] ECR II-3235, paras. 170 and 171. See also Commission, State aid SA. 35378-Germany, Financing of Berlin Brandenburg Airport, paras. 18–33, in which the Commission has taken the view that the additional financing is justified in light of the MEOT even though it serves the same purpose as the previous financing which in the previous decision NN 25/2009 was considered State aid, namely the construction of the new BER airport. 403 See Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 84. 404 Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 84, with reference to Com., State aid SA. 35378 Germany, Financing of Berlin Brandenburg Airport, recitals 14 to 33. It may be doubted whether the repeated financing of the Berlin airport project is a good example for unforeseeable events. 405 ECJ, Joined Cases C-278/92 to C-280/92 Spain v Commission [1994] ECR I-4103, para. 22; Case C334/99 Germany v Commission [2003] ECR I-1139, para. 134. 406 See for example: Jennert EuR 2000, p. 343.

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Ryanair. The Commission took the view that the fact that the Walloon Region promised a compensation shows that it acted not as an undertaking but as a public authority, using its regulatory powers to control an economic activity. The Court did not agree with the Commission’s analysis and classified the actions of the Walloon Region as economic activities.407 The fixing of the amount of landing charges and the accompanying confirmation of a compensation were held to be activities directly connected with the management of airport infrastructure, which is an economic activity. 408 Accordingly, the airport charges fixed by the Walloon Region had to be regarded as remuneration for the provision of services within Charleroi airport. The Court held that ‘the mere fact that, in the case concerned, the Walloon Region had regulatory powers in relation to fixing airport charges did not mean that a scheme reducing those charges ought not to be examined by reference to the private investor principle, since such a scheme could have been put in place by a private operator.’409 The Court concluded that the Commission erred in law when refusing to simultaneously examine the advantages granted by the Walloon Region and the airport operator in spite of the economic links binding those two entities and therefore should also have applied the MEOT to the measures adopted by the Walloon Region.410 166 According to that judgment, the MEOT is applicable even if a Member State acts as a public authority, as long as the activity concerned is by its nature economic and not exclusively an exercise of public authority powers.411 The essential point is whether the result could just as well have been achieved under private law. It is then irrelevant whether the legal system of the Member State concerned envisages that the specific task concerned should be governed by private law or by public law.412 167 In the judgments in EDF413 the Courts extended the MEOT even to situations in which the public authority concerned exercises its fiscal powers. This form of action by the State had previously been strictly considered as not suitable for the MEOT. 414 EDF, an undertaking owned by the French State, was given the task of maintaining the French electricity infrastructure at its own expense. In 1997 the Internal Market for electricity was opened up to EU-wide competition. France therefore initiated legislative changes, aimed at clarifying the assets of EDF and reorganising its balance sheet. Since monetary reserves originally created for the renewal of the electricity transmission network had not been used they were reclassified as capital injections without being subjected to corporation tax. As a result, EDF obtained tax concessions of about EUR 900 million. In a decision dated 16 December 2003415 the Commission demanded 407

GC, Case T-196/04 Ryanair v Commission [2008] ECR II-3643, para. 88. GC, Case T-128/98 Ae´roports de Paris v Commission [2000] ECR II-3929, paras. 107–109, 121 et seq. and 125. 409 GC, Case T-196/04 Ryanair v Commission [2008] ECR II-3643, para. 101. 410 See also Gisberts/Kleve EuZW 2009, p. 287; Gisberts/Streit EuZW 2009, p. 484. 411 Contrary to the opinion expressed by Oswell/Metaxas/Vahida EStAL 2009, p. 549, it is not apparent that the courts had previously clearly confirmed this principle. For details on the matter see also Lykotrufiti EStAL 2008, p. 1214. 412 Ko ¨ ster EuR 2005, p. 554 admitted that it may initially appear surprising that the MEOT does not apply for the most important economic instrument, namely the take-off and landing charges. According to Wimmer/Schirmer in Bar/Hellwege/Mo¨ssner/Winkeljohann, p. 9, regardless of the form of action chosen by the public authorities in the specific case, which will frequently depend on the requirements of the respective national law, the overall economic categorization of the situation is convincing. The legal form of the measure was, however, exactly the distinguishing criterion proposed by Jennert, EuR 2000, p. 343. 413 GC, Case T-156/04 EDF v Commission [2009] ECR II-4503, confirmed by ECJ, Case C-124/10 P Commission v EDF ECLI:EU:C:2012:318. 414 See Koenig/Ritter/Ku ¨ hling, para. 75; Bacon, para. 2.10. 415 Commission, OJ 2005 L 49/9 – EDF. 408

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recovery of that amount plus interest, since it was considered incompatible State aid. In its decision the Commission dismissed the French authority’s claim that the restructuring of EDF’s accounts in 1997 could be regarded as a capital injection of an amount equivalent to the partial tax exemption and that it was therefore an investment and not an aid measure. The Commission restated that the MEOT can only be applied in the context of the pursuit of an economic activity, not in the context of the exercise of tax regulatory powers. It stated that, while a Member State may act as a shareholder in addition to exercising its powers as a public authority, it must not mix its role as a State wielding public power with its role as a shareholder. Public and private enterprises would no longer be granted equal treatment if the State were to use the prerogatives of public power for the benefit of the enterprises in which it is a shareholder. 416 EDF successfully challenged the decision. The Court found that the Commission had erred in law by refusing to assess the disputed measures and by not applying the Private Investor Test. Contrary to the opinion of Advocate General Maza´k who agreed with the Commission’s approach,417 the ECJ upheld this judgment.418 The public participation in the capital of the beneficiary undertaking was an economic objective which could equally well have been pursued by a private investor. In order to determine whether measures taken by the State represent the exercise of State authority or whether they are the consequence of obligations that the State must assume as shareholder, the Court held that it is important not to look at the form of the measures, but at their nature, their subject-matter and the rules to which they are subject, while taking into account the objective pursued by the measures in question.419 The mere fact that the State has access to financial resources accrued through the exercise of State authority is not in itself sufficient justification for regarding the State’s actions as attributable to the exercise of State authority. If it were, application of the MEOT to the conduct of a State which is a shareholder could well be futile or, at least, of disproportionately limited value, since, as a State, it inevitably has recourse to financial resources accrued through the exercise of public power, in particular from taxation.420 If the share capital of an undertaking is owned by public authorities and the State then injects capital into that undertaking, the conduct of the State as shareholder can be assessed using the prudent Private Investor Test, regardless of the form chosen by the State for the capital injection.421 In 1997 the French State was the tax creditor of a publicly owned undertaking and at the same time its only shareholder. The Court took the view that the restructuring of EDF’s balance sheet and the capital injection it received had to be examined comprehensively. The fact that the capital injection originated in part from a write-off of a tax debt did not prevent the measure from being assessed in light of the Private Investor Test. bb) Sub-categories. (1) Capital holdings – Private Investor Test.422 Both the Courts 168 and the Commission apply the so-called Private Investor Test in cases involving capital holdings in order to assess whether the State’s participation in capital of an undertaking 416

Commission, OJ 2005 L 49/9, para. 95–97 – EDF. Opinion of Advocate General Maza´k in ECJ, Case C-124/10 P Commission v EDF ECLI:EU:C:2011:676. 418 ECJ, Case C-124/10 P Commission v EDF ECLI:EU:C:2011:676. 419 GC, Case T-156/04 EDF v Commission [2009] ECR II-4503, para. 229, confirmed by ECJ, Case C124/10 P Commission v EDF ECLI:EU:C:2012:218, para. 86. 420 GC, Case T-156/04 EDF v Commission [2009] ECR II-4503, para. 232; confirmed by ECJ, Case C124/10 P Commission v EDF ECLI:EU:C:2012:218, paras. 91–92. 421 GC, Case T-156/04 EDF v Commission [2009] ECR II-4503, para. 235, confirmed by ECJ, Case C124/10 P Commission v EDF ECLI:EU:C:2012:218, paras. 88–92. 422 The following section outlines the basic elements of the Private Investor Test. For more details see Witting on Government Capital Injections (chapter D.I.) in this commentary. 417

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constitutes State aid. The test dates back to the Commission’s position on public authorities’ holdings in company capital (‘the Commission’s Position’)423 published in 1984. According to Point 3.2 of the Commission’s Position, State aid is not given where fresh capital is provided to undertakings under the same circumstances that would have been acceptable to a private investor operating under normal market economy conditions. The Court confirmed this Private Investor Test for the first time in 1986: ‘In the case of an undertaking whose capital is almost entirely held by the public authorities, the test is, in particular, whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regionalpolicy and sectorial considerations, would have subscribed the capital in question.’424 In later rulings the Courts have clarified that although the conduct of a private investor with which the intervention of a public investor pursuing economic policy aims must be compared need not be the conduct of an ordinary investor laying out capital with a view to realising a profit in the relatively short term, it must at least be the conduct of a private holding company or a private group of undertakings pursuing a structural policy – whether general or sectoral – and guided by prospects of profitability in the longer term.425 169 According to the Commission this is the case where a new company is set up and the authorities apply the same criteria as a private provider of capital under normal market economy conditions would. It further applies where fresh capital is injected into an existing enterprise as long as the capital corresponds to new investment needs and to costs directly linked to them, provided that the industry in which the company operates does not suffer from structural overcapacity in the relevant market, and that the company is not in financial difficulty. 170 Similarly, where the public holding in a company is to be increased this does not qualify as State aid, provided the capital injected is proportionate to the number of shares held by the authorities and happens simultaneously with the injection of capital by private shareholders whereby the private investor’s holding must be of economic significance,426 so called “pari passu” Test. The “pari passu” Test is generally applicable in the context of the MEOT and may thus also apply to other subcategories such as the Private Creditor Test.427 The case law has clarified that this assumption cannot be applied analogously if only employees participate in the capital increase. Capital participation by employees is motivated by the desire to keep their jobs and therefore by considerations pertaining to the viability and survival of their company rather than by prospects of profitability.428 Particularly strict criteria have to apply when assessing a capital contribution made to an undertaking in difficulty. It is not enough for the private shareholders (particularly the minority shareholders) to make their proportionate contribution if their approach is not at least similar to that of a prudent private 423 Bulletin EC 9–1984, p. 28–29 – Government Capital Injections, Application of Articles 92 and 93 of the EEC Treaty to public authorities’ holdings. Since 1980, the so-called Transparency Directive (Directive 80/ 723, OJ 1980 L 195/35, amended by Directive 2005/81, OJ 2005 L 312/47, consolidated version in Directive 2006/111, OJ 2006 L 318/17) obligated the Member States to report in detail each year on the subsidies granted to public undertakings. In this directive separate accounting was first required for undertakings active both commercially and for the general economic interest. For more on this see Witting (chapter D.II.) in this commentary. 424 ECJ, Case 40/85 Belgium v Commission [1986] ECR 2321, para. 13. 425 ECJ, Case C-305/89 Italy v Commission (Alfa Romeo) [1991] ECR I-1603, paras. 19 et seq. Settled case-law since that time, see for example GC, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, para. 96 with further references. 426 GC, Case T-358/94 Air France v Commission [1996] ECR II-2109, paras. 148 et seq. 427 See Draft Commission notice on the nation of State aid pursuant to Article 107(1) TFEU, paras. 88–90. 428 GC, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, paras. 82, 84.

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investor, who would demand the presentation of a credible and realistic restructuring plan.429 Furthermore State aid can be given where private investments in the same undertaking occur only after the allocation of public funds,430 or only after the State has announced that it will participate in a capital increase or support the undertaking by other means.431 In addition, the decision of the private investors must be free from any motivations which result from special relations with the public authorities. 432 The Private Investor Test does not require the public investment to be profitable 171 immediately, as long as the strategic nature of the investment in terms of markets or supplies is such that the acquisition of shareholding may be regarded as the normal behaviour of a provider of capital. Investments do not constitute State aid where the recipient undertaking’s development potential, reflected in innovative capacity from investment of all kinds, is such that the operation may be regarded as an investment involving a special risk but likely to pay off ultimately.433 On the other hand, there are situations where State aid is assumed: This is for example 172 the case in a situation where the financial position of the undertaking, particularly its structure and volume of debt, do not let expect a normal return (in dividends or capital gains) from the capital invested within a reasonable time.434 Even capital injections to profitable companies can constitute aid, if the expected return is not sufficiently high. 435 ‘An informed private investor, that is an investor who wishes to maximise his profits but without running excessive risks in comparison with other participants in the market, would, when calculating the appropriate return to be expected for his investment, in principle require a minimum return equivalent to the average return for the sector concerned.’436 According to the Court, there is no discrimination against the public investor if the conduct of an informed private investor is taken as benchmark in order to assess the conduct of the public investor. A public investor is not in the same situation as a private investor. The private investor can count only on his own resources in order to finance his investments and is liable, up to the limits of those resources, for the consequences of his decisions. The public investor, on the other hand, has access to resources flowing from the exercise of public power, in particular from taxation. 437 The average return on the market concerned is, however, merely one of several analytical tools that can potentially be used when applying Article 107 TFEU. The average return approach neither automatically leads to the conclusion that State aid exists nor does it give information on the amount of State aid in question. It does not relieve the Commission of its obligation to make a complete analysis of all factors that are relevant 429 ECJ, Joined Cases C-328/99 and C-399/00 Italian Republic and SIM 2 Multimedia SpA v Commission [2003] ECR I-4035, paras. 44, 48. A case where there was both considerable private capital and a restructuring plan can be seen in Commission, OJ 2008 L 247/27 – Citynet Amsterdam; in that respect see Gaal/Papadias/Riedl, Competition Policy Newsletter 2008, p. 82. 430 GC, Case T-20/03 Kahla Porzellan v Commission [2008] ECR II-2305, para. 254; ECJ, Case C-301/ 87 France v Commission [1990] ECR I-307, para. 40. 431 Commission, OJ 2006 L 257/11, para. 227 – France Te ´le´com. 432 Mederer/Pesaresi/Van Hoof/Grespan/Santamato, para. 2.361. 433 The Commission’s Position, point 5. 434 Com. OJ 2013 L92/1 paras. 67–70 Male ´v Hungarian Airlines. 435 Commission communication to the Member States – Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector. 436 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, paras. 255; for more on this see Sto¨ ckl European Law Reporter 2003, p. 156. 437 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, paras. 271 et seq.

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174

175

176

177

178

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to the transaction at issue and its context, especially the situation of the beneficiary undertaking and of the relevant market.438 In cases concerning restructuring or turnaround plans the expected returns (in case the restructuring proves successful) must be significantly higher than the average return, due to the inherent element of risk.439 In such situations the minimum rate of return must include the risk premium which a private investor would ask for before engaging in a comparable financial commitment. It is directly proportionate to the risk inherent in the investment. The Commission has to assess the minimum rate and the expected rate of return using the most recent version of the restructuring plan available. 440 In the absence of indications to the contrary State aid is given in cases of capital participation/increase where, due to its inadequate cash flow, the recipient undertaking would not be able to assure financing on the capital market.441 In the case of short-term holdings with fixed duration and selling price State aid exists if the rate of return to the investor is considerably less than he could have expected for a similar short-term investment on the capital market. 442 State aid is also given where the public authorities are involved in renewing or continuing non-profitable operations of an undertaking in difficulty by creating a new legal entity.443 If private shareholders make a disproportionately low contribution to a capital injection to an undertaking whose capital is divided between private and public shareholders, there is a prima facie suspicion that State aid is given, especially if the absence of contribution is largely attributable to the undertaking’s poor profit outlook. 444 According to the Commission’s position, this does not to apply to SMEs which because of their size are unable to provide adequate collateral on the private capital market, but whose prospects could justify State participation that goes beyond the level of private investments in the undertakings.445 This exemption seems politically motivated, as it is not apparent why different rules of legal presumption should apply to Private Investor Tests regarding SMEs. Either private investors consider investment in SMEs to be attractive, in which case it appears unreasonable not to apply the rules regarding proportionality of the investment established for large undertakings. Or the SMEs are less attractive to private investors, in which case supporting them may well be necessary in political terms, but can still constitute State aid.446 The Commission has not pursued this approach any further and has instead addressed the SME issue by means of specific rules governing the approval of State aid.447 It should be added that a disproportionate public investment in a large undertaking does likewise not constitute State aid as long as the undertaking’s development forecast justifies the investment economically. Where the financial holding of the public authority exceeds the real value (net assets plus value of any goodwill or knowhow) of the beneficiary undertaking this also 438 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, paras. 250 et seq. 439 GC, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, paras. 113 et seq.; as well as Case T301/01 Alitalia v Commission [2008] ECR II-1753, paras. 236 et seq. 440 GC, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, paras. 165–169. see e. g. Com., OJ 2011, L 274/1, paras. 70–113 France, company tre`ves. 441 The Commission’s Position, point 3.3 (ii). 442 The Commission’s Position, point 3.3. (V). 443 The Commission’s Position, point 3.3 (IV). 444 GC, Case T-358/94 Air France v Commission [1996] ECR II-2109, paras. 148–149. 445 The Commission’s Position, point 4.5. 446 See also point 4.5 of the old Guarantee Notice, Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ 2000 C 71/14. 447 For more on this see Jestaedt in this commentary, (part III GBER).

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constitutes State aid, unless the undertaking’s prospects show that the holding will pay off ultimately.448 As in the case of disproportionate public investments, it is held not to apply to SMEs. As mentioned above this concept is questionable. The Commission will in general assume State aid to be given, if the State’s capital holding is combined with other types of aid,449 potentially even in cases of subsequent State interventions.450 That assumption does not apply where a capital injection directly succeeds the repayment of unlawfully received aid. If the business case and the prospective return rate of a public undertaking justify a capital injection then it will not matter whether the repayment of aid was the reason for the capital injection. This does not affect the rules governing the recovery of aid.451 In 1993 the Commission’s Position was supplemented by a Communication on the application of State aid law to public undertakings in the manufacturing sector (“the Communication”).452 The Commission Communication confirmed the position taken in the Commission’s position from 1984 which thus remained valid and was developed further.453 The Commission Communication supplemented the Commission Position, adding experiences gained in the meantime and including additional scenarios and rules on legal assumptions. The Commission attempted to dispel concerns that application of the Private Investor Test might lead to the Commission’s judgment replacing the public investor’s appreciation of the project. It pointed out that by the very nature of the problem the risk analysis implies a wide margin of judgment on the part of the investor. Within that wide margin the exercise of judgment by the investor cannot be regarded as involving State aid.454 The decisions the Commission took following the publication of the Communication have, however, not shown that such a wide margin of judgment was ever granted. According to the Commission Communication, the relevant moment for the Private Investor Test is the moment the investment or financing decision is made. The test does not take into account subsequent developments that were unforeseeable at that point in time.455 The conduct of the public authority investor has to be assessed by reference to the attitude which a private investor would have had at the time of the transaction in question, having regard to the available information and foreseeable developments at that time.456 The Commission recognizes the differences between minority and majority shareholdings and their significance for the investment time horizon. If there is no possibility to exercise control the investor will normally tend to be motivated by purely short-term profit considerations.457 In the case of majority holdings long-term strategic considerations may

448

The Commission’s Position, point 3.3. (VI). The Commission’s Position, point 3.4. (c). 450 See above, para. 162. 451 Commission, State aid NN 71/2005 – HSH Nordbank; Commission, State aid NN 72/2005, BayernLB; Commission, State aid NN 34/2007 – Nord/LB. For details on these decisions, see: Simon EStAL 2007, p. 499, and Friederiszick/Tro¨ge CPN 1/2006, p. 105. 452 Commission, Commission communication to the Member States – Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ 1993 C 307/3. 453 Commission Communication, para. 35. 454 Commission Communication, para. 27. 455 Commission Communication, paras. 28 and 37. 456 GC, Case T-16/96 Cityflyer Express v Commission [1998] ECR II-757, para. 76. In that respect see also Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land NordrheinWestfalen v Commission [2003] ECR II-435, para. 246. 457 Commission Communication, para. 30. 449

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Art. 107 TFEU

under certain circumstances justify a rate of return that is lower than the market rate (socalled ‘owner effect’). The burden of proof lies with the Member State. 458 183 Where a decision is made to abandon a line of activity because of its lack of medium/ long-term commercial viability, a public group is allowed to decide the timing and scale of its run-down in the light of the impact on the overall credibility and structure of the group.459 Thus the Member States have frequently referred to the duty to safeguard the public image of the public investor in order to justify capital injections to undertakings in difficulty, although so far unsuccessfully. In its 1991 ENI/Lanerossi judgment the Court ruled that it may reasonably be expected that a private shareholder will subscribe the capital ‘necessary to secure the survival of an undertaking which is experiencing temporary difficulties but is capable of becoming profitable again, possibly after reorganization. It must therefore be accepted that a parent company may also, for a limited period, bear the losses of one of its subsidiaries in order to enable the latter to close down its operations under the best possible conditions. Such decisions may be motivated not solely by the likelihood of an indirect material profit but also by other considerations, such as a desire to protect the group’s public image or to redirect its activities. However, when injections of capital by a public investor disregard any prospect of profitability, even in the long term, such provision of capital must be regarded as aid within the meaning of Article [107 TFEU] […].’460 That is especially apparent if after years of continuous losses the State makes a contribution of capital which, in economic terms, proves to be not only costlier than selling the assets, but is moreover linked to the sale of the undertaking, which removes any hope of profit, even in the longer term.461 The effectiveness of the EU rules governing State aid would be greatly reduced if one were to accept the argument to the effect that any State participation in an undertaking would permit the public authorities, by referring to the image of the public body involved and its other participations, to make unlimited financial injections from public funds without such provisions of capital being regarded as aid.462 In Corsica Ferries, dealing with the Private Vendor Test, the General Court has cast more light on the requirements to be met on the justification due to group image protection. In particular, it is normally not sufficient to refer to the protection of the brand image of a Member State as a global investor in the market economy, since otherwise the Member State could refer to practices in sectors only remotely or not at all concerned. Rather, the economic activities concerned must be precisely defined (sectorally and geographically), in order to be able – to define reference private investors, and – to demonstrate that the Member State will obtain an indirect material benefit, even in the longterm.463 184 The ECJ confirmed the ruling but stressed that under specific circumstances and with a particularly cogent reason the protection of the Member State as a global investor in

458 GC, Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, para. 270. 459 Commission Communication, para. 30. 460 ECJ, Case C-303/88 Italy v Commission [1991] ECR I-1433, paras. 20–22. For more on this see ECJ, Case 234/84 Belgium v Commission [1986] ECR 2263, paras. 14–17. 461 GC, Joined Cases T-129/95, T-2/96 and T-97/96 Maxhu ¨ tte v Commission [1999] ECR II-17, para. 124. 462 GC, Joined Cases T-129/95, T-2/96 and T-97/96 Maxhu ¨tte v Commission [1999] ECR II-17, para. 125; Opinion of Advocate General Wathelet in ECJ, Joined Cases C-533/12P and C-536/12 P SNCM and France v Corsica Ferries France ECLI:EU:C:2014:142, paras. 93–95. 463 GC, Case T-565/08 Corsica Ferries v Commission ECLI:EU:T:2012:415, paras. 81–87.

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the market economy may constitute a valid long-term economic rationale. However, mere summary references to such global image are not sufficient. 464 As far as capital increases are concerned, the Commission assumes that shareholders usually have or request the information needed to assess the commercial viability of the undertaking. A normal market economy investor would not usually provide any additional finance without the appropriate level of information.465 In particular no private investor would make capital contributions to an undertaking in difficulty without having a credible and realistic restructuring plan.466 Legal obligations requiring shareholders to contribute additional equity to the undertaking if the undertaking’s capital base has been eroded by continuous losses below a predetermined level, cannot parse justify a capital increase. If liquidating or reducing the investment is more economically rational than making additional resources available, then that is what a private investor would do. If this decision is nevertheless not taken then any subsequent investments may also be considered State aid. 467 In such cases, several investment measures can be qualified as one aid instrument, if they are linked through their chronology, the ongoing financial situation and their finality.468 However, situations are possible in which even a private shareholder who has already made two unprofitable capital injections would still choose to make a third capital injection.469 This is the case if with regard to their timing, nature and purpose, exceptionally, the latest measure can reasonably be dissociated from the earlier ones and classed, for the purposes of the Private Investor Test, as an independent investment.470 In an extreme situation it may be necessary to liquidate the undertaking, if that is less costly than injecting further capital without prospects of achieving profitability. The costs of liquidation have to be compared with the costs for maintaining business. When considering liquidation costs, one has to distinguish between the obligations which the State must assume as owner of the share capital of a company and its obligations as a public authority. In the case of limited liability companies, the public shareholder is normally only liable up to the value of its shares. It follows that the costs arising from redundancies, the payment of unemployment benefits and other social security benefits must not be taken into consideration when applying the Private Investor Test. 471 Losses arising from shareholder loans may be taken into account.472 In the case of capital injections the State aid element consists of the costs of the investment less the value of the investment appropriately discounted. According to the Communication, the analysis in this respect has to compare the profit and loss 464 Joined Cases C-533/12 P and C-536/12 P SNCM and France v Corsica Ferries, ECLI:EU:C:2014:2142, paras. 40–41. 465 Commission Communication, para. 31. 466 ECJ, Case C-305/89 Italy v Commission (Alfa Romeo) [1991] ECR I-1603, paras. 22, 23; Joined Cases C-328/99 and C-399/00 Italian Republic and SIM 2 Multimedia SpA v Commission [2003] ECR I-4035, paras. 44, 48. 467 Commission Communication, para. 36. 468 Com. OJ 2013 L92/1, para. 67; Male ´v Hungarian Airlines, Joined Cases C-399/10P and C-401/10 P Bouygues and others v Commission and others (‘France Te´le´com”) ECLI:EU:C:2013:175, paras. 103–105; GC, Case T-1/12 France v Commission ECLI:EU:T:2015:17, para. 34. 469 GC, Case T-11/95 BP Chemicals [1998] ECR II-3225, paras. 170, 171 and 180 et seq. 470 GC, Joined Cases T-415/05, T416/05 and T-423/05 Hellenic Republic and others v Commission (Olympic Airways) [2010] ECR II-4749, paras. 175–177; Com., OJ 2012 L 195/1 paras. 130–134 restructuring aid to SeaFrance SA. 471 GC, Joined Cases T-129/95, T-2/96 and T-97/96 Maxhu ¨tte v Commission [1999] ECR II-17, paras. 118–119. 472 Case T-323/99 INMA and Itainvest v Commission [2002] ECR II-545, para. 100.

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185

186

187

188

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189–192

Art. 107 TFEU

situation (results spread over several years, with the underlying trends being especially relevant), the financial indicators and the debt/equity ratio (gearing of the company) with generally accepted norms, industry-sector averages and those of close competitors, etc. Furthermore, a calculation of various liquidity and solvency ratios has to be undertaken to ascertain the financial standing of the company. If capital contributions are made to finance an investment programme the financial planning for that programme has to be studied in detail; the analysis must always consider market trends. 473 189 Besides addressing incorporations of undertakings, participations in undertakings and capital increases for existing undertakings, the Commission Communication also and for the first time addressed the issue of returns on investment capital. The waiver of a normal return by way of dividends or capital appreciation is described as State aid, since the State thereby foregoes the benefit which a market economy investor would expect from a similar investment. The approach adopted by the Commission is far reaching. It is not limited to obvious cases of undertakings in mixed public/private ownership where only the public sector shareholder waives the right to receive the accrued dividend. However, the Commission’s idea that it can ask the Member State to present detailed planning aimed at increasing overall profitability or even induce liquidation if it considers the rate of return rate inadequate, 474 seems politically unacceptable and completely at odds with the principle of the supposed wide economic discretion of the (public) investor. 190 The Commission’s 1984 Position only addressed the question of which sorts of capital injections do constitute State aid. It did not explicitly address the question of the circumstances under which this State aid might be compatible with the Internal Market. At that time the Commission was in fact still of the opinion that capital injections could never be approved because of their intrinsic distortion of competition. This opinion was first rejected by the Court in Intermills.475 The 1993 Communication then widened its scope in compliance with this judgment. (2) Loans – Private Lender Test. Low-interest public loans can also constitute aid.476 When granting loans the State must pursue strictly commercial principles and cannot rely on sectoral policy needs.477 The Private Lender Test has to determine whether the undertaking would have been able to obtain the sums in question on the private capital markets on the same terms.478 One commercial principle to be observed is whether the information in the possession of the public lender was such that a private lender would have relied on it and would have come to the same lending decision.479 In its 1993 Communication the Commission described for the first time how it proposed to assess public loans.480 192 The aid element involved is defined as being the difference between the interest rate the undertaking would have had to pay on the market (which in turn will depend on its financial situation and the securities to be provided) and the interest which was actually paid.481 To establish to what conditions the loan would have been obtained on the market, if can be assessed in the light of the terms and conditions under which 191

473

Commission Communication, para. 31. Commission Communication, para. 43. 475 ECJ, Case 323/82 Intermills [1984] ECR 3809, paras. 31–32. 476 See already ECJ, Case C-301/87 France v Commission (Boussac) [1990] ECR I-307. 477 ECJ, Case C-278/00 Greece v Commission [2004] ECR I-3997, paras. 44–48. 478 ECJ, Case 40/85 Belgium v Commission (Boch) [1986] ECR 2321, para. 13. 479 Com. OJ 2013 L 12/38, paras. 81–93, 97 aid to Christ Shipyard, Poland. 480 Commission Communication, para. 41. 481 Confirmed by GC, Case T-16/96 Cityflyer v Commission [1998] ECR II-757, para. 53. 474

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comparable transactions carried out by comparable private operators have taken place in comparable situations (benchmarking).482 The Commission does not always clearly distinguish between loans granted by the State 193 or a public entity as a third party and public shareholder loans, arguing that the test is whether a private investor would reasonably undertake this additional investment, irrespective of its existing involvement in the company.483 In other decisions, the Commission concedes that a shareholder loan should be compared with investments by a private holding company or a private group of companies pursuing a structural policy and being guided by long-term prospects.484 The State’s prior involvement in the company and thus the characterisation of a loan as a shareholder loan can also be important in the assessment of whether the State acts as a prudent private creditor by rescheduling debts. 485 In the case of an unsecured loan to an undertaking which would not be able to raise 194 funds under normal circumstances (for example because of high default risks) the amount of aid may be as high as the whole amount of the loan.486 Even the conversion of credit securities of a loan will constitute aid, if a private creditor would not have consented to such conversion because of its inherent risk.487 For loans, the Commission has provided the Member States with reference rates, 195 which should act as a proxy for the market price in situtations where identifying comparable market transactions is not straight forward, which the Commission believes to be more likely in cases involving small amounts or SMEs.488 Currently the market conformity of public loans can be determined using the Communication from the Commission on the revision of the method for setting the reference and discount rates (Reference Rate Communication).489 The reference and discount rates are used to simulate the market interest rate and can be used to calculate the grant equivalent of State aid measures. The Commission set out a new method for doing that in 2008. That method takes account of the debtor’s creditworthiness and securities when calculating the grant equivalent. The approach adopted by the Commission is to first take the 1year IBOR as a calculation basis, and to then add one of the margins specified in the Notice, depending on the rating of the undertaking concerned and the collateral offered. In the absence of a rating the creditworthiness of the undertaking can also be proven by means of other indicators. Recent examples where the Commission approved loans according to the Private Lender Test using the methods pursuant to the Reference Rate Communication are a loan to Czech Airlines490 and loans to Polish shipyards.491 (3) Guarantees – Private Guarantor Test.492 The Commission first expressed its 196 opinions on State guarantees and State aid law in two letters to the Member States in 1989. In the first letter it pointed out that it regarded all guarantees given by a State as 482 See Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 101. 483 See Com., OJ 2013 L284/27, paras. 43–50 Poland, Nauta S.A. 484 Com., OJ 2010 L298/51, para. 213 Poland, PZL Hydral S.A. 485 See below Private Creditor Test, paras. 204 et seq. 486 As regards guarantees, see: Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, OJ 2008 C 155/10 point 4.1.a. 487 See for example Commission, OJ 2003 L 140/30, para. 102 – TGI. 488 Draft Commission Notice on the Notion of State aid pursuant to Article 107(1) TFEU, para. 116. 489 Commission, OJ 2008 C 14/6. 490 Com., OJ 2012, L 289/56, paras. 65–72 Czech airlines a.s. 491 Com., OJ 2013 L 12/38, paras 77–80 aid to Christ Shipyard, Poland; Com., OJ 2013 L284/27, paras. 51– 64 Poland, Nauta S.A. 492 The following review presents only an overview of the treatment of State guarantees. For a more detailed examination and comments see Nu´~ nez-Mu¨ller in this commentary, (chapter D.IV).

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Art. 107 TFEU

falling within the scope of Article 107(1) TFEU, so that all of them had to be notified in advance.493 Had this letter been applied consistently it would probably have led to shambles in the Member States and to a noticeable increase in the workload of DG IV (now DG Competition). The second letter followed relatively soon. The Commission announced that it would be reviewing the rules for State guarantees in order to achieve that all guarantees complying with certain conditions would not have to be notified. 494 This new approach was published (in a somewhat incomplete form) in the 1993 communication relating to public undertakings mentioned above.495 In that communication the Commission emphasized that a State guarantee may constitute State aid even if the guarantee is never called, i. e. if no payments are made under the terms of the guarantee. The State aid is granted at the time when the guarantee is granted and not only once the guarantee is called.496 In the same way, the cancellation of a guarantee has a binding character from a State aid point of view. If parts of a lawfully granted guarantee are cancelled by the holder of the guarantee and if the holder of the guarantee then wishes to re-install them, this re-instalment should be considered as a new agreement between guarantor and guarantee holder, based on a distinct and new economic assessment of the risk factors that may have changed over time, and thus has to be assessed as new State aid.497 197 According to this early communication, the State aid element is the difference between the interest rate which the borrower would have to pay on the market and the interest rate actually paid under the terms of the guarantee less the guarantee premium. The communication still stated expressly that even if the undertaking has to repay the aid equivalent of the guarantee and therefore becomes insolvent, the public guarantor still has to satisfy the claims of the creditors. That is in line with the rationale of State aid law, since the creditor is normally not the beneficiary of the guarantee. It passes the value of the aid on to the debtor undertaking by applying a lower interest rate. Typically, with the benefit of the State guarantee, the borrower can obtain lower interest rates and/or needs to offer fewer securities. In certain cases, the borrower would not, without a State guarantee, find a financial institution prepared to grant a loan on any terms.498 The Commission later attempted to include the creditor banks into its State aid control policy by not ruling out the possibility of recovery of the guarantee erga omnes, i. e. with effect vis-a`-vis the creditor. It has since given up on these plans and in its most recent notice stated that only under certain circumstances will the lender, too, benefit from the aid. This is the case in particular if a State guarantee is given ex post in respect of a loan or other financial obligation already entered into without the terms of the loan or financial obligation being adjusted accordingly. 499

493

Commission letter to Member States SG (89) D/4328 of 5 April 1989. Commission letter to Member States SG (89) D/12772 of 12 October 1989. 495 Commission communication to the Member States – Application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector, OJ 1993 C 307/3, para. 34. 496 Point 2.1 of the current guarantee notice, Commission, Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (‘Guarantee Notice’), OJ 2008 C 155/10. 497 Commission invitation to submit comments, State aid SA.29338 Germany, Increase of the secondloss guarantee for HSH Nordbank AG, OJ 2013 C 315/81, para. 41. 498 Explicitly stated in point 2.2 of the Guarantee Notice. 499 Guarantee Notice, point 2.3.1. Point 2.3.2 does, however, include a reference to the possibility of civil law consequences arising from the breach of the standstill clause in Article 108(3) TFEU. For more on this subject see Werner, in this commentary Part VIII. Confirmed by C-275/10 Residex, ECLI:EU:C:2011:354, para. 42. 494

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In the Guarantee Notice the Commission enumerates the conditions which it considers necessary to assume that a given guarantee measure is in line with market conditions meaning that it could just as well have been made available by a private guarantor: 500 – The borrower is not in financial difficulty. – The extent of the guarantee can be properly measured when it is granted. This means that the guarantee must be linked to a specific financial transaction, for a fixed maximum amount and limited in time. – The guarantee does not cover more than 80 % of the outstanding loan or other financial obligation. – In order to prevent bypassing of State aid rules, the following two aspects must be considered: – When the size of the loan or of the financial obligation decreases over time, for instance because the loan starts to be reimbursed, the guaranteed amount has to decrease proportionally, in such a way that at each moment in time the guarantee does not cover more than 80 % of the outstanding loan or financial obligation. – Losses have to be sustained proportionally and in the same way by the lender and the guarantor. In the same manner, net recoveries (i. e. revenues excluding costs for claim handling) generated from the recuperation of the debt from the securities given by the borrower have to reduce proportionally the losses borne by the lender and the guarantor. Guarantees, where losses are first attributed to the guarantor and only then to the lender, will be regarded as possibly involving State aid. – A market-oriented premium is paid for the guarantee. The Guarantee Notice also first introduced safe-harbour premiums for SMEs, which enable guarantees to be granted more simply and with a greater degree of legal certainty and thus facilitate SMEs’ access to finance. This is a politically motivated feature which deviates somewhat from the private guarantor principle. The safe-harbour can be used to calculate the level of market rate guarantee premiums so that no State aid is involved, provided that the other requirements of the Guarantee Notice are observed. According to the MEOT, it is sufficient to rule out that the undertaking was granted an advantage by demonstrating that a usual market premium was paid. However, the calculation of the usual market premium is by its nature subject to uncertainties. In that respect the 80 % rule and its implementation can be seen as an economic litmus test. The lender has a greater incentive to properly assess, secure and minimise the risk arising from the lending operation, if the financial obligation is not wholly covered by a State guarantee. In particular, the borrower’s creditworthiness will be thoroughly assessed. In the case of a 100 % State guarantee, lenders would have a greater incentive to grant loans with a higher commercial risk. The 80 % rule provides a procedural safeguard for the presumption that a guarantee does not constitute State aid. The 80 % rule is, however, not absolutely mandatory. Even 100 % State guarantees can be in line with market conditions, even though they should be notified to the Commission for the sake of legal certainty.501 The question remains whether, when assessing the State aid quality of guarantees there is a need to distinguish between those guarantees granted for the benefit of private undertakings and those granted for the benefit of undertakings in which the State holds a stake. Under certain circumstances a market economy operator would attach particular importance to a situation in which his own enterprise is affected. A State 500

Guarantee Notice, point. 3.2. See for example Commission, State aid NN 25/2009 (ex N 167/2009) – Germany: Financing of the development of Berlin Brandenburg International Airport, where the Commission did not follow the non-aid-argument, but approved the aid on the basis of Article 107 (3) (c) TFEU. 501

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199

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202

Art. 107 TFEU

guarantee for the benefit of a State owned undertaking can be better compared with a letter of comfort than with an ordinary bank guarantee. The Commission treats binding letters of comfort502 in the same way as State guarantees for the benefit of a public sector undertaking and assesses them in terms of the Private Guarantor Test regardless of their specific form. Another example for the various forms of guarantees is a shareholder loan offer, which remains valid for a certain term without having to be accepted by the company concerned. The Commission held that the mere existence of such a loan offer conferred an advantage, as the market considers the recipient’s financial situation to be more secure.503 The ECJ has confirmed this assessment.504 202 As yet there is no established, reliable practice regarding non-binding letters of comfort505, partly due to the variety of forms such letters can take.506 In its France Te´le´com decision the Commission held that an (allegedly) non-binding statement of political support507 had a definite quality of State aid. Since the argument had never been used before it decided in the end that it would not seek recovery of the State aid. 508 It assumed that statements made by the French Minister for Economic Affairs and Finance had given an advantage to the company since it was because of these statements that France Te´le´com regained access to the market for private sector funding. Had France failed to support the company despite the previous political statements, this would have led to a significant loss of credibility with corresponding consequences both for its reputation as a major economic operator and as an actor on the international markets. These accumulated factors could be deemed to actually endanger State resources (either by incurring the State’s responsibility vis-a`-vis investors, or by increasing the cost of the State’s future transactions). Thus the Commission also 502 A binding letter of comfort is a declaration which is fully recognizable as security and which thus also has to be recognized in the balance sheet of the issuer. Its central feature is usually an undertaking to provide a borrower with sufficient financial support and with assistance by exercising whatever influence the issuer has with the borrower to ensure that loans can be repaid in good time. Such an undertaking is a sufficiently binding expression of the fact that the liquidity and creditworthiness of the subsidiary have to be safeguarded at least to the extent needed to ensure that the subsidiary can satisfy the bank’s claims thus secured when they become due. 503 Com. OJ 2006 L 257/11, paras 194–196 France Te ´le´com. 504 ECJ, Joined Cases C-399/10P and C-401/10 P Bouygues and others v Commission and others (‘France Te´le´com”) ECLI:EU:C:2015:175, paras. 127–139. 505 A non-binding letter of comfort has no value as security in the strict sense of the term. In some cases they are not worth the paper they are written on. For example, if the parent company does no more than declare that it has complete confidence in the commercial and professional skills of its subsidiary’s management, a bank will hardly take that as a basis on which to grant or extend a loan. When making an internal assessment of such declarations banks normally end up treating the loans in the same way as unsecured open credits. Where a loan is made solely against the background of the shareholding structure all that remains is an expectation (or a hope) that a corresponding readiness to provide support will be forthcoming in the event of the borrowing subsidiary finding itself in economic difficulties. 506 See Guarantee Notice, point 1.2, fifth indent. 507 An interview with the French Minister for Economic Affairs and Finance in Les E ´ chos No 18695, France, Friday 12 July 2002, p. 2, in which the Minister repeatedly stated that if France Te´le´com were to find itself in financial difficulties the State would take the measures needed to overcome those difficulties: ‘[…] if France Télécom had any financing problems, which is not the case today, the State would take whatever decisions were necessary to overcome them. You are reviving the rumour of a capital increase […] No, certainly not! I am simply saying that we shall take appropriate measures when the time comes. If it is necessary.’ The content of that interview was confirmed in various subsequent statements, which as time progressed became increasingly specific and eventually led to a statement setting out the way in which the promised solution to France Télécom’s financing problems was to be implemented. According to the Commission that amounted to a self-imposed obligation by the State to do what was needed to solve the undertaking’s structural financing problems, which in turn led to the stabilization of the company (and in particular its rating) which had come under considerable pressure. 508 Commission, OJ 2006 L 257/11 – France Te ´le´com.

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considered that the economic adavantage was based on a transfer of State ressources. 509 The General Court confirmed that the statements benefited the company without expressing a conclusive opinion about the question of whether the measure was economically justified, since it decided that there had been no transfer of State resources, so that it did not have to apply the Private Guarantor Test. The advantage was considered to be the facilitating of access to the market for financing, which would have been more difficult without the State’s statement. 510 It was however held that that advantage could not be traced back to a transfer of State resources. It was thus not covered by the concept of State aid. The ministerial statements had not been clear, precise and unconditional enough to give rise to a legal obligation of the French State under national law. They were held to have been quite intentionally left open, imprecise and conditional, so as to avoid any legal consequences. 511 Since this was clear on the markets, it was also unlikely that a failure to provide support in the event of crisis would have led the French State to suffer reputational damage or losses when seeking refinancing. Furthermore, the Commission had failed to sufficiently prove the possibility of potential damage.512 The General Court therefore confirmed that non-binding statements, made orally or in form of letters of comfort, do normally not constitute State aid. The Court could equally well have reached the same conclusion by applying the Private Guarantor Test. There it would have had to decide whether a private shareholder would have made a similar declaration free of charge, if that would have allowed him to conciliate the financial markets without having to assume any legal obligations. It is however questionable whether a declaration by a private investor could ever have a similar effect. That is presumably why the General Court initially chose to approach the case from the aspect of the (lacking) transfer of State resources. Unlike the General Court, the ECJ on appeal did not examine the character of the announcements made by the French minister, since it took the view that the characterisation of these announcements as State aid was not part of the examination undertaken by the Commission at all. The subject matter of the decision was limited to the investigation of a shareholder loan offer later granted by France. The Commission examined those declarations only insofar as they formed the basis for that measure. 513 The shareholder loan offer was considered legally binding vis-a`-vis France Te´le´com. Thus, the ECJ did not have to decide whether legally non-binding statements of national authorities can constitute State aid within the meaning of Article 107(1) TFEU. However, the ECJ referred the case back to the General Court for the latter to give a ruling on the arguments of the French State and of France Te´le´com that the General Court had not dealt with in its first judgment, in particular as to the question of the MEOT. And indeed, in its further judgment of 2 July 2015, the General Court ruled that the Commission was wrong to classify the offer of the shareholder loan as State aid and therefore annulled again the Commission’s decision, this time based on the fact that the Commission had not applied the MEOT to the shareholder loan offered in December 2002, but to the public statements made in July 2002, and thus with respect to the

Commission, OJ 2006 L 257/11, paras. 218–219 – France Te´le´com. GC, Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04 France and others v Commission (France Te´le´com) [2010] ECR II-2099, paras. 234–242. 511 GC, Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04 France and others v Commission (France Te´le´com) [2010] ECR II-2099 paras. 269–283. 512 GC, Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04 France and others v Commission (France Te´le´com) [2010] ECR II-2099, para. 288. 513 ECJ, Joined Cases C-399/10P and C-401/10 P Bouygues and others v Commission and others (‘France Te´le´com”) ECLI:EU:C:2013:175, paras 72–78. 509 510

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wrong measure and in light of the wrong time.514 Again, the Commission has appealed the judgment.515 203 The provisions of the Guarantee Notice published in 2000 indicated that the acceptance by the State of unlimited liability with regard to a holding in a company instead of the usual limited liability of shareholders has to be considered as being a guarantee for all the amounts which are covered by the unlimited liability, given that under normal circumstances no private shareholder would be willing to be bound by such a far-reaching letter of comfort. According to the current Notice, the same applies with regard to the more favourable funding terms obtained by companies whose legal form rules out bankruptcy or other insolvency procedures or provides an explicit State guarantee or coverage of losses by the State. 516 Accordingly, the Commission has demanded the withdrawal of such guarantees relating to a series of public undertakings, including German Landesbanken517 and the French energy company EDF.518 In a case involving an Italian undertaking in difficulty, the Commission regarded the transfer from joint control to the sole control of the public shareholder as being State aid, since under national law a shareholder acquiring sole control also assumed unlimited liability, a step a private shareholder would not have taken in the situation at hand. 519 204 Guarantees in the form of export credit commitments are subject to special rules. 520 The Commission differentiates between marketable export-related risks, which exporters must bear themselves, and non-marketable risks, such as those of exporting to certain high-risk countries, which the State is permitted to shoulder under certain conditions.521 205

(4) The State as creditor – Private Creditor Test. One sub-category of the MEOT, for which no specific Commission communication has been issued so far, is the Private Creditor Test. The need to take into account the special situation of creditors seeking to recover debts, thereby exempting payment deferrals or even partial waivers of debts by public bodies from the definition of State aid, was first acknowledged in the 1999 Tubacex judgment, in which the Court held, that ‘a public creditor […] like a private creditor, seeks to recover sums due to it and […] to that end, concludes agreements with the debtor, under which the accumulated debts are to be rescheduled or paid by instalments in order to facilitate their repayment.’ 522 The question which has to be asked is whether the payment has been facilitated in a manifestly more generous way than it would have been done by a private creditor.523 To that end, the public creditor must be compared with a hypothetical private creditor which is in the same or similar position vis-à-vis its debtor and which is seeking to recover the sums owed to it. 524 514 GC, T-425/04 RENV and T-444/04 RENV, France and Orange (formerly France Te ´le´com) v Commission, judgment of 2 July 2015, ECLI:EU:T:2015:450, paras. 202–263. 515 Pending under Case C-486/15 P. 516 Guarantee Notice, point 1.2, fourth bullet point. Confirmed with respect to the French La Poste by GC Case T-154/10 France v Commission, ECLI:EU:T:2012:452, paras. 82–88 and 91–94. 517 For more on this see Quardt EuZW 2002, p. 424, as well as Simon EStAL 2007, p. 499. 518 Commission, OJ 2005 L 49/9 -EDF. 519 Commission, OJ 1992 L 183/30, point IV – Industrie Ottiche Riunite – IOR. 520 Commission, OJ 2011 C 392/1 – Communication from the Commission to the Member States on the application of Articles 107 and 108 of the TFEU to short-term export-credit insurance. 521 For more on this see Nu ´~ nez-Mu¨ller in this commentary (chapter D.VI). 522 ECJ, Case C-342/96 Spain v Commission (Tubacex) [1999] ECR I-2459, para. 46. Confirmed by Case C-525/04 P Spain v Commission [2007] ECR I-9947. 523 See also Solte ´sz/Makowski EuZW 2003, p. 73; ECJ Case C-73/11 P Frucona Kosˇice v Commission ECLI:EU:C:2013:32, para. 73. 524 ECJ, Case C-256/97 De ´me´nagements-Manutention Transport (DMT) [1999] ECR, I-3913, paras. 24 et seq.

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II

The Private Creditor Test applies not only with regard to the State’s claims under 206 private law but also to its claims under public law, e. g. those relating to payment of social security contributions.525 Before determining the appropriate interest rate applicable to a debts deferral the 207 question which needs to be answered is whether rescheduling is to be allowed at all under the Private Creditor Test. Generally where a debtor is experiencing economic difficulties, a private creditor is not inclined to allow the debtor to defer payment, but relies directly on its rights, if necessary by realising the securities which it holds. 526 The Commission has to carefully ascertain, in each individual case and by reference to the facts of the case, whether the decision of the public creditor to agree to reschedule the debts of an undertaking in difficulties and also the conditions of that rescheduling are consistent with the Private Creditor Test.527 The reasoning must also show why the specific case is exceptional, thus justifying an interest in rescheduling. 528 Particular account must be taken of the size of the debt, all the legal remedies available to the public creditor, the chances that the debtor’s situation will recover if he is allowed to continue to operate and of the risks to the creditor of seeing his losses increase. 529 By assessing whether a rescheduling of debts is in line with the Private Creditor Test the Commission also takes into account the nature of a loan as a shareholder loan. In this case, the State’s interest as a creditor in maximising the return from its loan must not undermine the State’s interest as a shareholder in maximising the return from the capital investment. A forced redemption instead of debt rescheduling could undermine the viability of the company’s overall strategy and thus lead to a decrease in the value of the whole company.530 In that regard, all information liable to have a significant influence on the decision- 208 making process of a prudent and diligent private creditor must be regarded as being relevant.531 The duration of a bankruptcy procedure which postpones the recovery of the sums due and might thus affect, in the case of lengthy procedures, their value, is such a relevant factor.532 On the other hand, in the case of an undertaking in financial difficulty the fact that the public creditors do not apply for a declaration of insolvency in respect of the undertaking but simply pursue the legal procedures for the recovery of public debts may as well represent an advantage, since all insolvency proceedings, whether they result in the recovery of the company declared insolvent or in its liquidation, have – at the very least – the objective of discharging the liabilities of that company. In that context, the freedom of the company declared insolvent to manage both its assets and its business is limited. Accordingly, by failing to apply for a declaration of insolvency, the authorities allow that company to have a period of time in which it could make use of its assets freely and continue to trade, thus conferring on it an advantage liable to constitute State aid.533 A hypothetical private creditor is faced with a choice between, on the one hand, the foreseeable proceeds from the legal procedure for the recovery of debts and, on the other hand, the amount it expects to 525

ECJ, Case C-342/96 Spain v Commission [1999] ECR I-2459, para. 49. GC, Case T-36/99 Lenzing v Commission [2004] ECR II-3597, para. 98. 527 GC, Case T-36/99 Lenzing v Commission [2004] ECR II-3597, para. 152. 528 GC, Case T-36/99 Lenzing v Commission [2004] ECR II-3597, para. 153. 529 GC, Case T-68/03 Olympiaki Aeroporia Ypiresies v Commission [2007] ECR II-2911, para. 283, referring inter alia to Case T-46/97 SIC v Commission [2000] ECR II-2125, para. 95. 530 Com. OJ 2013 L284/27, para 70 Poland, Nauta S.A. 531 ECJ, Case C-73/11 P Frucona Kos ˇice v Commission ECLI:EU:C:2013:32, para. 78. 532 ECJ, Case C-73/11 P Frucona Kos ˇice v Commission ECLI:EU:C:2013:32, para. 81. 533 GC, Case T-1/08 Buczek Automotive v Commission [2011] ECR II-2107, paras. 68–69, 77; confirmed by ECJ, Case C-405/11 P Commission v Buczek Automotive ECLI:EU:C:2013:186, paras. 51–61. 526

Arhold

131

II

209

210

211

212

213

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Art. 107 TFEU

be able to recover following insolvency proceedings initiated in respect of the company. Since there is no obligation on national authorities seeking to recover public debts to make use of all the methods of recovery at their disposal, the only obligation to which they are subject, in order for their intervention to fall outside the classification as State aid, is to behave in the way a private creditor would have behaved under normal market conditions. Where there are several methods of recovery, it is necessary to compare the respective merits of the different methods in order to determine which method a private creditor would have chosen.534 Since appraising the conduct of a prudent private creditor in a market economy requires an assessment of complex economic circumstances which is naturally subject to considerable uncertainty, it is sufficient for the Commission to establish that, in view of the specific circumstances of the individual case, a certain course of conduct on the part of the private creditor (for example insistence on a bankruptcy procedure) would have been more likely than other alternatives (such as the write-off of some of the outstanding claims under an arrangement outside bankruptcy procedures). 535 The interest normally applicable to rescheduled debt is intended to make good the loss suffered by the creditor because of the debtor’s delay in performing its obligation to pay off its debt; it is default interest. The public creditor is therefore not obliged to apply a market interest rate to any payment deferrals it may grant to its debtors. If the rate of default interest applied to the debts of a public creditor is lower than the rate charged for the debts owed by the same debtor to its private creditors, it is the latter rate which ought to be charged.536 There can also be situations of de facto debt rescheduling, where a public body with responsibility for collecting social security contributions tolerates late payment of those contributions thus allowing to a company to accumulate significant amounts of debt. This has to be assessed by the same kind of analysis as in the case of a formal rescheduling or deferral agreement.537 In the case of a waiver of debt the examination required is more rigorous than in referral cases: First, it must be possible to render the undertaking economically viable and to improve its financial position. Second, everything possible must be tried in order to prevent accumulating further credit and new debts. Third, the State must be able to demand the recovery of the remaining debts owed to it within a reasonable period. 538 Public banks taking part in the final restructuring of a debtor undertaking by waiving part of its debts must be able to show that their losses would have been significantly greater in the absence of the financial restructuring. 539 When a firm faced with a substantial deterioration of its financial situation proposes an agreement or series of agreements for debt arrangement to its creditors in order to remedy the situation and to avoid liquidation, each creditor must make a decision regarding the amount offered to it under the proposed agreement, on the one hand, and 534 GC, Case T-1/08 Buczek Automotive v Commission [2011] ECR II-2107, paras. 70, 82–85, 87, 89; confirmed by ECJ, Case C-405/11 P Commission v Buczek Automotive ECLI:EU:C:2013:186, paras. 51–61. 535 Opinion of Advocate General Kokott in ECJ, Case C-73/11 P Frucona Kos ˇice v Commission ECLI:EU:C:2012:535, paras. 57–63. 536 ECJ, Case C-342/96 Spain v Commission (Tubacex) [1999] ECR I-2459, para. 48. 537 Com., OJ 2013 L167/41, paras. 76–77, 89–97 Polish PZL De ˛bica S.A. 538 Opinion of Advocate General Poiares Maduro in Case C-276/02 Spain v Commission [2004] ECR I8091, paras. 36–40. The Court did not have to address these proposals by the Advocate General, as the Commission’s decision had to be set aside due to a faulty determination of the facts, Case C-276/02 Spain v Commission [2004] ECR I-8091, paras. 36–37. 539 GC, Case T-123/97 Salomon v Commission [1999] ECR I-2925, para. 68. See also Commission, Report on Competition Policy 2000, para. 313.

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II

the amount it expects to be able to recover following possible liquidation of the firm, on the other. Its choice is influenced by a number of factors, including the creditor’s status as the holder of a secured, preferential or ordinary claim, the nature and extent of any security it may hold, its assessment of the chances of the firm being restored to viability, as well as the amount it would receive in the event of liquidation. If it turned out, for example, that in the event the firm was liquidated, the realisation value of its assets was only sufficient to cover mortgage and preferential claims, ordinary claims would have no value. In such a scenario, acceptance by an ordinary creditor of the cancellation of a major part of its claim would not really be a sacrifice. 540 With regard to those factors, the Commission has to determine whether the debt relief 214 granted was manifestly more generous than that which would have been granted by a hypothetical private creditor. There is no economic advantage when a public creditor facing debt conversions acts in the same way as its fellow creditors from the private sector, if the total amount of private debts converted is higher than the amount of public debts.541 But even if the total amount of debts to public bodies is higher than the private debts of the undertaking concerned this does not automatically mean that the Private Creditor Test cannot be passed. Otherwise this factor would amount to an unjustified restriction on the possibilities of debt arrangement for an undertaking in difficulty. 542 Although an apparent lack of proportion between the respective debt remissions by public and private creditors may be indicative of the existence of State aid, this factor does not in itself free the Commission from its obligation to examine, having regard to the circumstances of the case, whether the remissions granted by the public creditors go beyond what is justified by commercial constraints and thus can only be explained by an intention to confer an advantage on the firm in question.543 A debt-to-equity-swap is in line with the Private Creditor test, if it is the best 215 mechanism for maximising recovery of the public debt. This is true, on the one hand, if the available information gives reasons to believe in the fundamental viability of the debtor’s business, so that continuation of the debtor’s activity and further investments are favourable to its liquidation.544 On the other hand, debt conversion to be followed shortly by full sale of the resulting public stake is in line with the Private Creditor Test only if the public shares’ market value is above what can be expected to be obtained in a liquidation procedure.545 If the public creditor reasonably decides to carry out a debt-to-equity-swap, it may be reasonable economic behaviour not to envisage charging interest and penalties on the outstanding debt, as that debt is to be converted into equity in any event. 546 Economic advantage within the meaning of Article 107(1) TFEU is given where a State creditor waives a debt from a due claim in exchange for shares in the capital of a company which were worthless at the time of transfer.547 It should also be noted that debt reductions and debt relief mechanisms provided 216 automatically by law in the context of general insolvency proceedings normally 540 GC, Case T-152/99 Hijos de Andre ´s Molina, SA (HAMSA) v Commission [2002] para. 168. 541 GC, Case T-152/99 Hijos de Andre ´s Molina, SA (HAMSA) v Commission [2002] para. 166. 542 GC, Case T-152/99 Hijos de Andre ´s Molina, SA (HAMSA) v Commission [2002] para. 167. 543 GC, Case T-152/99 Hijos de Andre ´s Molina, SA (HAMSA) v Commission [2002] para. 171. 544 Com., OJ 2013 L148/33, paras 100–101 Romania Oltchim SA. 545 Com., OJ 2013 L148/33, paras 112–156 Romania Oltchim SA. 546 Com., OJ 2013 L148/33, paras. 99–103 Romania Oltchim SA. 547 GC, Case T-217/02 Ter Lembeek v Commission [2006] ECR II-4483, paras. 169–170.

Arhold

ECR II-3049, ECR II-3049, ECR II-3049, ECR II-3049,

133

II

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Art. 107 TFEU

remain outside the scope of Article 107 TFEU,548 because the measure does not fulfil the element of selectivity.549 If the debt rescheduling depends on the vote of the creditors concerned, either individually or in the scope of a creditors’ committee, the Private Creditor Test applies with respect to the voting of the public creditors. Again, each creditor has to vote in light of its own situation taking into account the aspects described above. If the committeee had decided in a certain way regardless of the voting of the public creditors (for instance because the vast majority of private creditors voted in the same way and the public creditors had no veto right) State aid can be excluded as the measure cannot be imputed to the State, independent of whether the outcome was in the economic interest of the public creditors. 550 As a matter of course, if the insolvent company receives further public financial support independently from the rules of in the insolvency proceedings, this further support may constitute State aid. 551 217 The Private Creditor Test does not apply to claims for recovery of State aid that was unlawfully granted. In such situations Article 14 of the State aid Procedural Regulation obliges the Member State to do all in its power to recover the aid immediately and efficiently in accordance with the provisions of the respective national law. 552 The MEOT does not play a role. The Private Creditor Test may, however, justify a debt restructuring by private and public creditors even after rescue aid has been granted. A possible result may be that the undertaking can repay the rescue aid and will therefore no longer be subject to the strict conditions governing restructuring aid. 553 (5) Public procurement – the Private Purchaser Test. When a public body purchases goods or services on the market it is obliged to observe the requirements of the MEOT. Where goods or services are procured at a price above the market rate there is an economic advantage within the meaning of Article 107(1) TFEU.554 Conducting an open, transparent and non-discriminatory tendering procedure may, as in other cases,555 be best suited for ensuring that a purchase is made at a market price. From a State aid law perspective this is not absolutely necessary, provided there are other safeguards to ensure that the transaction takes place according to normal market conditions and that the public purchaser receives the economically most advantageous service.556 219 According to the case law, purchasing the major part of the capacity of a transport undertaking for a period of several years in excess of the actual need of the purchasing public authority can, however, constitute an advantage, even if the price was at market rate.557 The judgment in the case concerned was not so much based on the fact that long-term business relations usually reduce the economic risks to be borne by the 218

548 See ECJ, Case C-480/98 Spain v Commission (‘Magefesa”) [2000] ECR I-8717, para. 18 with further references. 549 See Arhold in this chapter, para. 390. 550 Com., OJ 2015 L 219/71, para. 104 – NCHZ. 551 See ECJ, Case C-480/98 Spain v Commission (‘Magefesa”) [2000] ECR I-8717, paras. 17–21. 552 Cf. for example ECJ, Cases C-232/05 Commission v France [2006] ECR I-10 071, paras. 49–50; C419/06 Commission v Greece (Olympic II) [2008] ECR I-27, para. 59; Sa´nchez-Rydelski/Solte´sz p. 129, 143. 553 Commission, OJ 2008, L 44/36, paras. 13–14 – Huta Cynku Miasteczko S ´ la˛skie SA. 554 ECJ, Cases C-21/88 DuPont de Nemours Italiana [1990] ECR I-889, para. 20; C-351/88 Laboratori Bruneau [1991] ECR-3641, para. 7. 555 That applies for example to the Private Vendor Test in the case of real estate sales as well as of privatisations (for details see Arhold in this commentary, (chapter V.C.) or with regard to SGEI, see point c) below. 556 GC, Case T-158/99 Thermenhotel Stoiser v Commission [2004] ECR II-1, para. 108. 557 GC T-14/96 BAI v Commission [1999] ECR II-139, paras. 71–79, confirmed by GC, joined Cases T116/01 and T-118/01, P&O European Ferries (Vizcaya) SA and Diputacio´ n Foral de Vizcaya v Commission [2003] ECR-2957.

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II

service provider558 and that therefore prices of long-term supply agreements are usually lower. Instead, the ruling considers that a market economy operator would not have placed orders for volumes far in excess of its actual needs.559 Accordingly the question of what constitutes normal market practice has to be approached primarily from the perspective of the public operator. The private party to the contract may defend itself by demonstrating that it would have been able to sell the quota ordered by the State elsewhere on the market at the same price and on the same terms. If it fails to do so it is questionable whether the price paid by the public authority was actually the market price.560 These principles do not necessarily apply in situations where the Member State concerned has conducted an open, transparent and non-discriminatory tendering procedure, since such a procedure is normally considered sufficient to rule out the possibility that the Member State is seeking to grant an advantage to its contracting party.561 State aid law applies independently of the question of whether the specific transaction 220 is compatible with EU public procurement law.562 Public procurement rules do not have priority over State aid law.563 Compliance with applicable procurement law procedures does not automatically mean that the purchase does not contain State aid elements. 564 Conversely, an infringement of procurement law will not necessarily lead to classification as State aid, if it can be shown that the contract was entered into on normal market terms. The two areas of law serve different purposes. Procurement law is intended to safeguard non-discriminatory access to public sector contracts and thus to ensure that State actions are compatible with the fundamental freedoms guaranteed by the Treaty. For that it is sufficient to make sure that the potential parties to a contract are given the same opportunities to conclude the contract. The purpose of State aid law is to safeguard undistorted competition and it is thus concerned primarily with the contents of an awarded contract. It deals especially with the question of whether a rational market economy operator would have agreed to the contract on the same terms. Provided the applicable public procurement law requires an open and non-discriminatory tendering procedure, there is however an assumption that the price is at market rate. 565 State aid law may nevertheless require additional conditions to be observed, for example the market conformity of the reciprocal contractual obligations.566 The difference emerges clearly in the debate on services of general economic interest 221 (‘SGEI’). In terms of procurement law it would in principle be sufficient for contracts to be awarded in a non-discriminatory manner. However, the economic motivation of the See in this respect Schwarze/Ba¨r-Bouyssie`re Art 87 TEC, para. 23. GC, Joined Cases T-116/01 and T-118/01 P&O European Ferries (Vizcaya) SA and Diputacio´ n Foral de Vizcaya v Commission [2003] ECR II-2957, para. 117; confirmed by ECJ, Joined Cases C-442/03 P and C-471/03 P P&O European Ferries (Vizcaya) SA and Diputacio´n Foral de Vizcaya v Commission [2006] ECR I-4845. 560 Concerning the impact which public demand has on market prices and the implications under State aid law see also Nicolaides, EStAL 2010, p. 65. 561 GC, Joined Cases T-116/01 and T-118/01 P&O European Ferries (Vizcaya) SA and Diputacio ´ n Foral de Vizcaya v Commission [2003] ECR II-2957, para. 118. 562 ECJ, Cases C-21/88 DuPont de Nemours Italiana [1990] ECR I-889, para. 20; C- 351/88 Laboratori Bruneau [1991] ECR I-3641, para. 7. 563 Heidenhain/Heidenhain, European State Aid Law, section 4, para. 4; Tosics/Ga ´ a´l CPN 3/2007, p. 15. 564 As regards the possible situations where there can be State aid despite an award procedure, see Pu¨nder NZBau 2003, p. 530; Bartosch EuZW 2001, p. 229. 565 For example: Commission, State aid N 264/2002 – London Underground Public Private Partnership, para. 79. 566 See for example Commission, State aid N 45/2008 – Elefsina-Korinthos-Patras-Pirgos-Tsakona Motorway. 558 559

Arhold

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Art. 107 TFEU

public authority is unlikely to pass the MEOT, which has to be applied under State aid law. Accordingly, compensation by the State for SGEI was long considered as generally falling within the scope of the definition of State aid. Approval could then be granted pursuant to Article 106(2) TFEU.567 (6) Supply contracts – Private Supplier Test. If a Member State or a public or private body controlled or influenced by the State applies an unusually low tariff, that constitutes State aid. In such a situation the Member State or the public or private body designated or established by the State is not acting in the same way as a normal economic market operator would, but is instead using the preferential tariff to provide an economic advantage to a certain undertaking or sector, thereby waiving the possibility of obtaining a profit which it could have achieved. In contrast, a preferential tariff which, in the context of the market in question, is objectively justified by commercial reasons such as the need to resist competition on that market, does not constitute State aid.568 In order to determine whether such competition is present, one has to take into account not only the different price levels but also the costs involved in conversion to the competing product.569 The Private Supplier Test plays a particular role in sectors where the Member State either still has a monopoly or where it still holds a significant market position due to relatively recent liberalization of the market concerned, for instance in the energy sectors. 223 This approach was first adopted by the Court in its ruling in van der Kooy. The case concerned the decision by Gasunie, an undertaking owned by the Netherlands, to limit the rise in the gas price for the benefit of a particular group of customers, namely horticultural producers. Essentially, Gasunie’s justification for the preferential tariff was an alleged need to guard against the risk that the horticultural producers might convert their heating plants to coal, the price of which had recently fallen considerably. The ceiling price for gas was therefore set at a level reflecting the competition from coal. The Commission did not challenge the economic relevance of this argument. Nevertheless, it did note that the same risk arose with regard to gas customers in other sectors, thus making the preferential treatment of horticultural producers appear a selective advantage. According to the Court, the Commission’s argument was irrelevant, as the only relevant issue was whether there was a risk of conversion to other energy sources in the horticultural sector, regardless of the question of whether other sectors might be affected as well.570 In the end the Commission was able to prove that the disputed tariff was below the level needed in order to guard against the risk of conversion to coal, which led to the dismissal of the applications.571 224 The approach was confirmed in another case concerning the same Dutch company, Gasunie. In that case the Commission’s decision to terminate the procedure relating to a preferential tariff system for supplies of natural gas to Dutch producers of ammonia to be used for the manufacture of nitrate fertilizers on the grounds that the preferential tariffs were not aid was challenged by Belgium.572 The Commission had acknowledged that the preferential tariff was justified by Gasunie’s need to withstand competition on the ammonia market brought about by ammonia imports from non-member countries. 222

567

For more on this complex issue see paras. 238 et seq. below. ECJ, Joined Cases 67/85, 68/85 and 70/85, van der Kooy v Commission [1988] ECR-219, paras. 28– 30. cf. also GC, Case T-62/08 ThyssenKrupp Accini Speciali Terne v Commission [2010] ECR II-3229, para. 57. 569 ECJ, Joined Cases 67/85, 68/85 and 70/85, van der Kooy v Commission [1988] ECR-219, para. 30. 570 ECJ, Joined Cases 67/85, 68/85 and 70/85, van der Kooy v Commission [1988] ECR-219, para. 44. 571 ECJ, Joined Cases 67/85, 68/85 and 70/85, van der Kooy v Commission [1988] ECR-219, para. 55. 572 ECJ, Case C-56/93 Belgium v Commission [1996] ECR II-723. 568

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Ammonia is one of the main components of fertilizer. Its production is very energy intensive. The Dutch nitrate fertilizer producers had until then produced ammonia themselves. It was considered that if the price of the natural gas needed to produce ammonia became too high, they would rather choose to import ammonia than to continue to manufacture it themselves. There was therefore a risk of losing an important market outlet if Gasunie did not offer special tariffs. The Court agreed with that argument, thereby confirming the principles developed in van der Kooy. In another case the Commission applied the Private Supplier Test with regard to 225 price discounts which the State-owned energy supplier EDF granted to five paper mills in France. The Commission was of the opinion that the discounts were not State aid, as they had been granted before the electricity market was opened up to competition, and because at that time the French market was facing problems of overcapacity. EDF was said to have acted in the same way as a private supplier under the same circumstances would have, given that all variable costs and, on average, 57 % of fixed costs were covered. Commercial logic dictates that, where there is overcapacity, an operator in a market economy will naturally be led by the need to maximise profits to sell additional quantities of his product even without covering all the costs for that additional quantity, if the products were produced in any event and could not be stored so that they would otherwise remain unsold.573 It is not always possible to use economic arguments to justify variable supply tariffs. 226 The political incentive to provide support by allowing special tariffs is especially great when it comes to energy intensive industries. If it cannot be proven that a private operator would have granted the same price reductions, for example because of lower costs of supply, the existence of State aid cannot be ruled out.574 (7) (Land-)sales and privatisations – Private Vendor Test. Measures which, in various 227 forms, mitigate the burdens which are normally included in the budget of an undertaking and which are thereby similar to subsidies constitute benefits within the meaning of Article 107(1) TFEU such as, for example, sale of assets below market rate. 575 The question is whether a private vendor would have sold the asset concerned at the same price and on the same terms.576 In practice, the most relevant fields of application are the sale of public land577 and the privatization of State-owned enterprises. 578 In 1997 the Commission published a Communication relating to sales of public land 228 and buildings setting out the requirements the Commission applied when deciding whether sales were State aid free, so that the Member States would not be obliged to notify the transaction pursuant to Article 108 TFEU.579 According to this Land Sales Communication, a sale of land and buildings does not contain State aid, if following a sufficiently well-publicized, open and unconditional bidding procedure, comparable to an auction, the best or only bid which is by definition at market value is accepted. 580 573 Commission, OJ 2001, L 95/18, para. 74 – a measure which Electricite ´ de France carried out for the benefit of certain undertakings in the paper industry. 574 ECJ, Case C-169/84 CDF Chimie AZF v Commission [1990] ECR I-3083, para. 51. 575 ECJ, Case C-39/94 SFEI [1996] ECR I-3547, para. 59; GC, Joined Cases T-127/99, T-129/99 and T´ lava v Commission [2002] ECR II-1275, para. 72; GC, T-274/01 Valmond 148/99 Territorio Histo´rico de A v Commission [2004] ECR II-3145, para. 44. 576 ECJ, Cases C-342/96 Spain v Commission [1999] ECR I-2459, para. 41; GC, T-274/01 Valmond v Commission [2004] ECR II-3145, para. 45. 577 For details see Nu ´~ nez-Mu¨ller in this commentary (part V chapter E). 578 For details see Arhold in this commentary (part V chapter C). 579 Commission, OJ 1997 C 209/3 – Communication on State aid elements in sales of land and buildings by public authorities (‘Land Sales Communication’). 580 Land Sales Communication, OJ 1997 C 209/3, section II 1.

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According to the BVVG judgment of the Court, it is, however, conceivable that, in specific circumstances, the method of a sale to the highest bidder does not result in a price which corresponds to the market value of the property in question and that, as a result, taking into consideration factors other than the price may be justified. That could be the case in particular where the highest bid is distinctly higher than any other price offered in the public call for tenders and the estimated market value of the land on the basis of its manifestly speculative nature.581 Consequently, a rule of national law enabling the competent national authority, in those circumstances, to reject a bid which in its opinion is disproportionate and to refuse, on that ground, to consent to the sale of the agricultural land which that bid relates to, cannot be classified as “State aid”, provided that the application of that rule results in a price which is a close as possible to the market value of the land at issue.582 In the absence of such a procedure an independent evaluation should be carried out by one or more independent asset valuers prior to the sale. While under normal circumstances, it is clear that the best bid or an expert report are likely to provide prices corresponding to actual market values, it cannot be ruled out that other methods may also achieve the same result 583, for instance a calculation method which entails establishing the value of agricultural land on the basis of regional reference valuations, as long as these methods provide for the updating of the prices, so that the price actually paid by the purchaser reflects, as far as possible, the market value of that land.584 As that market value is theoretical, except in the case of sales accepting the highest bid, a margin for variation on the price obtained as compared with the theoretical price must be tolerated.585 The market price for the land thus established is the minimum purchase price that has to be demanded. 586 All other sales still need to be notified to the Commission.587 The value of the aid is equal to the difference between what the beneficiary actually paid and what it would have had to pay in an arm’s length transaction on the open market for an equivalent property from a private sector vendor at the time of the relevant transaction. 588 229 Where privatisations are concerned, the Commission again assumes that an open, transparent, discrimination free and unconditional bidder procedure is in principle enough to rule out State aid. Given that such transactions are considerably more complex than real estate sales it is hardly surprising to find that this general rule is accompanied by a range of exemptions and special rules, which the Commission has summarized in the 581 ECJ, Case C-39/14 BVVG, ECLI:EU:C:2015:470, para. 40. The Court refers to AG Cruz Villalo ´ n’s Opinion, according to which, if the market price estimated by the competent authority was close to most offers, while the highest bid was clearly above the other bids and the estimated market price, one may assume that the highest bid is of speculative nature and that the estimated value corresponds to the market price. On the other hand, if the highest bid is close to all other offers made during the tender procedure and the estimated value is considerably lower, it can be assumed that the estimated price is not at market rate, see Opinion of AG Cruz Villalo´n in Case C-39/14 BVVG ECLI:EU:C:2015:175, para. 71– 72. 582 ECJ, Case C-39/14 BVVG, ECLI:EU:2015:470, para. 42. As this ruling seems to be somewhat inconsistent with what a private vendor would do under the same circumstances (i.e. selling it to the bidder with the highest offer, even if speculative) it remains to be seen whether it will be confirmed also for other sales than those of agricultural land. 583 ECJ, Case C-239/09 Seydaland, ECLI:EU:C:2010:778, para. 39; Case C-39/14 BVVG, ECLI:EU:C:2015:470, para 31. 584 ECJ, Case C-239/09 Seydaland, ECLI:EU:C:2010:778, operative part. 585 ECJ, Case C-239/09 Seydaland, ECLI:EU:C:2010:778, para. 35 and operative part. 586 Land Sales Communication, point II.2. 587 Ibid, point II.3. 588 GC, Case T-366/00 Scott SA v Commission [2007] ECR II-797, para. 105. Case T-244/08 Konsum Nord v Commission ECLI:EU:T:2011:372, para. 61; Joined Cases T-186/13, T-190/13 and T-193/13 Netherlands and others v Commission ECLI:EU:T:2015:447, para. 77.

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privatization guidelines of 1993589, and which have in the meantime been specified further by the practice of the Commission and the EU Courts.590 For example, a sale for a negative price higher than the costs of liquidation – e. g. because of an assumption of debt by the seller – can be covered by Article 107(1) TFEU even if it occurs in the context of an open bidding procedure. In such cases, the State aid beneficiary will be the target company rather than the buyer.591 The costs of liquidation to be compared with the negative sales price may contain costs for a social plan 592 as long as such plan is customary in the sector concerned593 to protect the brand image594 and there is a legitimate economical595 interest in protecting the brand image.596 However, these costs have to be strictly distinguished from social security measures the State does not take in its capacity as shareholder but in execution of one of its public authority obligations. Under certain circumstances the tender procedure may ensure that the support provided by the State is kept to a minimum and that the buyer does not receive State aid. It is, however, still possible that there is State aid in favour of the privatised undertaking. 597 One possible alternative to carrying out a bidding procedure is to obtain an ex ante independent expert valuation.598 (8) Cross-subsidisation – Company Group Test. The principles described by the 230 Commission in its 1993 Communication on capital holdings in publicly owned undertakings599 apply also in cases where a public holding company uses profitable holdings to subsidise unprofitable holdings. In private company groups this can occur where the undertaking concerned chooses to pursue a strategy aimed at achieving profit in the long term, or in more general terms where cross-subsidisation is an advantage for the group as a whole. When assessing cross-subsidisation in State-owned company groups the Commission has to take account of similar strategic goals. According to the 1993 Communication, cross-subsidisation should be seen as State aid only if there are no economic reasons for the transfer of funds. Particular problems can arise if the cross-subsidisation is pursued by a publicly 231 owned undertaking which enjoys a monopoly in its market, as in the case of the French postal service. This case kept the EU Courts busy for decades and led to landmark judgments on procedural issues. In the matter itself the question was what sort of remuneration the French postal service was obliged to demand from those of its subsidiaries which were active in a liberalized market (express delivery services) in 589 Commission, Report on Competition Policy 1993, paras. 402 et seq., as well as Report on Competition Policy 1991, paras. 249, 250 and Report on Competition Policy 1992, paras. 19, 349, 416, 466. 590 For further guidance see Commission staff working document Guidance Paper on State aid – compliant financing, restructuring and privatisation of State – owned enterprises swd (2012) 14 final. 591 GC, Case T-511/09 Niki Luftfahrt v Commission ECLI:EU:T:2015:284, paras. 133–137. 592 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR paras. 81–83. 593 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR paras. 85, 87. 594 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR paras. 83. 595 GC, Case T-565/08 Corsica Ferries v Commission [2012] ECR para. 87. 596 Which is not the case e. g. if the State fully withdraws from the market concerned by privatising the company, Case T-565/08 Corsica Ferries v Commission [2012] ECR para 91. 597 See Opinion of Advocate General Jacobs in ECJ, Joined Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-4103, para. 30; Case C-334/99 Gro¨ ditzer Stahlwerke [2003] ECR I-139, para. 133. 598 For example, Commission, OJ 2003 L 14/56, para. 79 – Koninklijke Schelde Groep; Commission, OJ 2002 L 314/62, para. 30 – Gothaer Fahrzeugtechnik GmbH.; GC, Case T-123/09 – Ryanair v Commission (Alitalia), ECLI:EU:T:2012:164, para. 150, confirmed by ECJ, Case C-287/12 P – Ryanair v Commission (Alitalia), ECLI:EU:C:2013:395. 599 See above, paras. (171 et seq.).

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return for letting them use infrastructure which had been created earlier in the context of its monopoly position. In its UFEX judgment the General Court ruled that even supposing that the postal service had charged its subsidiaries the full costs for the provision of assistance that would not be sufficient in itself, as it would still not take into account that an undertaking operating under normal market conditions would not have had the (already amortized) monopoly infrastructure available. 600 By comparing the costs that would have arisen under normal market conditions, the court was obviously seeking to prevent the monopolist from using its monopoly structure in an already liberalized market. In its Chronopost judgment the Court dismissed the UFEX judgment, and ordered the General Court to base its decision on the actually incurred costs. The Court held that in the absence of any possibility of comparing the situation of La Poste with that of a private group of undertakings not operating in a reserved sector, ‘normal market conditions’, which are necessarily hypothetical, must be assessed by reference to the objective and verifiable elements which are available. 601 It also held that on that basis, the presence of State aid can be excluded if, first, it is established that the price charged properly covers all the additional, variable costs incurred in providing the logistical and commercial assistance, an appropriate contribution to the fixed costs arising from use of the postal network and an adequate return on the capital investment in so far as it is used for competitive activity and if, second, there is nothing to suggest that those elements have been underestimated or fixed in an arbitrary fashion.602 Accordingly, the Court accepted that the advantages arising from the existing infrastructure could at least partly be passed on to the subsidiary, in particular to the extent already amortized, although the costs for maintaining the infrastructure would have to be borne proportionately. The General Court, to which the case was referred back for judgment, attempted to apply these principles to the challenged Commission decision, but nonetheless came to the conclusion that the Commission had failed to take sufficient account of the Court’s requirements in its reasoning and therefore annulled the decision.603 The judgment was challenged again and once again annulled by the ECJ, as according to the ECJ there could be no question of inadequate reasoning: ‘Assuming […] that […] the Commission had applied assessment criteria of “normal market conditions” which might be incorrect in the light of those which the Court of Justice applied in its subsequent judgment in Chronopost […], that could be relevant to the substance of the reasoning for the contested decision, but not to its adequacy in procedural terms.’604 The ECJ did not refer the matter back to the General Court again, but instead decided itself that the case had to be dismissed, especially taking into account the Commission’s broad discretion when making assessments of complex economic issues.605

600 GC, Case T-613/97 Union Française de l’Express (Ufex) v Commission [2000] ECR II-4055, paras. 74–75. 601 ECJ, Joined Cases C-83/01 P, C-93/01 P and C-94/01 P, Chronopost SA and others v Commission [2003] ECR I-6993, para. 38. 602 ECJ, Joined Cases C-83/01 P, C-93/01 P and C-94/01 P, Chronopost SA and others v Commission [2003] ECR I-6993, para. 40. 603 GC, Case T-613/97 Union française de l’express (UFEX) and others v Commission [2006] ECR II1531, paras. 77–81, 101. 604 ECJ, Joined Cases C-341/06 P and C-342/06 P Chronopost SA and others v Commission (‘Chronopost II’) [2008] ECR I-4777, para. 92. 605 ECJ, Joined Cases C-341/06 P and C-342/06 P Chronopost SA and others v Commission (‘Chronopost II’) [2008] ECR I-4777, paras. 143, 144–158, referring to the judgments in Case C-56/93 Belgium v Commission [1996] ECR I-723, para. 11, and Joined Cases C-328/99 and C-399/00 Italy and SIM 2 Multimedia v Commission [2003] ECR I-4035, para. 398.

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The fact the Court chose to depart from the model of the hypothetical private 232 undertaking as proposed by the General Court has led legal commentators to question the extent to which the judgment can be applied to other constellations under the MEOT.606 It is, however, likely that the judgment is and may well remain limited to the specific situation of cross-subsidisation by a public monopolist. Closer examination actually shows that the General Court had modified the MEOT because of the particular features of the constellation (use of the already existing infrastructure). It took as its basis for the comparison the conduct of a market economy operator not in the same situation as the publicly owned undertaking, as such an operator could not have the corresponding infrastructure available or would be obliged to finance such infrastructure at completely different conditions. The ECJ rejected this modification of the MEOT.607 (9) State infrastructure measures. State infrastructure measures play a role in various 233 sectors, for example in the transport sector in connection with the provision of infrastructure for the benefit of land transport (motorways), air transport (airports) or maritime transport (ports), the provision of electricity grids or data and telecommunications networks,608 as well as with regard to the connection of properties to such or similar grids and networks. In infrastructure cases a distinction has to be made between State aid granted to undertakings that provide infrastructure, and State aid granted to undertakings that use infrastructure. Initially, only the second category was significant for State aid law, as infrastructure 234 was in essence provided by the Member States and the Commission did not regard this as an economic activity.609 In cases where infrastructure is run on a non-commercial basis the Member State’s actions to make the infrastructure available (including its construction and maintenance) do not fall within the scope of Article 107(1) TFEU as long as the infrastructure is available to all users at the same non-discriminatory conditions.610 Strictly speaking that does not mean an absence of the element of advantage, but rather an absence of the selectivity of the advantage. Insofar as infrastructure is not available to all undertakings, or an infrastructure measure is carried out specifically for a particular undertaking or group of undertakings, the measure is selective. Even in this case, there is no State aid involved, if the price charged for the measure is set at market rate, and thus it does not constitute an economic advantage. 606 For more on this see Bartosch Article 87 TEC, para. 55 with further references; Bartosch, EStAL 2003, p. 375. 607 As regards cross-subsidisation issues relating to hospital financing, see Koenig/Paul EuZW 2008, p. 359 and 2009, p. 844. 608 See Communication from the Commission — Community Guidelines for the application of State aid rules in relation to rapid deployment of broadband networks, OJ 2009 C 235/7, as well as Gaal/ Papadias/Riedl CPN 1/2008, p. 82, Papadias/Riedl/Westerhof CPN 1/2006, 13; Tosics/Van de Ven/Riedl CPN 1/2008, p. 81. 609 ECJ, Cases C 180–184/98 Pavel Pavlov [2000] ECR I-6451, para. 75; C-35/96 Commission v Italy [1998] ECR I-3851, para. 36. 610 See, for example, Commission, State aid N 284/2005, para. 34 – Irish Broadband; Commission, OJ 2003 L 91/23, para. 64 – Terra Mitica theme park; State aid N 355/2004, para. 34 – PPP Antwerp Airport; State aid N 550/2001, para. 24 – Partenariat public prive´ pour la construction d’installations de chargement et de de´chargement; State aid N 649/2001, para. 45 – Freight Facilities Grant; State aid N 356/2002, para. 70 – Network Rail; State aid N 511/1995 – Jaguar Cars Ltd. See also the 1994 Guidelines on State aid to the air transport sector, para. 12; the Commission White Paper on fair payment for infrastructure use (COM (1998) 466, para. 43); the Communication on improving quality at European sea ports (COM (2001) 0035 final); the Commission’s reply to written question No. 28 of the European Parliamentary Assembly member Mr. Dehousse, OJ 1967 No. 118, p. 311/67, para. 24 – ‘construction d’installations de chargement et de de´chargement’.

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Art. 107 TFEU

Here again, the question of what the market rate is has to be determined according to the MEOT, so that the question is whether a hypothetical rational operator in a market economy would have offered to provide (the use of) the infrastructure at the same price.611 As far as infrastructure measures relating to real estate are concerned one has to distinguish between cases of internal land development and external land development. Local authorities usually only provide the external infrastructure and charge a non-discriminatory contribution for its use.612 Internal land development measures are usually the responsibility of the property owner. If the local authority chooses to offer and carry out such services, it is obliged to charge a market price. The same applies if the land development is tailored to meet the needs of a particular undertaking or group of undertakings.613 235 In an increasing number of cases, the construction and operation of infrastructure is considered to be an economic activity.614 For the operation of airports, this has been established by the ECJ’s judgment in Ae´roports de Paris.615 Since that time the Commission’s approach has been to assess whether the construction and maintenance of an airport complies with the MEOT.616 In Leipzig-Halle, the EU Courts have confirmed that the construction of the infrastructure cannot be seperated from its maintenance and operation and thus shares its nature as economic activity.617 If the measure does not pass the MEOT, the compatibility of the financing of the infrastructure has to be assessed in light of Article 107(3) (c) TFEU in conjunction with the airport guidelines, 618 according to which is necessary to examine in particular the proportionality of the infrastructure measure. 236 Similar principles also apply to other infrastructures. A port infrastructure project does not involve State aid at the level of the private concession holders required to operate the new port infrastructure, if the concession fees meet the MEOT and enable the State to recover the entire infrastructure investments costs including a reasonable return.619 The MEOT was also passed in a case concerning a public extension of a gas grid, since the tariff revenues from customers were considerably higher than the investment costs.620 States are increasingly choosing not to build and maintain motorways on their own but to award concessions or commissions to private project companies. The exploitation of the new motorway by a concession holder is an 611

See GC, Case T-196/04 Ryanair v Commission [2008] ECR II-3643. Commission, OJ 2003 L 91/23, paras. 62 et seq. – Terra Mitica theme park; Soltesz EuzW 2001, p. 107, 109. 613 Commission, OJ 2002 L 12/1, paras. 149 et seq. – Kimberly-Clark (special development measures for undertakings in the paper industry with high water consumption), Commission, OJ C 9/6, paras. 14 and 16 and OJ L 38/33, paras. 41 – Lenzing Lyocell (special rail connection). 614 For example the construction and maintenance of pipelines, often by a PPP, Commission, OJ 2005 L 56/15 – Propylene pipeline; Commission, OJ 2007 L 143/16 – Ethylene pipeline. 615 Case T-128/98 Ae ´roports de Paris v Commission [2000] ECR II-3929, paras. 107–109, confirmed by ECJ, C-82/01P, ECLI EU: 2002: 617, paras. 75–79. 616 In a recent example, the Commission approved a refurbishment of a cargo hangar in the context of the implementation of a low-cost-carrier strategy as not constituting State aid with regard to the Private Investor Test, Com., OJ 2013 L 309/27, paras. 79–104 – Finland, Tampere-Pirkkala airport. 617 The AdP Case law has been explicitly confirmed by GC Joined Cases T-443/08 und T-445/08 Freistaat Sachsen, Land Sachsen-Anhalt and Flughafen Leipzig v Commission, ECLI:EU:T:2011:117, confirmed by ECJ, C-288/11 P, Flughafen Leipzig Halle v Commission, ECLI:EU:C:2012:821. 618 Guidelines on State aid to airports and airlines, OJ 2014 C 99/3. The Aviation guidelines specify the conditions, under which public financing of airports and airlines may constitute State aid within the meaning of Article 107(1) TFEU, as well as the conditions, under which it can be declared compatible with the Internal Market. Additionally, it treats the question of SGEI compensation in the aviation sector. 619 Com. OJ 2011 L 319/92 para. 79–86 Latvia, Ventspils Free Port Authority; see also Commission OJ 2012 C 402 – opening decision in State aid case C 21/09 – Piraeus. 620 Com. OJ 2012 L 166/83 paras. 37–40 Greece, Aluminium of Greece SA. 612

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economic activity621 and thus the Commission has started examining whether the service and concession agreements contain State aid. Whereas its original approach was that if an award procedure has been carried out that will give rise to a presumption that the price obtained was at market rate and thus satisfied the MEOT,622 the technical complexity of such projects, which usually makes it necessary to conduct negotiation procedures and competitive dialogue, has led the Commission to steadily depart from that approach.623 Although the Commission’s practice is not very coherent,624 there is a tendency to leave the question of the presence of State aid unanswered and instead to approve the measure by analogy with the conditions set out in the air transport guidelines.625 This tendency towards not answering the question of whether State aid is present can be observed in cases concerning the construction and operation of multifunctional buildings used for cultural and sporting purposes as well. In its decisions the Commission closely analyses the necessity and proportionality of the public funding, using the concept of market failure in order to approve the measure pursuant to Article 107(3) (c) TFEU.626 The construction, maintenance and operation of the national rail infrastructure network is – in light of the AdP and Leipzig Halle case law – to be considered an econmic activity. Financial State support is nevertheless normally not be assessed under the MEOT, since in most Member States, the national rail infrastructure network constitutes a legal monopoly. As long as there is no competition for627 or on the railway infrastructure market, the financial support of the operator can not distort competition and escapes already for this reason alone Article 107(1) TFEU.628 However, distortion of competition can not be excluded if the monopolist is also active on other liberalized markets and is able to cross-subsidize those activities.629 (10) Other specific cases. In addition to the sub-categories of the MEOT outlined 237 above, which correspond to various types of economic activity, there are in reality a great number of other situations which defy classification within any of the sub-categories and which have to be assessed according to the general principles of the MEOT. Examples can 621 For example: Commission, State aid N 149/2006 – Traffic guarantee for M3 Clonee to North of Kells and N7 Limerick; Southern Ring Road Phase II, para. 35. 622 For example: Commission, State aid N 264/2002 – London Underground Public Private Partnership, para. 79. 623 For example: Commission, State aid N 149/2006 – Traffic guarantee for M3 Clonee to North of Kells and N7 Limerick; Southern Ring Road Phase II, paras. 38–39. 624 See for example, Commission, State aid N 45/2008 – Elefsina-Korinthos-Patras-Pirgos-Tsakona Motorway where although a solution was found based on the award procedure that was conducted, the Commission nevertheless examined in addition whether the concession agreement was in line with market conditions, for example whether it provided for risk allocation as typical on the market. It may be assumed that the changes in responsibilities (DG Comp is now also competent to deal with State aid in the transport sector, previously the responsibility of DG TREN) will result in the Commission’ practice being more coherent in terms of legal theory. 625 E. g. Commission, State aid N 462/09 – A2 Motorway. 626 See Commission, State aid SA.33728 – Denmark, Financing of a new Multiarena in Copenhagen, paras. 54–69; as well as Com., OJ 2013 L 243/19, paras. 50–54 Sweden, Uppsala arena. 627 See already Commission State aid N 500/2001 – United Kingdom, Network Grants to licensed Heavy Rail Infrastructure Managers, para. 19. See further State aid N356/2002 – United Kingdom, Network Rail, paras. 75–78. Confirmed by State aid SA.35948 – Czech Republic, prolongation of the interoperability scheme in railway transport, paras. 18 etc seq. 628 For competition for the relevant markets see GC, T-222/04 Italy v Commission, [2009] ECR II-1877, para. 50. 629 See Communication from the Commission – Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, para. 189. See also GC, T-222/04 Italy v Commission [2009] ECR II1877 para. 53.

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be seen in the case of payments of marketing subsidies public sector operators of airports frequently grant to air carriers landing at their airports, 630 or in the case of the promotion of social housing schemes which often do not match the behaviour expected of a rational market economy operator and thus need to be justified pursuant to Article 106(2) TFEU, if the Altmark criteria are not fulfilled.631 238

c) Compensation for the costs for providing services of general economic interest (‘SGEI’). For a long time it was disputed whether States can provide compensation for the costs arising to an undertaking for the provision of services of general economic interest (‘SGEI’) without such compensation falling within the definition of State aid pursuant to Article 107(1) TFEU. In its Altmark Trans judgment the Court developed assessment criteria which still apply today, although they are constantly being refined further. If compensation falls within the definition of Article 107(1) TFEU it may still be justifiable pursuant to Article 106(2) TFEU.632 The distinction between Altmark and 106(2) TFEU is based on the constituent element of ‘economic advantage’.633 If the Altmark criteria are fulfilled, an economic advantage within the meaning of Article 107(1) TFEU can be excluded.

239

aa) Overview of the development in the case law. The case law of the EU Courts has been driven by a debate on the choice between the so-called definition-based solution on the one hand and the exemption solution on the other. The ECJ originally favoured the definition-based solution, according to which there is no State aid if the compensation payments by the State do not exceed the costs for the SGEI.634 The General Court then developed the exemption solution in its 1997 FFSA rulings on the French postal service. It ruled that the Commission’s assessment powers also extend to State aid granted to the undertakings referred to in Article 106(2) TFEU and in particular to undertakings which are tasked by the Member States to provide SGEI.635 It held that, in so far as aid is capable of affecting trade between Member States and distorting competition, it is incompatible with the Internal Market, save where otherwise provided for by the Treaty. Article 106(2) TFEU was held to be an exemption rule of that kind. However, it also ruled that because Article 106(2) TFEU lays down an exemption, it must be interpreted narrowly. Thus it was held not to be sufficient that the undertaking in question has been entrusted by the public authorities with the operation of a service of general economic interest, but that in addition the prohibition of aid would also have to obstruct the performance of the particular tasks assigned to the undertaking. Furthermore, the interests of the EU had not to be affected. By applying the case law regarding the cartel law provisions of Article 101 and 102 in conjunction with Article 106 TFEU, mutatis mutandis, to the field of State aid, the State aid may, under Article 106(2) TFEU, escape the general prohibition of State aid provided that its sole purpose is to offset the additional costs incurred in performing the particular task assigned to the undertaking entrusted with the operation of a service of general economic interest and that the grant of the aid is necessary to perform the public service obligations under conditions of economic equilibrium. Determining whether the aid is necessary entails a general assessment of the economic conditions in 630 See Commission, OJ 2004 L 137/1, paras. 239 et seq., and GC, Case T-196/04 Ryanair v Commission [2008] ECR II-3643. 631 See Bartosch EuZW 2007, p. 559. 632 See Wolf in this commentary, part II, chapter D. 633 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 42. 634 ECJ, Case 20/83 ABDHU [1985] ECR 531. 635 GC, Case T-106/95 Fe ´de´ration française des socie´te´s d’assurances (FFSA) v Commission [1997] ECR II-229, para. 165.

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which the undertaking performs its obligations.636 In the SIC I judgment relating to grants made to the Portuguese public sector broadcaster, RTP, the General Court confirmed the exemption solution with reference to the ‘effects doctrine’637 and explicitly confirmed that the compensation payments were by their very nature State aid. 638 In 2001 the exemption solution developed by the General Court in FFSA and SIC was 240 rejected by the ECJ in favour of the definition-based solution in its judgment in Ferring. In his Opinion delivered in that case Advocate General Tizzano stated that, if the State imposes certain public service obligations on an undertaking, covering the additional costs arising from the performance of those obligations confers no advantage on the undertaking in question, but serves, if anything, to ensure that it is not unjustly disadvantaged vis-a`-vis its competitors. Accordingly, competition could only be distorted where the compensation exceeds the additional net costs attributable to the performance of public service obligations.639 The ECJ agreed with the Advocate General, ruling that in so far as a measure of State intervention only serves to offset the additional costs arising from discharging public service obligations (in the specific case, certain duties of pharmacies to keep certain medicines available), that does not constitute an advantage and that there is thus no State aid. Insofar as the compensation exceeds such costs, the Court ruled that they cannot be regarded as necessary and that they are thus not justified by Article 106(2) TFEU.640 Following this judgment it was no longer necessary or indeed conceivable to justify aid according to Article 106(2) TFEU.641 Both before and after the judgment in Altmark Trans Advocates General Jacobs 642 and 241 Stix-Hackl643 made attempts to develop a new approach, according to which the definition-based solution should only be applied to cases where the funding measures were compensation for clearly defined services of general economic interest. In other words, cases in which the connection between the funding granted by the Member State and the clearly imposed service of general economic interest is direct and manifest (direct and manifest link). bb) The Altmark Trans judgment and the aftermaths. The matter referred to the 242 Court concerned a concession, awarded to the Altmark Trans bus company by the local authority, for the provision of certain local public transport services. The concession was contested by a competitor claiming that Altmark could not operate in a commercially viable manner without the subsidies it actually received (one of the grounds of compulsory exclusion under German public procurement law). Among the elements which the plaintiff alleged amounted to State aid were the compensation payments which Altmark Trans received for providing local public transport services on other unprofitable routes. The referring court therefore asked whether the compensation payments would be considered State aid, if the local public transport services were to be considered SGEI. 636 GC, Case T-106/95 Fe ´de´ration française des socie´te´s d’assurances (FFSA) v Commission [1997] ECR II-229, paras. 169–178. 637 For more on this concept see the preface above, para. 2. 638 GC, Case T-46/97 SIC – Sociedade Independente de Comunicaça ˜ o SA v Commission [2000] ECR II2125, paras. 81–85, referring to the judgment in Case T-106/95 Fe´de´ration française des socie´te´s d’assurances (FFSA) v Commission [1997] ECR II-229, paras. 178 and 199; see also ECJ, Case C-174/97 P FFSA v Commission [1998] ECR I-1303, para. 33. For more on the judgment see Tigchelaar EStAL 2003, p. 169. 639 Advocate General’s Opinion in ECJ, Case C-53/00 Ferring [2001] ECR I-9067, paras. 61–63. 640 ECJ, Case C-53/00 Ferring [2001] ECR I-9067, paras. 32–33. For more on the judgment see Bartosch EStAL 2002, p. 1. 641 See Santamato/Pesaresi CPN 1/2004, p. 17 et seq. 642 Opinion of Advocate General Jacobs in ECJ, Case C-126/01 GEMO SA [2003] ECR I-13769. 643 Opinion of Advocate General Stix-Hackl ECJ, Joined Cases C-34/01 to C-38/01 Enirisorse [2003] ECR I-14 243, paras. 153, 157–161.

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Art. 107 TFEU

Advocate General Le´ger644 expressed the opinion that the ECJ should distance itself from the definition-based solution adopted in Ferring and follow the exemption-based reasoning adopted by the General Court. He argued that the definition-based solution confuses the questions of classifying a measure as State aid with the question of whether the measure could be exempted from State aid prohibition. This would render Article 106(2) TFEU and its requirements practically irrelevant in State aid cases and effectively remove the financing of public services from the Commission’s State aid control. 244 In its judgment645 the ECJ took an intermediate position, combining the two solutions. According to that approach, in order for such compensation to escape classification as State aid, a number of conditions must be satisfied. – First, the recipient undertaking must actually have public service obligations to discharge and the obligations must be clearly defined by the national legislation and/ or the licences.646 – Second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings.647 – Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations. Compliance with such a condition is essential to ensure that the recipient undertaking is not given any advantage which distorts or threatens to distort competition by strengthening that undertaking’s competitive position.648 – Fourth, where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure, which would allow for the selection of the tenderer capable of providing those services at the least cost, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations 649 (the so-called Benchmark Company test). 245 Compensation payments that satisfy these so-called Altmark criteria cumulatively are not covered by Article 107(1) TFEU. However, if even one of the criteria is not satisfied, the payments are deemed to be State aid and must be notified. It is then still possible that the measure is justifiable pursuant to Article 106(2) TFEU, for example if the fourth Altmark criterion is not satisfied but overcompensation can be ruled out in the specific 243

644 Advocate General’s Opinion of 19 March 2002 and 14 January 2003 in ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, para. 101. Following publication of the judgment in Ferring, the Court decided that the oral proceedings in Altmark Trans should be repeated; this resulted in two Opinions by the Advocate General. 645 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747. 646 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, para. 89. 647 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, para. 90; see also para. 94: ‘[…] where public subsidies granted to undertakings expressly required to discharge public service obligations in order to compensate for the costs incurred in discharging those obligations comply with the conditions set out in paras. 89 to 93 above [of the judgment], such subsidies do not fall within [Article (107(1) TFEU)]. Conversely, a State measure which does not comply with one or more of those conditions must be regarded as State aid within the meaning of that provision.’. 648 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, para. 92. 649 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, para. 93.

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246–247

II

case.650 The first and third criteria are not new and in essence formed a part of the ECJ judgments of the Court based on the definition-based solution. The second and fourth criteria are characteristic, however, and take into account the assessments derived from the MEOT. Accordingly, the market price is assessed by a public procurement procedure or a benchmark test. As the Court of Justice did not place any temporal limitation on the scope of its 246 findings in Altmark, those findings are therefore fully applicable to compensation payments which were agreed or fixed before that judgment was published in 2003. In that connection, it must be borne in mind that the ECJ’s interpretation of a provision of EU law is limited to clarifying and defining the meaning and scope of that provision as it ought to have been understood and applied from the time it came into effect. It follows that the provision thus interpreted may, and must, be applied even to legal relationships which arose and were established before the judgment in question. 651 However, the particular nature of the SGEI mission concerned in a specific ‘pre Altmark’ case can make it appropriate to adapt the criteria formulated in Altmark, in accordance with the spirit and the purpose which prevailed when they were laid down, in a manner adapted to the particular facts of the specific case. The General Court did so in its BUPA judgment concerning certain SGEI obligations of a compulsory nature imposed on private health insurers in the Irish health care sector, 652 in particular with regard to the fourth Altmark criterion,653 thereby reducing its importance significantly. One does in fact have to assume that hardly any of the compensation mechanisms in place at the time of the Altmark judgment were in line with the strict requirements set out in the Altmark judgment.654 The question of whether the more relaxed interpretation of the Altmark criteria deployed in the BUPA judgment applies only for ‘pre Altmark’ cases or whether it is an expression of a generally more relaxed application of the criteria remains to be seen.655 Following the Altmark judgment, in 2005 the Commission adopted a set of specific 247 legal instruments in order to provide legal certainty on public service compensations (First SGEI package). The objective of this First SGEI package was clearly confined to the compatibility assessment and did not target the State aid assessment as such. With its SGEI reform launched in 2010, the Commission addressed not only the questions concerning compatibility with the Internal Market but also the questions arising from the application of the Altmark criteria. In the Second SGEI package the Commission put in place a differentiated legal framework aiming at covering all possible SGEI situations in the context of State aid. The new SGEI package consists of: – the Communication on the application of EU State aid rules to compensation granted for the provision of SGEI (‘SGEI Communication’)656

650

For more on this see Wolf in this commentary, (part II, chapter D). GC, Case T-289/03 British United Provident Association Ltd (BUPA) [2008] ECR II-81 paras. 158– 160, which refers to the judgments of the Court in ECJ, Cases C-209/03 Bidar [2005] ECR I-2119, paras. 66 et seq., and C-292/04 Meilicke and others [2007] ECR I-1835, paras. 34–36 and the cases cited there. 652 GC, Case T-289/03 British United Provident Association Ltd (BUPA). [2008] ECR II-81, para. 160. 653 GC, Case T-289/03 British United Provident Association Ltd (BUPA). [2008] ECR II-81, para. 246. 654 See Bartosch, EU State aid Law Article 87 TEC, para. 71 with further references. 655 Hoping for the latter: Biondi EstAL 2008, p. 401, 406. Lu ¨ bbig/Martin-Ehlers, para. 186, sees the BUPA case-law as applicable essentially to old cases. It seems that particularities of certain sectors may be taken into account even for post-Altmark cases, see GC, Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, para. 131, for public hospitals; and for public broadcasting see GC, Case T-151/11 ~a v Commission ECLI:EU:T:2014:631, paras. 159 et seq., as well as T-533/10 DTS v Telefo´nica Espan Commission ECLI:EU:T:2014:629, paras. 126 et seq.; matter appealed to the ECJ (C-449/14). 656 OJ 2012 C 8/4. 651

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Art. 107 TFEU

– the Commission Regulation on the application of Article 107 and 108 TFEU to de minimis aid granted to undertakings providing SGEI (‘SGEI de minimis Regulation’)657 – the Commission Decision on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of SGEI (‘SGEI Decision’)658 – the EU framework for State aid in the form of public service compensation (‘SGEI Framework’)659 248 The SGEI Communication further explains the conditions a measure needs to fulfil if it is to comply with the Altmark criteria and thus not to constitute State aid. As it is true of all Commission communications with respect to the notion of State aid within the meaning of Article 107(1) TFEU, the Commission Communication can only give an indication of how the Commission understands the case law of the EU Courts and therefore intends to apply Article 107(1) TFEU. Its statements can bind neither the Member States nor the courts nor, ultimately, itself. 249

(1) The Altmark criteria. The so-called Altmark criteria have been widely discussed660 and were specified in practice by both the Commission and the EU Courts. The current situation is somewhat heterogeneous.

(a) First Altmark criterion: Public service obligations to discharge. The first criterion sets out two requirements that need to be specified: firstly, the matter must involve public service obligations; secondly, the undertaking must be entrusted with discharging them. 251 As far as the definition of public service obligations is concerned, the Member States have a broad margin of discretion. In EU law there is no clear and precise regulatory definition of the concept of an SGEI and no established legal concept definitively fixing the conditions that must be satisfied in order for a Member State to invoke the existence and protection of a SGEI, either within the meaning of the first Altmark criterion or within the meaning of Article 106(2) TFEU.661 In accordance with the priorities set by Article 14 TFEU, the decision about the nature and type of a SGEI for specific sectors of activity remains with the Member States if these sectors either do not at all or only partly fall within the competence of the Union. Consequently, the control which the EU institutions may exercise over the use of the discretion of the Member State in determining SGEIs is limited to ascertaining whether there is a manifest error of assessment.662 The existence of mere EU framework legislation or even State aid soft law does normally not limit the Member State’s discretion.663 It remains to be seen whether the current tendency in the Commission’s decision-making practice to apply the ‘more economic approach’, (i. e. to check for the existence of a market failure as an additional precondition) can be brought into line with this margin of discretion 250

657

OJ 2012 L 114/8. OJ 2012 L 7/15. 659 OJ 2012 C8/15. 660 See for example Sinnaeve EStAL 2003, p. 351; Hancher EStAL 2003, p. 365; Bartosch EStAL 2003, p. 375 and EuZW 2004, p. 295; Travers EStAL 2003, p. 387; Bovis EStAL 2003, p. 543; Ko¨ nig/Haratsch EStAL 2003, p. 569; Jennert NVwZ 2004, p. 425; Do¨rr NZBau 2005, p. 617; Otting/Solte´sz/Melcher EuZW 2009, p. 444. 661 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II81, para. 165. 662 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 169. GC, Case T-309/12 Zweckverband Tierko¨rperbeseitigung v Commission ECLI:EU:T:2014:676, paras. 104–105; Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, paras. 44–45 with further references. 663 GC, Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, para. 50. 658

148

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252

II

available to the Member States.664 According to the Commission’s SGEI Communication, the entrustment with the operation of SGEIs has to be the entrustment of a ‘particular’ task which implies the supply of services, which, if it were merely considering its own commercial interest, an undertaking would not assume or would not assume to the same extent or under the same conditions.665 This precondition is actually established for cases concerning sectors at least partially governed by EU law, especially the transport sector.666 The Commission is trying to apply this as a general principle to all public services without distinction,667 while admitting that its assessment of the market failure is limited to checking whether the Member State has made a manifest error.668 However, even though a Member State retains a wide discretion when determining 252 what it considers as a SGEI, it is still required to ensure that the public service obligation (PSO) satisfies certain minimum criteria common to every PSO and to demonstrate that those criteria are indeed satisfied in the particular case. 669 These criteria are, notably, the presence of an act of the public authority entrusting the operators in question with a SGEI and the universal and compulsory nature of that SGEI.670 The SGEI does not have to constitute an universal service in the strict sense, such as a public social security scheme. The concept of universal service within the meaning of EU law does not mean that the service in question must respond to a need common to the whole population or be supplied throughout a territory.671 The provision of the service concerned must, however, by definition serve the general or public interest and not merely as a commercial basis for the operator.672 The “pollutor pays” principle as laid down in Art. 191(2) TFEU may preclude the SGEI classification of certain services.673 In addition, the general or public interest on which the Member State relies must not be reduced to the need to subject the market concerned to certain rules or the commercial activity of the operators concerned to authorisation by the State. The mere fact that the national legislature, acting in the general interest in the broad sense, imposes certain rules of authorisation, of functioning or of control on all the operators in a particular sector does not in principle mean that there is a PSO. 674 An operator entrusted with a SGEI does not have to be given an exclusive or special right to carry it 664

See Bartosch Article 87 TEC, para. 62. Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 47. 666 See Article 2 of Regulation (EC) 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EC) 1191/69 and 1107/70, OJ 2007 L 315/1; ECJ, Case C-205/99 Analir [2001] ECR I1271, para. 71 and Com., OJ 2013 L 220/20 paras. 161, 166–167 France, Socie´te´ Nationale Maritime Corse-Me´diterrane´e (SNCM), concerning the maritime transport. 667 See for example Commission, State aid SA.34947 – UK, Investment Contract for the Hinkley Point C New Nuclear Power Station, OJ 2014 C 69/60, paras. 103 et seq. 668 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 47. 669 GC, Case T-309/12 Zweckverband Tierko ¨ rperbeseitigung v Commission ECLI:EU:T:2014:676, para. 46; Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, para. 106 with further references. 670 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, paras. 171, 172. 671 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 186. 672 ECJ, Case C-179/90 Merci Convenzionali Porto di Genova [1991] ECR I-5889, para. 27; Joined Cases C- 34/01 to C-38/01 Enirisorse [2003] ECR I-14243, para. 33. 673 GC, Case T-309/12 Zweckverband Tierko ¨ rperbeseitigung v Commission ECLI:EU:T:2014:676, para. 121; Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, para. 61. 674 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 178. 665

Arhold

149

II

253–254

Art. 107 TFEU

out. It follows from Article 106(1) TFEU together with Article 106(2) TFEU, that a distinction must be drawn between a special or exclusive right conferred to an operator and the SGEI which is attached to that right. The grant of a special or exclusive right to an operator is merely the instrument which allows that operator to perform the SGEI concerned.675 If the operator entrusted with a particular mission is under an obligation to provide a particular service to any user requesting it, this is sufficient to conclude that the service is compulsory. The compulsory nature of the service is established if the service-provider is obliged to contract, on consistent conditions, without being able to reject the other contracting party. That makes it possible to distinguish a SGEI from any other service provided on the market and, accordingly, from any other activity carried out in complete freedom.676 However, the universal and compulsory nature of the SGEI is not dependent on a reciprocal obligation to contract.677 The universal and compulsory nature of a service does not mean that it has to be provided free of charge 678 or in exchange for a predetermined (maximum) charge.679 253 The entrustment of a SGEI can be undertaken by an act of legislation and can relate to a group of undertakings defined in abstract terms, if that act clearly defines the PSOs concerned. There is no requirement that each of the operators be separately entrusted with that mission by an individual act or mandate.680 It is sufficient if there is a general instrument granting the power to issue a subsequent formal legal act specifying the precise extent of the SGEI.681 The requirements set out in Article 106(2) TFEU with respect to the act of entrustment apply accordingly.682 According to the Commission’s SGEI Communication the entrustment must at least specify: – the content and duration of the public service obligations, – the undertaking(s) and, where applicable, the territory concerned, – the nature of any exclusive or special rights if assigned to the undertaking by the authority in question, – the parameters for calculating, controlling and reviewing the compensation and – the arrangements for avoiding and recovering any overcompensation. 683 254 From the case law regarding Article 106(2) TFEU it follows that the Member State has a duty to give reasons why it considers that the service in question deserves to be characterised as a SGEI and therefore to be distinguished from other economic activities. Otherwise, the Commission would not be able to review the correctness of the Member State’s approach.684 A failure by the Member State to demonstrate that the SGEI criteria are satisfied may constitute a manifest error of assessment, which the 675 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 179. 676 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 190. 677 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 195. 678 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 203. 679 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 195. 680 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 183. 681 Commission, State aid N 37/2003, paras. 45 et seq. – BBC Digital Curriculum. 682 Koenig/Ritter/Ku ¨ hling, para. 86. 683 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 52. 684 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, paras. 171, 172.

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B. The definition of State aid

255–256

II

Commission must address, since otherwise the Commission itself commits a manifest error.685 (b) Second Altmark criterion: Establishment in advance of the parameters used to 255 calculate the compensation in an objective and transparent manner. The requirement to establish the parameters used to calculate the compensation in advance and in a transparent manner is intended primarily to rule out the possibility that the authority granting the compensation will retain any kind of discretion that might allow it to influence the compensation according to considerations that might possibly be politically motivated.686 The second Altmark criterion also serves to ensure transparency of the compensation payment concerned and thus to avoid potentially disguised overcompensation.687 This could arise in particular if the public authority concerned were to decide the compensation payments ex post and in awareness of the actual cost structure of the chosen undertaking.688 Thus, it allows all interested service providers to inform themselves in advance about the conditions envisaged for the SGEI. The condition thus anticipates the procurement procedure needed for the fourth criterion. 689 The requirements set out by the second criterion can be best met by a fixed remuneration rate for each service transaction.690 However, the Member State has a wide discretion also when determining the compensation for the costs, which calls for an assessment of complex economic facts and is subject to only restricted control. A certain degree of flexibility of the parameters may be necessary in certain cases.691 The Member State must introduce a control mechanism which ensures subsequent compliance with the parameters. The precise organisation of that mechanism is up to the Member State. 692 (c) Third Altmark criterion: No overcompensation. The compensation received by 256 the undertaking should be limited to what is necessary to cover the costs of performing the public service obligations plus a reasonable profit. According to the BUPA judgment the Member State has certain discretion in that respect. The review is limited to ascertaining whether the compensation provided for is necessary in order for the SGEI in question being performed in economically acceptable conditions or whether, on the other hand, the measure in question is manifestly inappropriate by reference to the objective pursued.693 The question of how far the approach in that ruling, which was made with regard to a pre-Altmark constellation, may also be applied to post-Altmark cases remains to be seen. The Commission’s practice is usually much stricter. Thus even the fact that a procurement procedure (according to the fourth criterion) leads to selection of the candidate making the most favourable offer is not in itself sufficient to rule out any overcompensation. The candidate selected in that way might enjoy particular cost advantages which its competitors do not have, meaning that the compensation payment it demands might be in excess of what is necessary, despite 685 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, paras. 171, 172. 686 Commission, State aid N 382/2004, paras. 57 et seq. – DORSAL. 687 ECJ, Case C-280/00 Altmark Trans [2003] ECR I-7747, paras. 90–91. 688 See Commission, State aid N 265/2006, para. 39 – Societa ` Ustica Lines e Societa` N.G.I. 689 Mederer/Pesaresi/Van Hoof/Santamato, para. 2.586. 690 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 64. 691 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II-81, para. 214. 692 GC, Joined Cases T-309/04, T-317/04; T-329/04 and T-336/04 TV2/Danmark v Commission [2008] ECR II- 2935, para. 227. 693 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II81, para. 222, with further references.

Arhold

151

II

257–259

Art. 107 TFEU

being lower than those demanded by competitors.694 It is doubtful whether this strict approach is in line with the Altmark case law. Some authors claim that when calculating the revenues obtained from a SGEI account has to be taken not only of revenues obtained directly from providing the SGEI, but also of other advantages, for example scale economies resulting from increased sales volume or positive branding effects. 695 In any case according to current case law of the General Court, the Court’s review of the Commission’s assessment in that regard must also observe the same limit and, accordingly, its review must be confirmed to ascertaining whether the Commission properly found or rejected the existence of a manifest error by the Member State. Furthermore, since the Court’s role is not to substitute its assessment of the relevant complex economic facts for that made by the Commission, the Court’s review consists in ascertaining that the Commission complied with the rules of procedure and the rules relating to the duty to give reasons and also that the facts relied on were accurate and that there has been no error of law, manifest error of assessment or misuse of powers. 696 257 According to the SGEI Communication, reasonable profit should be calculated by reference to the rate of return on capital that would be required by a typical company considering whether or not to provide the SGEI, taking into account the specific risk level. The calculation of reasonable profit may include incentive criteria relating, in particular, to the quality of service provided and gains in productive efficiency. 697 (d) Fourth Altmark criterion: Procurement procedure or Benchmark-CompanyTest. According to the fourth Altmark criterion, the undertaking which is to discharge public service obligations and the level of compensation needed must be chosen pursuant to a public procurement procedure. If this cannot be done the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with proper means of production, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations (Benchmark Company Test). 259 The fourth criterion is intended to ensure that the company entrusted with rendering SGEI will do so efficiently. That is in line with the fundamental requirements of the MEOT, according to which a service provider must receive no more than a market rate of compensation. The question of whether that aspect means that any procurement procedure permitted by the procurement guidelines is sufficient has not yet been clarified beyond all doubt. Even the wording in the Altmark Trans ruling is ambiguous. Some authors take the view that any procurement procedure conducted according to the procurement guidelines will suffice.698 That is not entirely in line with the MEOT which is, however, not directly applicable to SGEIs, as a market economy operator would not pay for SGEI anyway. The Commission has so far chosen to examine precisely whether the actual procedure carried out was suitable to identify the most favourable offer.699 The SGEI Communication gives some further guidance on how the Commission assesses the 258

694

Commission, State aid N 382/2004, paras. 57 et seq. – DORSAL. Koenig/Ritter/Ku¨hling, para. 88. 696 GC, Case T-289/03 British United Provident Association Ltd (BUPA) v Commission [2008] ECR II81, paras. 221–222. Confirmed by Case T-309/12 Zweckverband Tierko¨ rperbeseitigung v Commission ECLI:EU:T:2014:675, para. 169, and Case T-295/12 Germany v Commission ECLI:EU:T:2014:675, para. 116. Germany has appealed the letter judgment to the ECJ (pending as Case C-446/14 P). 697 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 61. 698 Mederer/Pesaresi/Van Hoof/Santamato, para. 2.582. 699 Commission, State aid N 475/2003, para. 57 – Public Service Obligations in respect of new electricity generation capacity for security of supply. 695

152

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B. The definition of State aid

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different procurement procedures. The Commission proposes that even in cases where it is not a legal requirement, the SGEI tendering procedure should be in line with the requirements of an ‘open’ or a ‘restricted’ procedure according to the procurement guidelines. The latter is only acceptable if interested operators are not prevented from tendering unless there are valid reasons closely linked to the provision of the SGEI. In contrast, the ‘negotiated procedure without publication of a contract notice’ cannot lead to the selection of the tenderer capable of providing the SGEI at least cost to the community. The ‘competitive dialogue’ and the ‘negotiated procedure with prior publication’ can only be deemed to satisfy the fourth Altmark criterion in exceptional cases, as they can restrict the participation of interested operators.700 Notwithstanding the procedure chosen, it must be carried out in a way that prevents overcompensation within the meaning of the third Altmark criterion. That can be ensured, for example by agreeing so-called claw-backclauses, which provide for (partial) repayment after a specified profit margin has been achieved.701 The most favourable offer is not necessarily the lowest offer. The award criteria may include environmental or social considerations as long as these considerations are closely related to the subject-matter of the service provided and allow for the selected offer to match the value of the market. Qualitative aspects are also allowed as award criteria.702 The Benchmark-Test is complex, difficult to conduct, and produces not very reliable 260 results. It should therefore be limited to cases where a procurement procedure is impractical, e. g. where existing intellectual property rights or the necessary infrastructure is owned by a particular service provider or where the tender procedure only led to one single bid. In the absence of any official definition in the EU case law, the Commission has given examples on how the Member States should find representative undertakings that comply with the notion of a ‘typical well run undertaking’. The representative undertakings should be found by applying objective criteria that are economically recognised as being representative for proper and satisfactory management, such as compliance with accounting standards in force, analytical ratios representative of productivity or analytical ratios relating to the quality of supply as compared with user expectations.703 In the absence of comparable undertakings, the Commission has accepted it if the Member State proved by other means that the chosen solution was the most favourable.704 (2) Burden of proof before national courts. Competitors bringing action on the basis 261 of Article 108(3) TFEU in a national court frequently find themselves faced with the practical difficulty of having to prove the non-fulfilment of the Altmark criteria, since according to a settled legal principle, a person seeking to rely upon a right in an action has to prove the facts on which that right is based (ei incumbit probatio qui dicit, non qui negat).705 That principle applies under EU law as well. However, the ECJ provides plaintiffs with a guideline on how to address the complex Altmark criteria. According to 700 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, paras. 64–66; e. g. for disapproval of a negotiated procedure with prior notification Com., OJ 2013 L 220/20 paras. 170–178 France, Socie´te´ Nationale Maritime Corse-Me´diterrane´e (SNCM). 701 For more details see Commission, State aid N 381/2004, para. 74 – Setting up of a high speed infrastructure in Pyre´ne´es-Atlantiques. 702 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, para. 67. 703 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest, OJ 2012 C 8/4, paras. 72–74. 704 Commission, OJ 2007, L 219/9, paras. 111–122 – Slovenian Electricity Tariffs. 705 Opinion of Advocate General Tizzano in Case C-526/04 Laboratoires Boiron SA [2006] ECR I-7529, para. 68.

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the principle of effectiveness, if the national court finds that it is impossible or excessively difficult for the competitor to prove overcompensation, inter alia because that evidence relates to data which the plaintiff cannot have, the national court is required to use all procedures available to it under national law, including that of ordering the necessary measures of inquiry, in particular the production by one of the parties or a third party of a particular document.706 That principle also applies to the Commission, which in State aid cases has to prove that measures in question are illegal aid, i. e. that the Altmark criteria have not been fulfilled. 707 In particular, the Commission has to demonstrate precisely both the fact that and the amount by which the compensation payments exceeded the undertaking’s net additional costs. It is not enough to take the circumstance that the undertaking entrusted with the SGEI pursues a policy of aggressive competition that does not cover costs in another business sector, and deduce from this that such measures are being cross-subsidized from the SGEI and that this indicates the existence of overcompensation. 708 262

(3) Aid to a party other than the SGEI provider. Insofar as compensation payments to an SGEI provider satisfy the Altmark criteria, State aid in favour of that provider can be ruled out. That does not, however, automatically mean that the SGEI is entirely State aid free. According to the principle that all the elements of Article 107(1) TFEU have to be fulfilled and that granting of an indirect advantage is also possible, situations can arise where a provider is entrusted with providing SGEI despite the fact that another person would have had an obligation to provide the services concerned – for example as a consequence of the ‘polluter pays’ principle. That question has to be examined in each individual case; one example is the case of disposal of slaughterhouse waste by undertakings especially commissioned by the State, with whom the slaughterhouses and farms were obligated to contract, even though the ‘polluter pays’ principle meant that they would have had a duty to carry out the disposal themselves.709

III. Granted through State resources Bibliography: Bartosch, Schranken-Schranken in der EG-Beihilfenkontrolle – Tendenzen der ju¨ngsten Rechtsprechung der Gemeinschaftsgerichte, NJW 2002, 3588; id., Neues zum Tatbestandsmerkmal der “Belastung des Staatshaushalts” i. S. des Art. 87 I EG, NVwZ 2001, 643; id., Wettbewerbsverzerrungen auf den Ma¨rkten fu¨r den Betrieb und die Nutzung von Flughafeninfrastrukturen, WuW 2005, 1122; Castendyk/ Bark, Unterliegt das Filmfo¨rderungsgesetz der Beihilfekontrolle der Art. 87 et seqq. EGV? Ein Beitrag zu den EG-rechtlichen Grenzen der Filmfo¨rderung in Deutschland, ZUM 2003, 480; Do¨rr, Der Einfluss des EGBeihilfenrechts auf die Gebu¨hrenfinanzierung der o¨ffentlich-rechtlichen Rundfunkanstalten, ZUM 2003, 887; Ehricke, Staatliche Maßnahmen zur Fo¨rderung umweltfreundlicher Energien und europa¨isches Wettbe¨ ffentlich-rechtliche Rundfunkanstalten als Beihilfeempfa¨nger und o¨ffenwerbsrecht, RdE 2003, 57; Frenz, O tliche Auftraggeber, WRP 2007, 264; Hakenberg, Die Rechtsprechung des EuGH und EuG auf dem Gebiet der staatlichen Beihilfen in den Jahren 2000 und 2001, EWS 2003, 201; id./Erlbacher, Die Rechtsprechung des EuGH und EuG auf dem Gebiet der staatlichen Beihilfen in den Jahren 1999 und 2000, EWS 2001, 208; Herrmann, Der gemeinschaftsrechtliche Begriff der Beihilfe, ZEuS 2004, 415; Iro,Die Vereinbarkeit des Stromeinspeisungsgesetzes mit dem EG-Vertrag, RdE 1998, 11; Jaeger, Grenzen der staatlichen Zurechenbarkeit parafiskalischer Abgabenerhebung durch o¨ffentliche Einrichtungen – Zugleich Anmerkung zum EuGH-Urteil Pearle, EuZW 2004, 558; Koenig, EG-beihilfenrechtskonforme Beteiligung privater Gesellschaften an gemischt o¨ffentlich-privaten Gemeinschaftsunternehmen, EuZW 2006, 203; id./Haratsch, Ring frei im DVB-T-Beihilfenstreit vor der Europa¨ischen Kommission – Terrestrischer digitaler Rundfunk vor dem Aus?, 706

ECJ, Case C-526/04 Laboratoires Boiron SA [2006] ECR I-7529, para. 55. Cf. Opinion of Advocate General Niilo Ja¨a¨skinen in ECJ, Case C-399/08 P Commission/Deutsche Post [2010] ECR I- 7831, paras. 88–89 with further references; as well as the judgment in the same case, paras. 38–48. 708 GC, Case T-266/02 Deutsche Post v Commission [2008] ECR II-1233, para. 90. 709 ECJ, Case C-126/01 GEMO [2003] ECR I-13769. 707

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ZUM 2005, 275; id./Ku¨hling, How to cut a long story short: Das Preussen-Elektra-Urteil des EuGH und die EG-Beihilfenkontrolle u¨ber das deutsche Rundfunkgebu¨hrensystem, ZUM 2001, 537; dies., Das PreussenElektra-Urteil des EuGH: Freibrief fu¨r Abnahme- und Vergu¨tungspflichten in der Energiewirtschaft, NVwZ 2001, 768; id./id., EG-beihilfenrechtlicher “Switch-Off” fu¨r das digitale terrestrische Fernsehen (DVB-T)? – Zugleich ein Beitrag zur EG-beihilfenrechtlichen Qualifikation staatlich benannter Einrichtungen, K&R 2004, 201; Kruse, Das Merkmal der “Staatlichkeit” der Beihilfe nach Art. 87 Abs. 1 EG, ZHR 165 (2001), 576; Ku¨hling, Von den Vergu¨tungspflichten des Energieein-speisungsgesetzes bis zur Deckungsvorsorge des Atomgesetzes: Die deutsche Energierechtsordnung im Koordinatensystem des Europa¨ischen Beihilfenrechts, RdE 2001, 93; Lu¨bbig, Das “Stardust-Marine” Urteil des EuGH zur Anwendung des EG-Beihilfenrechts auf das Aktivgescha¨ft der o¨ffentlichen Banken, WM 2002, 1828; Mederer/Pesaresi/Van Hoof, EU Competition Law Vol. IV – State Aid, 1. Aufl. 2008, Part 2, Chapter 2; Nagel, Die Vereinbarkeit des Gesetzes fu¨r den Vorrang Erneuerbarer Energien (EEG) mit dem Beihilferecht der EG, ZNER 2000, 100; Nicolaides/Kekelekis/ Kleis, State Aid Policy in the European Community: Principles and Practice, 2. Aufl. 2008, Chapter I; Reich/ Helios, EuGH, Urteil v. 16. 5. 2002, Rs. C-482/99 m. Anm. Reich/Helios, EuZW 2002, 468; Ritgen, Stromeinspeisungsgesetz und europa¨isches Beihilfenaufsichtsrecht, RdE 1999, 176; Ruge, Das BeihilfeMerkmal der staatlichen Zurechenbarkeit in der Rechtsprechung des EuGH am Beispiel des Stromeinspeisungsgesetzes, WuW 2001, 560; Sanchez/Rydelski, Handbuch EU Beihilfenrecht, 1. Aufl. 2003, Kapitel 2 § 1; Salje, Die Vereinbarkeit des Stromeinspeisungsgesetzes mit dem EGVertrag, RIW 1998, 186; Slotboom, State Aid in Community Law: a Broad or Narrow Definition?, ELRev 1995, 289; Schnelle/Bartosch, Umfang und Grenzen des EG-wettbewerbsrechtlichen Verbots der Quersubventionierung, EWS 2001, 411; Slot, Comment on “Sloman Neptun”, CMLR 1994, 142; Solte´sz, Sa¨umige Schuldner, sa¨umige Gla¨ubiger … – Die Nichtdurchsetzung von Forderungen der öffentlichen Hand als staatliche Beihilfe i. S. v. Art 87 Abs. 1 EG, EuZW 2003, 73; id, Die “Belastung des Staatshaushaltes” als Tatbestandsmerkmal einer staatlichen Beihilfe i. S. des Art 92 I EGV, EuZW 1998, 747; id, A challenge for the Commission’s State aid policy in the field of airports – Case T-68/03 – Olympic Airways v. Commission, European State Aid Law Quarterly 2008, 207; id., Regionalflughäfen im Visier der Brüsseler Beihilfenkontrolle – Die Ryanair-Praxis der Kommission und die neuen Leitlinien, EWS 2006, 211; id., “Billigflieger” im Konflikt mit dem Gemeinschaftsrecht? – Niedrige Flughafengebühren und das Europäische Beihilferegime, WuW 2003, 1034; Vesterdorf, A Further Comment on the New State Aid Concept as this Concept Continues to be Reshaped, EStAL 2005, 393; Zuleger, EGStrukturfondspolitik und EG-Beihilfenrecht – Strukturfondsmittel als staatliche Mittel i. S. von Art. 87 Abs. 1 EG, EWS 2008, 369.

1. General The category ‘granted by a Member State or through state resources’, involves, to be 263 precise, two different ‘tests’710, which have only been further developed and specified in the most recent case law. Unfortunately, the case law and legal commentaries have not always drawn a clear distinction between these two levels: Firstly, it is necessary to ascertain whether the measure is ‘imputable’ to the Member 264 State. This criterion, which was introduced with the Stardust judgment 711, excludes – to put it in non-technical terms – those measures comprising State aid that do not originate from State decision-makers. The reasoning behind this is that the prohibition of State aid is only directed at Member States. While it is relatively clear that private undertakings cannot grant State aid, public undertakings whose shares are held by public shareholders and enjoy relatively autonomous freedom of action, do occupy a certain grey area. It frequently cannot be determined whether a certain measure taken by a particular undertaking involved its management’s own free decision or if the undertaking was acting on the instruction of the State (as its ‘extended arm’, so to speak). The second part of the double test involves ascertaining whether the measure in 265 question leads to a burden on the State budget. This criterion too, which was ultimately introduced with the Sloman Neptun712 and Kirsammer-Hack713 judgments, derives from 710 ECJ Case C-482/99 France v Commission [2002] ECR I- 4397, mn. 32; GC Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 103. 711 ECJ Case C-482/99 France v Commission [2002] ECR I- 4397. 712 ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887. 713 ECJ Case C-189/91 Kirsammer-Hack [1993] ECR I-6185.

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the language of Article 107(1) TFEU and the necessity of restricting the definition of the term ‘State aid’. If measures that would not entail a burden on the State budget had to fall under the scope of application of Article 107 TFEU as well, the term ‘State aid’ would lose any distinctiveness it may have had. Almost any State intervention in the economy for the purpose of improving the economic conditions would then be subject to State aid control. The criterion ‘burden on the State budget’ would exclude measures that, although instigated by the State (thus fulfilling the first part of the double test, i. e. imputability), are ultimately financed by private third parties (‘at the expense of private entities’). 266 This division will be maintained to the greatest possible extent in the following discussion. However, since the two requirements of imputability and burdening of a State budget are closely interlinked, they cannot always be consistently distinguished from each other.714

2. Imputability a) Background. The question of imputability to a State is a criterion that only recently has been increasingly incorporated into case law, specifically with the fundamental Stardust decision.715 This case took up the question of the extent to which measures taken by companies controlled by a State are subject to the prohibition of State aid. 268 The backdrop to this ruling is the fact that in many cases the public shareholder exerts a considerable influence over the activity of an undertaking and uses this as a vehicle for implementing certain economic policy goals. For example, public banks have often served as an instrument to support companies in distress since they are able to grant capital participations, loans, bank guarantees, etc. to companies that could not attract such support from private backers on the free market. In these cases, the fact that assistance provides a benefit is generally beyond any doubt. The intervention of the public undertaking (the bank) occurs because the company that is to be supported does not receive any funds from private investors and the State would like to rescue it for political reasons (jobs, securing the business location, etc.). 269 On the other hand, however, there are also state investments that work in complete accordance with the principles of private economy and on which the State deliberately refrains from exerting any influence. Such undertakings are not the vicarious agents of the State in the implementation of economic policy concepts, but independent economic entities. The political decision-makers are, in fact, not involved in the strategic entrepreneurial decisions made by these undertakings. Due to the neutrality requirement in the Treaty (Article 295 EC), such measures cannot be assessed under the State aid rules. 267

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b) The Stardust judgment. Under the earlier case law, it had been sufficient for State aid law to apply if an entity was established by the State to perform the task of granting State aid and the State had the ability to exert influence over it.716 Only in isolated individual decisions did the Court of Justice take up the question of whether a certain measure was ‘imputable’ to the State. For example, the Court of Justice found in Van der Kooy that there is no need to distinguish between whether aid is granted by the State directly or by public or private bodies that have been established or appointed to 714 An illustrative example of this is provided by GC Case T-136/05 EARL [2007] ECR II-4063, mn. 129 et seqq. Salvat pe`re & fils and Others v Commission, as well as Com, OJ 2009 L 83/1, mn. 328 et seqq. – Power Purchase Agreements, Poland. 715 ECJ Case C-482/99 France v Commission [2002] ECR I- 4397. 716 GC Case T-358/94 Air France v Commission [1996] ECR II-2109, mn. 57 et seqq.

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implement the State aid regulation.717 In ENI/Lanerossi718 and Alfa Romeo719, the Court of Justice explicitly found that the injections of capital in question were the results of actions attributable to the Italian State. A decisive reason for this was the fact that the body that had taken the measure was controlled by the Italian State, members of its board of directors and management board were appointed by the Prime Minister, it had to take account of directives issued by State agencies, and it refinanced itself from bonds guaranteed by the State.720 In fact, the decision-making practice of the Commission was even ‘more generous’. In order to extend the prohibition of State aid to the greatest possible extent, in its earlier practice, the Commission had normally limited itself to finding that the body or undertaking in question was controlled by the State.721 However, up to the year 2002, the case law had in no case denied the State aid character of a measure for lack of imputability. This changed fundamentally with the Stardust judgment722 in 2002. According to this decision of the Court of Justice – which was both trailblazing and annoying from the Commission’s point of view – a measure taken by companies controlled by a State only fall under the prohibition of State aid if such measure is imputable to the State. The CJEU does recognise that on that point, it cannot required that it be demonstrated, on the basis of a precise inquiry, that in the particular case the public authorities specifically incited the public undertaking to take the aid measures in question. Precisely due to of the privileged relations existing between the State and a public undertaking, it would be very difficult for a third party to demonstrate in a specific case that State aid measures taken by such an undertaking were in fact actually adopted at the directive of the authorities. The imputability to the State of an aid measure taken by a public undertaking may be inferred from a ‘set of indicators’ arising from the circumstances of the case and the context in which that measure was taken. According to the CJEU, the following signs could be drawn upon to conclude imputability: – the fact that the undertakings involved could not take the decision in dispute without taking account of the requirements of the State, – the fact that the undertakings had to take account of directives issued by State bodies, – the integration of the public undertaking into the structures of the public administration, – the nature of its activities and the exercise of the latter on the market in normal conditions of competition with private market participants, – the legal position of the undertaking, – the intensity of the supervision exercised by the public authorities over the management of the undertaking, – any other indicator showing, in a particular case, an involvement by the public authorities in the adoption of a measure or the unlikelihood of their not being involved, having regard also to the compass of the measure, its content or the conditions which it contains. The mere fact that a public undertaking has been constituted in the form of a corporation, which involves certain autonomy, can, according to the CJEU, not be 717

ECJ Cases 67/85, 68/85 a. 70/85 Van der Kooy and Others v Commission [1988] ECR 219, mn. 35. ECJ Case C-303/88 Italy v Commission [1991] ECR I-1433. ECJ Case C-305/89 Italy v Commission [1991] ECR I-1603. 720 ECJ Cases C-303/88 Italy v Commission [1991] ECR I-1433, mn. 12 et seq.; C-305/89 Italy v Commission [1991] ECR I-1603, mn. 14 et seq. 721 Cf. for example Commission, OJ 2000 C 162/15(16) – SNIACE. 722 ECJ Case C-482/99 France v Commission [2002] ECR I-4397. 718 719

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deemed sufficient to exclude imputability.723 In the words of the Advocate General Jacobs, ‘the fact that the public authorities may exercise directly or indirectly a dominant influence does not prove that they actually exercised that influence in a given case.’724 This judgment has led to some legal uncertainty, since it is virtually impossible for either the Commission or ‘outside’ control authorities to ascertain whether a specific measure was taken at the directive of the State shareholder or the management of the undertaking decided to take it of its own accord. The members of the management of public undertakings often come from governmental circles, and directives can often be issued ‘soundlessly’ by the State without the Commission being able to prove it. With the Stardust judgment, the Court of Justice has therefore not only weakened the efficiency of the State aid control, but also granted the Member States some opportunities to circumvent the State aid regime. As a result, for example, consultants often recommend very openly that decisions on the granting of benefits be delegated to the management to the greatest possible extent (in order to escape State aid control). Naturally, competitors have to face with this problem of legal uncertainly, but it exists for State aid recipients as well, who often are not even aware of the ‘State origin’ of a measure.725 A vivid example of this can be seen in State banks, which act in part as public institutions that promote economic development, but also in part as economic undertakings. For an outside contractual party it is often scarcely discernible if a specific transaction has come about at the directive of the State, or it was decided at the management’s own initiative.726 It remains to be seen in practice whether the criteria developed by the Court of Justice can be properly wielded or if State entities will be able to elude State aid control in the future under the ‘cover’ of public undertakings. The Commission can be expected to at least more closely examine those cases in which the public bodies’ influence on the public undertaking’s day-to-day business is ensured by extensive interlocking directorships. This is the case, for example – as the Commission’s decision-making practice has shown – with many airports (representatives of local authorities can frequently be found in the governing bodies of the operating companies).

c) ‘Post-Stardust’ – The Deutsche Bahn judgment and the subsequent case law. Although the Commission had initially resisted the Stardust judgment, it has handled this criterion very well since then. As the subsequent case law shows, not all that many decisions have been repealed for lack of imputability. 280 The most important decision after Stardust was the Deutsche Bahn case 727, in which the imputability criterion performed a demarcation function that had presumably not been foreseen. Deutsche Bahn held that the German tax exemption for aviation fuel was State aid that distorted competition with the ‘low-cost airlines’. The Court made it clear that the question of imputability can also arise when States grant benefits on the basis of legislative acts. However, benefits are not to be imputed to the States insofar as they are granted in implementation of binding Community law. Since the contested regulations were ultimately based on EU directives, the existence State aid was excluded. The benefit was not imputable to the German State.728 279

723

ECJ Case C-482/99 France v Commission [2002] ECR I-4397, mn. 50 et seqq. Opinion of Advocate General Jacobs C-482/99, ECR 2002, I-4397, mn. 65 and 73 et seqq. GC Case T-55/99 CETM v Commission [2000] ECR II-3207, mn. 124–127. 726 An instructive case can be seen in the Commission decision, 13 August 2008, not yet published, Article 318 et seqq. – Hellenic Shipyards. 727 GC Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 99 et seqq. 728 GC Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 102. 724 725

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Airports were involved in the Olympic Airways decision729, in which the GC had 281 repealed a decision of the Commission. The Commission found that the Greek State had granted benefits to the Greek airline by way of the airport operating company which it controlled. These benefits consisted of tolerance of the non-payment, or deferment of the payment dates of social security contributions, value added tax, airport charges and a special ticket tax. In the contested decision, the Commission had merely determined with regard to the question of imputability that the Greek airports were being financed by the State and that the income derived from their activities would flow to the State, and therefore they were not autonomous financially. 730 Thus, although the Stardust judgment was explicitly cited, its criteria were not really examined. It was obvious that such a curtailed approach could not hold up before the Community courts.731 Significantly, the ‘Community guidelines on financing of airports and startup aid to airlines departing from regional airports’ which are relevant in this regard have a serious shortcoming: there is even a mention of imputability criteria pursuant to Stardust.732 The Commission has meanwhile also become aware of this defect and made efforts in its more recent decision-making practice to substantiate imputability more extensively where measures of airport operating companies are involved. 733 In some cases, the case law is also very generous in its definition of imputability. In 282 the Elliniki Nafpigokataskevastiki u. a./Commission734 case, the central point of the dispute was the question of whether the guarantee of a bank was imputable to the Greek State. The bank (the alleged State aid grantor) had been involved in a privatisation procedure immediately before the guarantee had been granted. Although the bank was already completely privatised at the time of the legally formal handover of the guarantee and no influence of the State could be proven, the Commission took as a basis the time at which the bank had raised the prospect (without being legally bound) of granting the guarantee. Since at this (earlier) point in time, the bank had still been controlled by the State, the imputability could be constructed with this trick. However, this approach, which was approved by the Court, is in violation of the Guarantees Notice of the Commission, according to which the existence of State aid is based on the time at which the guarantee is officially assumed.735 d) The imputation criteria in the decision-making practice. The case law and the 283 Commission practice have continued to develop the Stardust criteria in recent years. Naturally, the primary reason for this was the fact that the Member States were exerting influence by way of supervisory bodies: aa) State influence in the decision-making bodies. The most important indicator of 284 imputability to the State in practice is certainly a dominant role of the State in the decision-making bodies, as well as State consent requirements which are not limited to a pure regularity control, but enable it to actively steer the entity involved. 736 Already in 729

GC Case T-68/03 Olympic Airways v Commission [2007] ECR II-2911. Commission, OJ 2003 L 132/1, mn. 210 – Olympic Airways. 731 Commission, OJ 2003 L 132/1, mn. 312–319 – Olympic Airways. 732 OJ 2005 C 312/1, cf. in particular Article 51 et seq. therein. 733 Cf. for exampleCommission, OJ 2009 C 12/6, mn. 215 et seqq. – Frankfurt-Hahn Airport and Ryanair; Commission, OJ 2007 C 257/16, mn. 58 et seq. – Berlin-Scho¨ nefeld Airport; Commission, OJ 2007 C 217/25, mn. 78 – NERES – Dortmund Airport; Com, OJ 2008 L 346/1, mn. 184 et seqq. – DHL and Leipzig/Halle Airport. 734 GC Case T-384/08 Elliniki Nafpigokataskevastiki and Others v Commission [2008] BeckEuRS 483435. 735 Guarantees Notice, OJ 2008 C 155/10, Article 2.1. 736 GC Case T-136/05 EARL Salvat pe `re & fils and Others v Commission [2007] ECR II-4063, mn. 140 et seqq. 730

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1991, the Court of Justice had explicitly determined the imputability of capital injections to the State in ENI/Lanerossi737 and Alfa Romeo738 on similar grounds; in this case, the decisive factors were that the entity in question was controlled by the Italian Member State, its board of directors and management board were appointed by decree of the Prime Minister, it had to take account of directives issued by state agencies, and it refinanced itself from bonds guaranteed by the State.739 285 One indicator of imputability is if the measure in question was approved by the supervisory board and shareholders’ meeting of the undertaking in question and State decision-makers had a dominant influence over these bodies (i. e. a decision could not be made without their consent).740 This is particularly the case if the State has special rights under company law.741 If a measure ‘cannot be taken without regard to the requirements of the public authority’, this would likewise indicate imputability.742 If the members of the board of the directors are ‘directly linked to the government’, according to the Commission, this would indicate imputability.743 If the measure in question is of considerable strategic importance for the activity of the respective undertaking, the Commission considers it ‘rather unlikely’ that such a resolution would be adopted without the public majority shareholder.744 If a State body ultimately decides on the allocation of the resources, imputability must be deemed to exist.745 Another indication of imputability is the question of what person has taken or promulgated the measure. If it was a State official, that would be an argument for State involvement.746 On the other hand, if State representatives who sit on the supervisory board of a public undertaking simply tolerate the granting of an advantage by the public undertaking to another company, this would not be enough to conclude that the behaviour of the public undertaking could be imputed to the State.747 286 If the remuneration regulations of a public institution (in this case an airport), including price reductions and discounts, are subject to the requirement of permission by the competent Ministry, such measures are, in the view of the Commission, imputable to the State.748 If a State body plays a decisive role in the granting and execution of the measure in question, this too would indicate imputability. 749 In the view of AG Wathelet imputability could even be assumed in cases where the manager of a public company had exceeded its authority and had acted in breach of his internal rules of competence.750 This obviously goes too far and departs from the Stardust case law, according to which it has to be demonstrated that the public authorities have actually exercised their influence in a given case.751 If the manager clearly acts ultra vires 737

ECJ Case C-303/88 Italy v Commission [1991] ECR I-1433. ECJ Case C-305/89 Italy v Commission [1991] ECR I-1603. 739 ECJ Case C-303/88 Italy v Commission [1991] ECR I-1433, mn. 12 et seq. –. Similar: ECJ Case C305/89 Italy v Commission [1991] ECR I-1603, mn. 14 et seq. 740 Commission, OJ 2009 C 12/6, mn. 215 et seqq. – Frankfurt-Hahn Airport and Ryanair. Cf. also Com, OJ 2008 L 346/1, mn. 184 et seqq. – DHL and Leipzig/Halle Airport. 741 Commission, OJ 2009 L 83/1, mn. 179 – Power Purchase Agreements, Poland. 742 Commission, OJ 2006 L 81/36, mn. 30 – Shetland Leasing and Property Developments Ltd. 743 Commission, OJ 2005 L 240/45, mn. 35 – Public Spanish shipyards. 744 Commission, OJ 2007 C 217/25, mn. 78 – NERES – Dortmund Airport. 745 Commission, OJ 2009 L 159/11, mn. 57 – Luxembourg compensation fund for the organisation of the electricity market. Cf. also Commission, OJ 2007 L 219/9, mn. 68 – Slovenian legislature on qualified energy producers (on the question of burdening of state resources). 746 Commission, OJ 2006 L 257/11, mn. 207 – France Te ´le´com. 747 Commission, OJ 2006 L 225/1 – Inter Ferry Boat. 748 Commission, OJ 2007 C 257/16, mn. 58 et seq. – Berlin-Scho ¨ nefeld Airport. 749 Commission, OJ 2009 L 83/1, mn. 179 – Power Purchase Agreements, Poland. 750 Opinion of Advocate Wathelet in ECJ Case C-242/13 Commerz Nederland NV v Havenbedrijf Rotterdam NV [not yet published]. 751 Opinion of Advocate General Jacobs C-482/99, ECR 2002, I-4397, mn. 65 and 73et seqq. 738

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and the State has not caused him to do so, there is no reason why Art. 107 TFEU, which only applies to the behaviour of member states, should apply. Even if a public entity has certain autonomy on constitutional grounds (indepen- 287 dence of broadcasting), this does not, in the Commission’s view, automatically exclude imputability if this entity carries out a public task.752 If the other main activity of the entity is to provide State aid, this is a sign of imputability.753 If the measure serves the implementation of political goals or a statute, this would 288 argue for imputability.754 One indication of this would be if the entity’s activity is ‘closely linked to public policy’.755 If the State bears the bulk of the financing, this is also a sign, from the Commission’s point of view, that these measures form a part of government policy.756 The fact that for several years, the State or a regional authority has offset the losses of the undertaking that took the measure in question, would – along with interlocking directorships – argue for their imputability.757 bb) Bodies appointed by the Member State. The Court of Justice found as early as 289 1988 in Van der Kooy that there is no need to distinguish between whether aid is granted directly by the State or by public or private bodies that have been established or appointed to implement the State aid regulation.758 The activity of a State (or municipally) controlled business development company (promotion of economic development) is therefore imputable to the State as a rule, particularly if it can be determined beyond any doubt that the responsibility for these tasks was transferred to it and the measures were approved by the public shareholder.759 If a private company performs the coordination and approval of subsidies in the area of public transport and in doing so is subject to a State ministry as if it were a government body, so that it is only formally separate from the government but is still subject to its direct influence, then its actions are also imputable to the State.760 Even if the body involved is not a legally independent legal entity, but merely a 290 dependent State body without a legal personality of its own, it is generally possible that the measure in question might not be imputable to the State in an individual case. That would be the case if the body – despite its legal dependence – has a great degree of organisational independence, as well as an autonomous authorisation to make decisions, and no involvement by government authorities is present. After all, the legal form of an undertaking, and thus also the question of legal dependency, ultimately do not play a role in competition law761, so this also has to apply for the question of imputability that is under consideration here.

752 Commission, OJ 2008 L 236/10, mn. 67 et seq. – Digital terrestrial television (DVB-T) NordrheinWestfalen. 753 Commission OJ 2005 L 240/45, mn. 35 – Public Spanish shipyards. 754 ECJ Case C-345/02 Pearle BV and Others v Hoofdbedrijfschap Ambachten [2004] ECR I-7139, mn. 37; GC Case T-136/05 EARL Salvat pe`re & fils and Others v Commission [2007] ECR II-4063, mn. 164; Commission, OJ 2009 L 83/1, mn. 176 et seqq. – Power Purchase Agreements, Poland. 755 Commission, OJ 2005 L 240/45, mn. 35 – Public Spanish shipyards. 756 Commission, OJ 2007 L 32/37, mn. 82 – French liquor wines. 757 Commission, OJ 2007 C 217/25, mn. 54 et seq. – NERES – Airport Dortmund. 758 ECJ Cases 67/85, 68/85 and 70/85 Van der Kooy and Others v Commission [1988] ECR 219, mn. 35. 759 Commission, OJ 2004 L 61/66, mn. 29 et seqq. – Space Park Bremen. For measures taken by public development banks see GC Case T-387/11 Nitrogenmuvek Vegyipari,Zrt. v Commission ECR [not yet published], mn. 63. 760 Commission, OJ 2008 C 174/13, mn. 69 – Emsla ¨ndische Eisenbahn GmbH. 761 ECJ Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, mn. 17; C-82/01 P Ae ´roports de Paris v Commission [2002] ECR I-9297, mn. 70 et seqq.

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cc) Implementation of mandatory Community law. No imputability applies where the measures under discussion involve the implementation of binding Community law. In this case, the Member State merely acts as an extended arm of the Community and implements, for example, directives. This applies to such benefits as tax exemption for aviation fuel762, as well as the right to deduct input tax payable on taxed turnovers within the framework of the harmonised VAT system763. 292 This case law is presumably to be understood to mean that no imputation will be made to a State if the State has no room for manoeuvre in the implementation of Community standards, i. e. a ‘clear and precise obligation’ exists in this regard. 764 Whether the Community courts would find in favour of an imputability even if a State has various alternatives available in its implementation of the Community standards, is highly doubtful, but this is also very unlikely to occur. For example Article 11(3) of EU Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading765 explicitly stipulates that the national allocation plans of the States must be consistent with the State aid provisions. This means that the application of State aid law will not be excluded for lack of imputability if the national transposition measures contain specific benefits. Thus, imputability can be ruled out only if the State is left with absolutely no flexibility in implementing the measure. 291

3. Burden on State resources 293

a) Background. The criterion ‘burden on the State budget’ has also gained in importance only recently. This criterion was explicitly introduced by the Court of Justice with its decision in the Sloman Neptun766 matter. Whether or not this is justified remains a subject of controversy.767 With the ‘burden on public funds’ criterion, benefits are excluded from State aid control if they are granted by a State that does not incur any financial expenditures thereby.

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b) Previous case law. The case law of the CJEU on this issue had been rather inconsistent and not always free of contradictions. The Court of Justice took up this issue for the first time with the Van Tiggele768 case. This involved the question of whether a Dutch regulation requiring minimum prices for alcoholic beverages constitutes State aid for the manufacturers and the distributors. The Court of Justice found that this was not the case and determined that a ‘measure … with the objective of favouring distributors of a product at the exclusive expense of consumers cannot constitute an aid’. The advantages that such an intervention in the formation of prices provides for the distributors of the product are not, in the CJEU’s assessment, granted directly or indirectly through State resources.769 The Advocate General Capotorti also argued that the existence of State aid requires a ‘burdening of the public finances in the form of an expenditure or reduced revenues’. 770 This assessment was confirmed by the Court of Justice in its Norddeutsches Vieh- und Fleischkontor decision. 771 762

GC Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 99 et seqq. ECJ Case C-460/07 Puffer v Unabha¨ngiger Finanzsenat ECR [not yet published] mn. 67 et seqq. 764 GC Case T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 102; ECJ Case C-460/07 Puffer v Unabha¨ngiger Finanzsenat ECR [not yet published], mn. 70. 765 OJ 2003 L 275/32. 766 ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887. 767 Adverse: in particular Slotboom ELRev 1995, 289. 768 ECJ Case 82/77 Public prosecutor of the Kingdom of the Netherlands v Van Tiggele [1978] ECR 25. 769 ECJ Case 82/77 Public prosecutor of the Kingdom of the Netherlands v Van Tiggele [1978] ECR 25, mn. 23/25. 770 Opinion of Advocate General Capotorti, 82/77, ECR 1978, 25, 52 et seq. 771 ECJ Cases 213/81 to 215/81 Norddeutsches Vieh- und Fleischkontor [1982] ECR 3583. 763

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However, the CJEU has meanwhile made a surprising about-face. In the case of 295 Commission v France772, the Court of Justice took up the issue of the State aid character of a ‘solidarity grant’ to subsidise the poorest farmers in France. This grant was financed by the Caisse nationale de cre´dit agricole, a public entity. The resources with which the ‘solidarity grant’ was paid out came from surpluses the Caisse nationale de cre´dit agricole had generated from private banking transactions. No public moneys contributed to the establishment of this fund. The Court of Justice presumed the existence of State aid, but its substantiation was in stark contrast to its previous decisions. It stated explicitly that ‘aid need not necessarily be financed from State resources to be classified as State aid.’773 Some legal commentators have taken this decision to mean that the Court of Justice has abandoned the criterion of ‘burden on public funds’.774 c) The more recent case law – Sloman Neptun, Kirsammer Hack and PreussenE- 296 lektra. The Court of Justice resolved this lack of clarity in the aforementioned Sloman Neptun775 case. It returned to the point of departure it had expressed in Van Tiggele and Norddeutsches Vieh- und Fleischkontor and confirmed the decisiveness of the criterion ‘burden on public funds’. The subject matter of the Sloman Neptun preliminary proceeding was the German Law on the International Shipping Register, which contained a provision on contracts of employment with seafarers from non-member countries. If the ship in question was not registered in the International Shipping Register, these contracts could be subjected to working conditions and rates of pay that were less favourable than under German law. This Law served to secure the international competitiveness of German shipping by reducing the personnel costs, i. e. it had a clear reference to competition. The Labour Court of Bremen took the view that this constituted State aid since it permitted a partial non-application of German laws on employment and social security. This assessment was shared by the Commission, since the application of foreign employment law led to lower rates of pay. Since these remuneration rates served as the basis for calculating social security contributions and taxes, this led to a loss of tax revenue, and thus to a financial burden on the German State. Beyond that, the Commission and the Advocate General Darmon argued that the ‘burden on public funds’ criterion is not justified.776 The Court of Justice, on the other hand, found that State aid is always subject to the 297 prerequisite of a burden on public funds, stating that only those benefits are to be seen as State aid ‘which are directly or indirectly granted through state resources’. However, this was supposedly not the case in the legal dispute involved, since the system at issue did not seek, through its object and general structure, to create an advantage which would constitute an additional burden for the State or the abovementioned bodies, but only to alter in favour of shipping undertakings the framework within which contractual relations are formed between those undertakings and their employees. The consequences arising from this (lower social security contributions, loss of tax revenue) are always inherent in such a system.777 Shortly thereafter the Court of Justice confirmed the decisiveness of the ‘burden on 298 public funds’ criterion in Kirsammer-Hack.778 This case involved the exemption of small businesses from the German Protection Against Unfair Dismissal Act (Ku¨ndi772

ECJ Case 290/83 Commission v France [1985] ECR 439. ECJ Case 290/83 Commission v France [1985] ECR 439, mn. 14. 774 Slotboom ELRev 1995, 289, 293. 775 ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887. 776 Opinion of Advocate General Darmon, ECJ C-72/91 a. C-73/91, ECR 1993, I-887, 905 et seqq. 777 ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887, mn. 21. 778 ECJ Case C-189/91 Kirsammer-Hack [1993] ECR I-6185. 773

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gungsschutzgesetz), through which they gained a certain advantage over other undertakings (e. g. no compensation payments for socially unjustified dismissals, no legal expenses for proceedings). The Labour Court of Reutlingen had therefore posed the question to the CJEU whether this constituted State aid. The CJEU found, with reference to the Sloman Neptun decision, that the exclusion of a category of businesses from the protection system in question does not entail any direct or indirect transfer of State resources to those businesses. One could ask if it was even necessary to substantiate the lack of State aid features with reference to the lack of a burden on public funds in the first place. Since the German regulation quite evidently did not favour any individual undertakings or production sectors, the measure already lacked specificity. However, the Court of Justice did not retreat to this simpler route, but once again emphatically underlined the principles it had developed in the Sloman Neptun decision. The Court of Justice continued along these lines in a decision from the year 1998. The Viscido779 matter once again involved a regulation of national labour law. Provisions of Italian law released certain public undertakings from the stringent labour law requirements regarding fixed-term employment contracts. An Italian court referred to the Court of Justice the question of whether this would constitute State aid. The Court of Justice responded in the negative with the same substantiation as in Sloman Neptun and Kirsammer-Hack. Although the case law on this criterion was already quite settled, it was only with the PreussenElektra780 decision that it permanently entered the consciousness of legal practitioners in general. This involved the permissibility under State aid law of the purchase and remuneration duties set forth in the German Law on the Sale of Electricity to the Grid (Stromeinspeisungsgesetz – StromEG), which has since been replaced. The StromEG applied to the sale of electricity from energy companies that were classified as having special ecological value (renewable energies) and created a purchase and remuneration obligation for electricity supply companies. In the view of the CJEU, this did not constitute State aid because no burdening of a State’s budget was involved. It made it clear that even promotion measures financed indirectly through State resources, namely those which are granted by a public or private body appointed or established by a State, are covered by the term ‘State aid’. However, according to its – very brief – statement of reasons, the purchase and remuneration obligations pursuant to the StromEG did ‘not involve any direct or indirect transfer of State resources to undertakings which produce that type of electricity’.781 The most important subsequent case law following PreussenElektra was the Pearle 782 judgment which dealt with parafiscal charges remitted to a trade association governed by public law. Here too, the Court of Justice found that no State aid was present as burdening of a Member State’s budget was involved. The decisive factor in arriving at this assessment was that the public law trade association was never able to dispose of the resources freely. Ultimately, this decision also shows the unmistakeable tendency of the case law to use this criterion to restrict the definition of State aid to the greatest possible extent.783 This case law is generally to be welcomed. One argument for the application of the criterion ‘burdening of public budgets’, is the necessity of restricting the definition of the term ‘State aid’. If measures that do not involve a burden on the State budget were 779

ECJ Cases C-52/97, C-53/97 and C-54/97 Viscido and Others [1998] ECR I-2629. ECJ Case C-379/98 PreussenElektra AG [2001] ECR I-2099. 781 ECJ Case C-379/98 PreussenElektra AG [2001] ECR I-2099, mn. 58 et seq. 782 ECJ Case C-345/02 Pearle [2004] ECR I-7139. 783 See also Case C-677/11 Doux e ´levages SNC et al ECR ECLI:EU:C:2013:348. 780

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also to be subjected to the scope of application of the Article 107(1) TFEU, the term ‘State aid’ would lose all distinctiveness. Virtually any State intervention in the economy with the intention of improving economic conditions would be subject to State aid control. This is made extremely clear by the Sloman Neptun case. The subject matter of the question referred to the CJEU was a provision of German international private law. Requiring even private law conflict of law provisions to be examined by the Commission on the basis of the State aid rules in the future appeared to be more than unreasonable, if only due to the limited personnel and material resources of the Commission. Such a ‘boundlessness’ of State aid law would obviously be quite amiss. If the measures covered by Article 107 TFEU were to be ‘extracted’ from the broader category of State interventions in the economy, then only the feature of specificity would remain. Contrary to the assumption of Slotboom784, however, this criterion is hardly in a position to distinguish State aid within the meaning of Article 107(1) TFEU from other State interventions. It is true that a comprehensive definition of ‘State aid’ could better ensure the 303 creation of equal competitive conditions,785 since benefits that do not lead to a burdening of public budgets could distort the intra-Community competition just as easily as measures that entail a financial burdening of the Member State. However, this does not necessarily mean that such measures must also be subject to State aid control. The provisions on State aid merely represent a portion of the instruments provided for in the Treaty. Along with the State aid provisions, these instruments also include the rules on fundamental freedoms and harmonisation. If the ‘burden on public funds’ criterion were not applied, then almost any State intervention in the economy that benefits certain undertakings or production sectors would fall under Article 107 TFEU. The scope of application of the provisions on fundamental freedoms and harmonisation would then be largely identical in content to that of Article 107 et seq. TFEU which, in view of the overall structure of the Treaty, cannot have been the intention. It therefore stands to reason that the scope of application of State aid law should be limited in a manner appropriate to its position. The rules on fundamental freedoms and harmonisation would also undoubtedly appear to be better suited to cover the measures mentioned above.786 Apart from these structural and teleological considerations, the presumption of State aid in the aforementioned cases would also lead to considerable practical problems in recovering the benefits. The demarcation that is being carried out by the Court of Justice has become 304 increasingly important, particularly in the last few years, given the broad field that the Commission has meanwhile attributed to itselet seq. By now, only a very few rules still remain that are not analysed for possible violations of State aid law. This development is naturally spurred on by a growing willingness on the part of companies to oppose any reflexive effect of a regulatory measure from the point of view of European State aid law by filing a complaint with the Commission. But what manoeuvring room would such a State aid corset leave for national (or European) politics? Furthermore, the Commission would be taking on a Herculean task if it sought to review each and every regulation – including those that do not lead to a burden on the State budget – in order to bring about a comprehensive control for national measures. Such a broad interpretation of the term ‘State aid’ would undermine the refined and differentiated distribution of compe784

Differing view: Slotboom ELRev 1995, 289, 297. According to the opinion of Advocate General Darmon, C-72/91 a. C-73/91, ECR 1993, I-887, 912 and in ECJ Case C-189/91 Kirsammer-Hack [1993] ECR I-6185, mn. 16 et seqq.; in agreement: Slotboom ELRev 1995, 289, 296. 786 Likewise Slot, CMLRev 1994, 142, 143. 785

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tences under the EC. It cannot be proper for the Commission to arrogate to itself regulatory competence for matters, which clearly fall within the competence of the Member States. State aid control cannot solve all of the problems in this world – it is responsible only for inherently competitive aspects. 305 In fact, a parallel to this controversy can also be seen in international subsidy law: The EC anti-subsidy regulation attempts in Articles 2 and 3 to paraphrase the term ‘subsidy’ in a positive light. However, these provisions do not address the question of whether the term ‘subsidy’ requires a burdening of public budgets. The Commission had answered this question in the affirmative in the old version of the antidumping and anti-subsidy Regulation787, which for the most part had met with agreement in the legal commentaries788, and this assessment was also confirmed by the Court of Justice. 789 306

d) The criterion ‘burden on the State budget’ in the decision-making practice. The case law has meanwhile defined the ‘burden on the State budget’ criterion more precisely in several decisions. These centred around cases in which mandatory contributions or fees were paid to specific bodies (parafiscal charges), which in turn were used to support specific undertakings. Moreover, attempts are being made again and again – as for example in the case of PreussenElektra – to invoke State aid law in order to torpedo general economic regulations. In the following, the various types of cases involved will be described by category:

aa) Private undertakings and bodies. There is no question that a State’s budget does not include those resources to which private undertakings or individual persons are entitled. Thus, the grant in the Sloman Neptun790, Kirsammer-Hack791 and Viscido792 cases was rendered at ‘the expense of’ the employees of the favoured undertakings. Likewise, in the Van Tiggele793 matter, the favouring of the manufacturers and the distributors resulted in a burdening of the private consumers. Accordingly, in these cases, the grants had to be deemed not to constitute State aid. This applies, of course only if all resources are private, i. e. the mere fact that the subsidies are financed in part by voluntary private contributions is not sufficient to rule out the presence of State resources if there is public funding involved.794 308 If, on the other hand, a private body is assigned to grant subsidies, and they are financed from State resources, then the wording of Article 107(1) TFEU (‘aid granted through state resources’) would infer that this comprises State aid. 795 Moreover, according to the case law of the CJEU, even assistance measures that are financed indirectly through State resources, namely those granted by a public or private body that was appointed or established by a State, fall under the category of State aid. 796 However, no definition of bodies utilised by the State in this manner can be derived from the case law. To date, the case law has not even identified explicit criteria for determining the 307

787 Commission, 16 April 1985, OJ 1985 L 106/19(24) – Soya meal originating in Brazil; Commission, 18 April 1995, OJ 1985 L 108/28(29) – Soya meal originating in Argentina. 788 Stanbrook/Bentley, Dumping and Subsidies, 1996, 88; Beseler/Williams, Anti-Dumping and AntiSubsidy Law, 1986, 123. Adverse: Bronckers/Quick, Journal of World Trade Vol. 23, No. 6(1989), 5. 789 ECJ Case 187/85 FEDIOL v Commission [1988] ECR 4155, mn. 11 et seqq. 790 ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887. 791 ECJ Case C-189/91 Kirsammer-Hack [1993] ECR I-6185. 792 ECJ Cases C-52/97, C-53/97 and C-54/97 Viscido and Others [1998] ECR I-2629. 793 ECJ Case 82/77 Public prosecutor of the Kingdom of the Netherlands v Van Tiggele [1978] ECR 25. 794 ECJ Joined Cases T-139/09, T-243/09 and T-328/09 France et al. v Commission, ECR ECLI:EU:T:2012:496 mn. 63 and 64. 795 ECJ Cases 78/76 Steinike and Weinlig v Deutschland [1977] ECR 595, mn. 19 et seqq.; 67/85, 68/85 and 70/85 Van der Kooy and Others v Commission [1988] ECR 219, mn. 35. 796 ECJ Case C-379/98 PreussenElektra AG [2001] ECR, I-2099, mn. 58.

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existence of a body or whether it is being ‘utilised’ by the State. Quite surprisingly the General Court has found that the fact that a public undertaking is a beneficiary of an aid measure does not exclude it from granting aid (state resources) to another beneficiary by way of a different aid measure.797 This “double counting” of aid measures is confusing. In particular the assumption that donor and reciepint could be identical is contradictory in itself. According to an assessment that has been expressed (sporadically) by the Commission, State aid is rendered to an undertaking even if it receives an economic advantage another undertaking has ‘passed on’ to it.798 But this probably goes too far799, since the term ‘State aid’ would then have absolutely no distinctiveness whatsoever. bb) Financial resources to which public undertakings are entitled. If a State owns the shares in or dominates an undertaking, the financial resources of this undertaking are likewise essentially State resources800, since in such cases, the State bodies are in a position to avail itself of these resources, irrespective of whether or not they are permanent assets of the public sector.801 Naturally, a completely separate question is whether the granting of these resources would be ‘imputable’ to a State if the granting is carried out by the undertaking itself. cc) Funds and parafiscal charges. Probably the most difficult group of cases are situations in which intermediaries set up by the State, which are organisationally independent to a large degree, can dispose of resources that are financed by parafiscal charges or mandatory contributions. This is the case, for example, with funds and special funds that do not belong to a State. In the past – prior to Sloman Neptun – the Court of Justice had affirmed the State aid character of such measures if the financing was effected through a mandatory charge ordered by the State, but collected by a separate body.802 This broad construction of the term ‘public funds’ would scarcely hold water nowadays. The most illustrative case for the assessment of such a situation today is most likely the Pearle803 judgment involving the financing of advertising campaigns for the benefit of undertakings in the field of optical services. This advertising campaign was executed by a trade association governed by public law, from which undertakings in the field of optical services are members by law, and was financed by ‘compulsory earmarked levies’ collected from the members. However, a particularity of this case was that the public body (the trade association) could not dispose of its resources freely, as they were earmarked for the campaign. The non-State element was further intensified by the fact that the organisation and execution of the campaign were instigated by a private association, and the public body served merely as a vehicle for the levying and allocating of the resources collected. The Court of Justice found that this did not burden the 797 GC Joined Cases T-443/08 and T-455/08, Freistaat Sachsen and Land Sachsen-Anhalt and Others v Commission [2011] ECR II-1311, mn 143. 798 Cf. the decision to initiate the proceedings: Commission, OJ 2007 C 48/7, mn. 48 – DHL and Airport Leipzig/Halle. 799 The Commission correctly did not address this aspect any further in the decision concluding the proceeding, cf.Commission, OJ 2008 L 346/1 – DHL and Airport Leipzig/Halle. 800 ECJ Cases C-482/99 France v Commission [2002] ECR I- 4397, mn. 35 et seqq.; 67/85, 68/85 and 70/85 Van der Kooy and Others v Commission [1988] ECR 219, mn. 35 et seqq. 801 ECJ Case C-482/99 France v Commission [2002] ECR I-4397, mn. 37. 802 ECJ Cases 47–69 France v Commission [1970] ECR 487, 489, 495; 47/69 Italy v Commission [1974] ECR 709, mn. 33/35; 78/76 Steinike and Weinlig v Deutschland [1977] ECR 595, mn. 21; 259/85 France v Commission [1987] ECR 4393, mn. 23; cf. additionally ECJ Case C-114/91 Claeys [1992] ECR I-6559, mn. 25; Commission, OJ 1992 L 170/34(35) – Dutch disposal of manure; Commission, OJ 1989 L 116/52 – Kohlepfennig. 803 ECJ Case C-345/02 Pearle [2004] ECR I-7139.

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Member State’s budget, and thus State aid law did not apply, noting that the advertising campaign was not financed from resources over which the (public) trade association could freely dispose. The resources were financed from a private source, were strictly earmarked, and thus ‘had nothing to do with a policy determined by the Netherlands authorities’. This latter point – in the assessment of the CJEU – made the facts involved in the Pearle case materially different from those in Commission v France 804, where the relevant body only implemented actions that were decided on by the French government.805 The (at times rather belaboured) substantiation however, which based itself on the specific particularities of this Dutch system, shows an unmistakable tendency to interpret the term ‘State aid’ in this context as narrowly as possible, which also has been reflected in the ECJ’s judgment Doux e´levages SNC806. 314 EARL Salvat pe`re & fils807 likewise involved premiums awarded by a committee in which the State played a dominant role. In its statement of reasons (which to some extent mixed up the question of burden on the State budget with the question of imputability), in keeping with the Pearle judgment, the Court based itself on whether the measure in question was being ‘funded by resources made available to the national authorities’. Decisive for determining that this was the case was primarily the composition of the committee, with a large number of representatives of the State in leading functions, as well as State consent requirements 808 which went far beyond a purely regulatory control and enabled it to actively steer the entity involved (ultimately, the State could make decisions in lieu of the body). This led the Court to conclude that the State could ‘dispose’ of the resources.809 An additional consideration was the fact that – as distinct from Pearle – the premium in question did not consist exclusively of private contributions, but was also financed with public subsidies.810 In contrast to the Pearle case, the organisation and execution of the measure were not instigated by a private association, and the public body was not merely a vehicle for the levying and allocation of the resources collected.811 Moreover, the awarding of the premium formed ‘part of a policy suggested by the State’.812 315 Taking the same direction is the Essent Network Noord813 decision, which affirmed the burdening of State budgets, and thus the State aid character. Here too, the plaintiffs invoked the Pearle judgment. The Court of Justice, however, found that – again making an explicit distinction from Pearle – the moneys were collected on the basis of a charge and could only be used for purposes provided for by the law. Moreover, the use of resources was decided by the legislature and – unlike in PreussenElektra – a body was appointed by the State to manage State resources. 814 More recent Commission decisions 804

ECJ Case 290/83 Commission v France [1985] ECR 439. ECJ Case C-345/02 Pearle [2004] ECR I-7139, mn. 36 et seqq. 806 ECJ Case C-677/11 Doux e ´levages SNC et al ECR [not yet published]. 807 GC Case T-136/05 EARL Salvat pe `re & fils and Others v Commission [2007] ECR II-4063. 808 Cf. also Commission, OJ 2002 L 272/25, mn. 25 – Belgian regulation for the diamond industry; Commission, OJ 2009 L 83/1, mn. 328 et seqq. – Power Purchase Agreements, Poland. 809 GC Case T-136/05 EARL Salvat pe `re & fils and Others v Commission [2007] ECR II-4063, mn. 140 et seqq. 810 Cf. also Commission, OJ 2009 L 127/11, mn. 58 – French contingency plans in the fruit and vegetable sector. 811 Cf. also Commission, OJ 2008 L 144/37, mn. 103 – ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche. 812 GC Case T-136/05 EARL Salvat pe `re & fils and others v Commission [2007] ECR II-4063, mn. 158 et seqq. Cf. also Commission, OJ 2009 L 83/1, mn. 178 et seqq. – Power Purchase Agreements, Poland. 813 ECJ Case C-206/06 Essent Netwerk Noord and Others v Commission [not yet in official ECR]. 814 ECJ Case C-206/06 Essent Netwerk Noord and Others v Commission [not yet in official ECR], mn. 64 et seqq. 805

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have also been along these same lines.815 In particular, in its (pending) investigation into the German support system for energy-intensive companies benefitting from a reduced renewables surcharge (the so-called “EEG-surcharge”), the Commission went too far. It took the view that a surcharge managed by the four (private) German transmission system operators would constitute state aid because the management of these funds was subject to detailed rules established by law and monitored by the state regulator. 816 This would ultimately mean that any type of state regulation would turn “private” funds into “public” resources. Sucn an interpretation would overstretch the boundaries of Art. 107 (1) TFEU. In TV2/Danmark A/S817, the Court addressed the extremely controversial topic of 316 broadcast licence fees. In its extremely terse statement of reasons, the Court confirmed that the Danish regulation constituted State aid because the amount of the licence fee is determined by the Danish authorities, the obligation to pay is not based on a contractual relationship, the fee is collected in accordance with the rules on the collection of personal taxes, and the broadcasters’ share of the income from licence fees is determined by the Danish authorities. Consequently, the Court found that the ‘licence fee resources are available to and under the control of the Danish authorities and that they therefore constitute State resources’ 818. The Commission had already determined previously that the German broadcast licence fee system constituted State aid. The German federal government believed otherwise, since the licence fees are paid directly by the owners of radios and television sets to the public service broadcasters. The Commission, however, pointed out that the federal states had transferred sovereignty to the broadcasting organisations, which are to collect the licence fees directly. The distribution of the revenue from the fees had been determined by state treaty and resolved by the federal state parliaments.819 In the Iride case820, contributions were levied on energy consumers that were then 317 paid into the account of a public body before they flowed to a private undertaking. The Court found that this constituted a burdening of State resources, and thus State aid. Even if the resources were not permanently in the economic ownership of the public bodies, the fact that they are constantly under public control, and thus at the disposal of the competent national bodies, should be sufficient for them to be classified as State resources. In contrast to the PreussenElektra case, the resources were levied by a public body and administered in a separate account (and were therefore also in the ownership of the State under civil law), before they were paid to the private recipients. 821 The State could therefore ‘make use of’ these sums as well.822 Similarly in Vent de Cole`re the system was considered to involve state resources since the funds were collected from final consumers of electricity and entrusted to a public body which centralised the sums collected in a special account before paying them out to the operators concerned, 815 Commission, OJ 2009 L 159/11, mn. 56 – Luxembourg compensation fund for the organisation of the electricity market; Commission, OJ 2007 L 219/9, mn. 68, 72 – Slovenian legislature on qualified energy producers; Commission, OJ 2002 L 272/25, mn. 25 – Belgian regulation for the diamond industry. 816 Commission, OJ 2014 C 37/73 – EEG surcharge. 817 GC Cases T-309/04, T-317/04, T-329/04, T-336/04 TV2/Danmark A/S v Commission [2008]II-2935. 818 GC Case T-309/04, T-317/04, T-329/04, T-336/04 TV2/Danmark A/S v Commission [2008],II-2935, mn. 158 et seq. 819 Commission, OJ 2007 C 185/1, mn. 142 et seqq. – Financing of public service broadcasters in Germany. 820 GC Case T-25/07 Iride SpA and Iride Energia SpA [2009] II-245. 821 This point of view is also stressed in Commission, OJ 2007 L 219/9, mn. 68 – Slovenian legislature on qualified energy producers. 822 GC Case T-25/07 Iride SpA and Iride Energia SpA [not yet in official ECR], mn. 27 et seqq.

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thereby acting as an intermediary. In addition, the levy imposed on each final consumer of electricity was determined annually by ministerial order.823 318 All of these latter decisions, which were rendered after Pearle, show an unmistakable tendency to demarcate them from the Pearle judgment. The Community courts are working very hard to clarify that Pearle should not be taken to provide a carte blanche for the outsourcing of subsidy activities to semi-public bodies. In the meantime, the question that has emerged as the generally recognised and central demarcation criterion is whether the resources involved came – if only temporarily824 – under the control of the State.825 319 The Commission is endeavouring to restrict the Pearle judgment (which it dislikes) to the greatest possible extent. According to the Commission’s reading, parafiscal charges are not to be seen as constituting State resources only if they meet all of the following four conditions cumulatively and at the same time: (a) the measures financed through the mandatory contributions were determined by the sector concerned; (b) 100 % of the financing came from the contributions of the companies in the sector; (c) the contributions were compulsorily earmarked for the funding of the measure with no possibility for the State to intervene by determining or modifying the use of these resources; and (d) the parties who paid the contributions were also the beneficiaries of the measure. 826 However, it is somewhat questionable whether prerequisites (a) and (d) are necessarily to be derived from the case law, and they were not required with the same stringency in other decisions of the Commission.827 dd) Public regulation with indirect financial consequences. What a great number of State measures have in common is that they (also) have indirect financial consequences for the State budget. It is evident that this cannot be sufficient to conclude that these measures ‘burden the State budget’, since such effects are ‘inherent’ to numerous regulations.828 321 The UTECA case829, for example, involved the obligation of public television operators to earmark a percentage of their revenue for the financing of European. The Court of Justice found that this does not constitute a burdening of a Member State’s budget, and thus State aid, since it involves a general regulation which applies to all television stations equally. Even though public television operators are also covered by the measure, the granting of the advantage in question was not dependent on State control, but derived from the generally applicable legislation. 322 Ultimately, what is most important for a demarcation would appear to be the question of what direct legal effects the State measure in question intends to bring about. Hence, the measure involved in the Sloman Neptun decision was deemed not to constitute State aid, since the German regulation did not seek, through its object and general structure, to 320

ECJ, Case C-262/12,– Vent De Cole`re! Fe´de´ration nationale, ECLI:EU:C:2013:851, mn 19 et seq. Cf. for example Commission, OJ 2008 L 144/37, mn. 105 – ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche. 825 Cf. for example Commission, OJ 2009 L 159/11, mn. 56 – Luxembourg compensation fund for the organisation of the electricity market. 826 Commission, OJ 2009 L 127/11, mn. 57 – French contingency plans in the fruit and vegetable sector. Similar, but less stringent: Commission, OJ 2008 L 144/37, mn. 103 – ThyssenKrupp, Cementir and Nuova Terni Industrie Chimiche. 827 Commission, OJ 2009 L 159/11, mn. 56 – Luxembourg compensation fund for the organisation of the electricity market. 828 Cf. for example ECJ Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola [1998] ECR I-7907, mn. 36. 829 ECJ Case C-222/07 Unio ´ n des Televisiones Comerciales Asociadas v Administracio´n General de Estado [2009] I-1407. 823 824

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create an advantage which would constitute an additional burden for the State. 830 In the end, the only question, then, is whether the respective legal consequence that is ordered by a particular State measure directly involves a burden on public funds. Of no relevance, on the other hand, are other legal consequences which the legal system links to the existence of the State measure. What is decisive for determining whether a measure brings about a burden on public funds is the primary legal consequence that is established with the regulation. Other legal effects which the legal system links to the existence of the State measure have to be left out of consideration. For example, if a municipality issues a zoning plan which designates certain real 323 properties of an undertaking as an industrial zone, this is of considerable benefit to the undertaking (the property can be used as a business property or sold at a substantial profit). However, this does not involve a burdening of the public budgets. True, there are other public law provisions that link additional consequential effects to the existence of a zoning plan (e. g. the infrastructure burden of the municipality), but these are of no relevance when determining if the Member State’s budget is being burdened, since they merely involve statutory obligations that are linked to the existence of a zoning plan. Nor is it likely to pose a problem under State aid law if an authority tolerates the 324 unlawful discharge of wastewater in order to save costs for the undertaking involved (e. g. costs for construction of a treatment plant). 831 True, the State will more than likely incur costs at a later point in time for remedying the environmental damage, but this is merely an indirect consequence of the contamination that was tolerated by the authority. As a matter of fact, this case also shows clearly that other instruments compatible with EU law would appear to be more suitable for encouraging the State involved to enforce appropriate environmental standards (infringement proceedings due to the violation of Community secondary environmental law). Furthermore, private persons who suffered damage due to the contamination can always assert damages claims against the State under the principles of the Francovich judgment. ee) Loss of revenue for the State. The burden on public funds need not necessarily manifest itself in a positive payment obligation for the State budget. Even if the State waives revenues, e. g. tax revenues or social contributions, this also leads to a loss for the State treasury, and thus to a burden on the public budgets,832 since in that case the public sector is being deprived of income it would have generated under ordinary circumstances. This is also the case, of course, if no formal waiver takes place, but rather debt rescheduling or deferment agreements are reached, or if the payment claim is simply not enforced in reality. Since the economic effects of such actions are no different from those of an explicit decree or waiver, however, these measures can also be considered to constitute State aid. Even if the question of the burden on the State budget has not always explicitly been the subject of discussion in such situations, this can implicitly be derived from the Court of Justice’s decisions in the Tubacex833, DM Transport834 and Magefesa835 cases. However, a ‘burdening of State resources’ is not to be presumed if a prohibition of compulsory enforcement measures that is ordered by statute pertains to all of the debts 830

ECJ Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887, mn. 21. See also Commission, OJ 1998 Nr. C 49/2(7) – SNIACE. ECJ Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, mn. 127 et seqq. 833 ECJ Case C-342/96 Spain v Commission [1999] ECR I-2459. 834 ECJ Case C-256/97 DM Transport [1999] ECR I-3913. 835 ECJ Case C-480/98 Spain v Commission [2000] ECR I-8717. 831 832

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of an undertaking, i. e. not only the debts to public bodies, since the loss of revenue involved thereby is inherent to any regulation under insolvency law.836 But it is another matter if the public creditors are the principal creditors and the relevant rules result in an excessive waiver by the public creditors in comparison to the customary regulations. 837 329 The granting of a loan at more favourable interest rates than are customary in the market leads to a loss of profit as a loss of revenue, and is therefore to be seen as State aid. If, for example, a public law permit is normally only granted for a fee (e. g. a special use permit), then awarding it free of charge or issuing it for less than the normal fee would constitute aid. If, on the other hand, remuneration customary in the market is paid for a performance rendered by a State, then no burdening of the State’s budget exists. 838 330 More difficult to assess, on the other hand, is a State’s waiver of possible (potential) revenues. This problem exists, for example, when evaluating the question of whether an allocation of rights in emissions trading systems could represent State aid. The Commission has already found this to be the case in several rulings in the past (in some cases only implicitly).839 Although the granting of the emission rights does not incur any costs for a State, the Commission generally takes the point of view that the State’s budget is burdened840 on the grounds that the State can freely decide whether it will freely grant a certain portion of the emission rights. Should it decide in favour of granting them (or some of them) free of charge, it would forgo possible revenues. 841 This assessment is underscored by the Commission/Netherlands judgment, in which the CJEU appears to agree with this evaluation.842 331 This judgment goes too far. Ultimately, this could mean that any waiver of potential revenues by a State would result in the granting of State aid. Since there are innumerable possible sources of income which the State – for whatever reasons – does not tap, this would ultimately mean that aid would exist whenever a State has the theoretical possibility of levying revenues (fees, charges, taxes, civil law counter-performances, etc.), but refrains from doing so. This definition of State aid would know no bounds and thus would undermine the control by the Commission – the very result the CJEU sought to avoid with its PreussenElektra judgment. 332

ff) Potential burden on the State budget. One question that must be taken up separately from the question of the waiver of potential revenues discussed above is whether a burdening of the State budget has to actually occur, or a potential burdening would suffice, as in the case of a guarantee for example. This has been assumed in some judgments.843 However, in such cases it would be correct to operate on the assumption – in accordance with the new Commission Notice on guarantees from the year 2008 – that the burden on the State budget lies less in the assumption of risk itself than in a remuneration that is not customary in the market. The risk-bearing function associated with the guarantee would normally be remunerated with an appropriate premium. Should a State waive such a premium in whole or in part, this represents a benefit for 836

ECJ Case C-200/97 Ecotrade v Altiforni e Ferriere di Servola [1998] ECR I-7907, mn. 36. ECJ Cases C-200/97 Ecotrade v Altiforni e Ferriere di Servola [1998] ECR I-7907, mn. 38 et seqq.; C295/97 Piaggio [1999] ECR I-3735, mn. 42 et seq. 838 GC Case T-613/97 Ufex and Others v Commission [2000] ECR II-4055, mn. 108. 839 Cf. for example Commission, 28 November 2001, N 416/2001 – UK Emission Trading Scheme. 840 Rusche, Emissions Trading, in: Sanchez-Rydelski (Ed.), The EC State Aid Regime (2004), 349. 841 Commission 29 November 2009 on Germany’s national allocation plan according to Directive 2003/ 87/EC (not published). 842 ECJ Case C-279/08 P Commission v The Netherlands [2011] I-7671, mn. 74 et seqq. 843 ECJ Case C-200/97 Ecotrade [1998] ECR I-7907, mn. 41; ECJ, Joined Cases C-399/10 P and C-401/ 10 P Bouygues SA and Bouygues Te´le´com SA v European Commission and Others ECLI:EU:C:2013:175 mn. 137–139. 837

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the undertaking and, at the same time, a loss of State resources. Even if a State does not make any payments whatsoever under a guarantee, State aid can nonetheless exist. Logically speaking, the aid is granted already with the assumption of the guarantee and not only if the guarantee is utilised or payments are made on the basis of the guarantee.844 gg) Statements by politicians without legally binding effect. In France Te´le´com, the undertaking suffered considerable losses, whereupon the French Minister for Economy promised in a press interview in July 2002 that in the event of financing problems, the State would ‘take the decisions necessary to overcome them’. Around six months later, December 2002, the French State announced the project of a ‘shareholders’ advance’ for France Te´le´com. However, France Te´le´com did not accept this offer to conclude a contract, and so this capital injection did not come about. Contrary to the determinations of the Commission, in the assessment of the GC, no State aid had been granted. There was no doubt that the high-profile declarations in July 2002 had provided the undertaking with a financial benefit, since they decidedly influenced its rating. The State’s communique´s had strengthened the trust of the financial markets, improved the refinancing conditions on the capital market in favour of the undertaking and enabled a refinancing by investors and creditors, which ultimately – and ironically – rendered the State’s offer of a capital injection superfluous. In the viewof the GC, however, this financial benefit that was inherent in the public declarations of July 2002 did not constitute a transfer of public funds, since the declarations were ultimately not sufficiently concrete (too vague and unspecific) to comprise a strict obligation to provide financial support to France Te´le´com. The Minister’s announcements did not designate a specific amount or financial framework, nor did they say what the State’s prerequisites would be for its support. Only half a year later, in December 2002, did the French State announce to the public explicitly and precisely the financial sum it wished to grant to the undertaking. As mentioned, however, this offer was never accepted.845 In this connection, the question also arose whether the burdening of a Member State’s budget requires that a legally binding measure be involved. But the GC appeared not to demand this in France Te´le´com. Rather, the judgment implies that even legally informal guarantee commitments meet the definition of State aid if they are sufficiently specific.846 Here, the General Court is in agreement with the Commission Notice on guarantees, which states that even non-binding declarations are sufficient as long as they have an actual beneficial effect, and thus lead to a burden on the State budget. 847 The ECJ, however, took a completely different view from the GC and annulled the GC’s judgment, hereby confirming the Commission’s viewpoint that the measure involved state aid. In the view of the ECJ the different measures in question (statements by politicians and subsequent offer of a shareholders’advance) should rather have been assessed as a whole. It would also be sufficient that the recipient would have had the possibility to sign the offer which could have ultimately led to a potential burden on state resources (see above ff)). The ECJ also did not require a close link between the economic advantage (improvement of credit standing) and the potential burden on state 844 Commission Notice on the application of Articles 87 and 88 of the Treaty to State aid in the form of guarantees, OJ 2008 C 155/8, Article 2.1. 845 GC Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04 France and Others v Commission [2010] II-2099, paras. 212 et seqq. 846 Cf. especially GC Joined Cases T-425/04, T-444/04, T-450/04 and T-456/04 France and Others v Commission [2010] II-2099, para. 288. 847 Guarantees Notice, OJ 2008 C 155/8, Article 1.2.

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resouces (shareholders’ advance).848 This effects-based approach is in line with the general tendency of the Courts to assess the state aid character of a measure by rather evaluating its economic impact than the precise legal context. Such a economics-based test, however, leads to some degree of legal uncertainty. 337

hh) Funding by EU and international organizations. EU funding (e. g. from structural funds) or support from international financial institutions (IMF, EBRD) awarded directly by the EU or the international financial institutions, do not constitute State resources. This is, however, different if these funds are being transferred to the national budget in order to co-finance national interventions, such as national aid schemes. A transfer of State resources is also present if resources are at the joint disposal of several Member States who decide jointly on the use of those resources. 849

IV. Selectivity Bibliography: Arhold, The Case Law of the European Court of Justice and the Court of First Instance on State Aids in 1998–2008, EStAL 2002, 2; 2003, 145; 2004, 167; 2005, 175; 2006, 215 & 465; 2007, 151 & 435; 2008, 441; Arhold, Steuerhoheit auf regionaler oder lokaler Ebene und der europa¨ische Beihilfenbegriff – wie weit reicht das Konzept von der regionalen Selektivita¨t – Zugleich Anmerkung zu EuGH, Urt. v. 6. 9. 2006 – C-88/03 – Portugal/Kommission, EuZW 2006, 717; Arhold, The German Scheme on the Fiscal Carryforward of Losses – a ‘Selected’ Case, EStAL 2011, 71; Bacon, European Community law of State aid, 2009; Bartosch, EU-Beihilfenrecht, 2009; Bartosch, Materielle Selektivita¨t und Europa¨ische Beihilfenkontrolle – Ein Diskussionsbeitrag zum derzeitigen Stand der Gemeinschaftsrechtsprechung EuZW 2010, 12; Bousin/ Piernas, Developments in the Notion of Selectivity, EStAL, 2008, 634; Che´rot, Le TPICE se prononce pour la premie`re fois sur les conditions d’application de la notion d’aide d’Etat aux e´le´ments des re´gimes de permis ne´gociables, Concurrences, Revue des droits de la concurrence 2008, 148; da Cruz Vilaça, Material and Geographic Selectivity in State Aid – Recent Developments, EStAL 2009, 443; Di Bucci, Some Brief Comments on the Court’s Judgment in Case C-88/03, Portugal versus Commission (Azores), New developments in European State aid law 2006: proceedings of the 4th Experts’ Forum held in Brussels on 18 and 19 May 2006 (Ed. Lexxion – Berlin) 2006, 53; Do¨rr, Infrastrukturfo¨rderung (nur) nach Ausschreibung? NZBau 2005, 617; Englisch, Zur Bedeutung des gemeinschaftsrechtlichen Gleichheitssatzes im Recht der Gemeinschaftsbeihilfen, EuR 2009, 488; Farantouris, Port Infrastructure and State Aids: In Search of Coherent EU Policy, EStAL 2012, 85; Feld, Fiskalischer Fo¨deralismus in der Schweiz – Vorbild fu¨r die Reform der deutschen Finanzverfassung?, 2004; Glaser, Regionale Steuerautonomie im Fokus des EGBeihilfenrechts, EuZW 2009, 363; Golfinopoulos, Concept of Selectivity Criterion in State Aid Definition Following the Adria-Wien Judgment – Measures Justified by the ‘Nature of General Scheme of a System’, ECLR 2003, 543; Grabitz/Hilf (Eds.), Das Recht der Europa¨ischen Union, Stand: April 2009; v.d.Groeben/ Schwarze (Eds.), EU/EG Vertrag, 6th Ed., 2003; Hancher/Ottervanger/Slot, EU State aids, Fourth Edition, 2012; Heidenhain, Handbuch des Europa¨ischen Beihilfenrechts, 2003; Heidenhain, European State aid law, 2010; Hohmann, Economic Activities in Natural National Heritage? EStA 2015, 161; Honore´, Reflections in the Light of Case C-487/06 P, British Aggregates Association, EStAL 2009, 527; Ipsen, Europa¨isches Gemeinschaftsrecht, Tu¨bingen 1972; Jaeger, Ende der “Organisationsblindheit’ der Gemeinschaft im Beihilferecht: Keine automatische Selektivita¨t regionaler Steuermaßnahmen, RiW 2007, 120; Jungnickel/ Dulce, Die Zula¨ssigkeit der (teilweisen) Versteigerung von Emissionsberechtigungen aus europarechtlicher Sicht, NVwZ 2009, 623; Kekelekis, Recent Developments in Infrastructure Funding: When Does It Not Constitute State Aid?, EStAL 2011,433; Kliemann/Stehmann, EU State Aid Control in the Broadband Sector – The 2013 Broadband Guidelines and Recent Case Practice, EStAL 2013, 493; Koenig/Ku¨hling/Ritter, EGBeihilfenrecht, 2. Aufklage, 2005; Ko¨nig/Roth/Scho¨n (Eds.), Aktuelle Fragen des EG-Bihilfenrechts, Beiheft des ZHR Heft 69, 2001; Ko¨nings, Emission trading – why State aid is involved: NOx trading scheme, Competition Policy Newsletter 2003, 77; Lang, State Aid and Taxation: Recent Trends in the Case LAW of the ECJ, EStAL 2012, 411; Lambros/Papadias/Riedl/Westerhof, Public funding for broadband networks — recent developments, Competition Policy Newletter, 2006, 13; Linn, Die Anwendung des Beihilfeverbots im Unternehmenssteuerrecht IStR 2008, 601; Lo Schiavo, The General Court Reassesses the British Aggregates Levy: Selective Advantages ‘Permeated’ by an Exercise on the Actual Effects of Competition?, EStAL 2013, 848 ECJ, Joined Cases C-399/10 P and C-401/10 P Bouygues SA and Bouygues Te ´le´com SA v European Commission and Others ECLI:EU:C:2013:175. 849 Com., OJ 2010 L 274/54 – Dexia SA.

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384; Lo´pez, General Thought on Selectivity and Consequences of a Broad Concept of State Aid in Tax Matters, EStAL 2010, 807; Lo´pez/Jorge, Annotation of Cases T-424/05 and T-445/05: Indirect Advantage and Selectivity Revisited, EStAL 2010, 219; Lu¨bbig/Martin-Ehlers, Beihilfenrecht der EU, 2. Auflage, 2009; Luja, Group Taxation, Sectoral Tax Benefits and De Facto Selectivity in State Aid Review, EStAL 2009, 473; Mederer/Pesaresi/Van Hoof (Eds.), EU Competition law, Volume IV, State aid, Book One; Mohr-Egger, Liechtenstein’s Taxation Rebates on Assets Owned by Investment Companies, EStAL 2013, 601; Moscoso del Prado/Arranz, A NEW Stap in Material Selectivity in Tax Measures, EStAL 2013, 401; Nicolaides, State Aid, Advantage and Competitive Selection: What Is a Normal Market Transaction?, EStAL 2010, 65; Nicolaides, Developments in Fiscal Aid: New Interpretations and New Problems with the Concept of Selectivity, EStAL 2007, 43; Nicolaides, The Boundaries of Tax Autonomy, EStAL 2006, 119; Pautsch, Die beihilferechtliche Relevanz der UMTS-Vergabe im Ausschreibungsverfahren, MMR 2001, 423; Prek/Lefe`vre, The Requirement of Selectivity in the Recent Case-Law of the Court of Justice, EStAL 2012, 335; Quigley, European State aid law and policy, 2009; Renner-Loquenz, State aid aspects in the implementation of the Emission Trading Scheme, Competition Policy Newsletter 2005, 16; Reuter/Busch, Einfu¨hrung eines EUweiten Emissionshandels – Die Richtlinie 2003/87/EG, EuZW 2004, 39; Reuter/Kindereit, EG Emissionshandelsrichtlinie und Beihilfenrecht am Beispiel prozessbedingter Emissionen, DVBL 2004, 537; RossiMaccanico, Community Review of direct Business Tax Measures: Selectivity, Discrimination and Restrictions EStAL 2009, 489; Rossi-Maccanico, The Notion of Indirect Selectivity in Fiscal Aids: A Reasoned Review of the Community Practice, EStAL 2009, 161 Rossi-Maccanico, Gibraltar and the Unsettled Limits of Selectivity in Fiscal Aids, EStAL 2009, 63; Sa´nchez-Rydelski, Geographically limited national tax rate variations and State aid, ELR 2006, 402; Schwarze (Ed.), EU-Kommentar, 2. Auflage, 2009; Seinen, State aid aspects of the EU Emission Trading Scheme: the second trading period, Competition Policy Newsletter 2007, 100; Solte´sz, Non-Enforcement of public debts, the application of the ‘private creditor test’, in ¨ ffentliche Finanzierung von Sa´nchez-Rydelski (Ed.), The EC State aid Regime, 2006, 129 Solte´sz, O Infrastruktur- und Erschließungsmaßnahmen und das EG-Beihilferecht EuZW 2001, 107; Solte´sz/Makowski, Die Nichtdurchsetzung von Forderungen der o¨ffentlichen Hand als staatliche Beihilfe i. S. von Art. 87 I EG, EuZW 2003, 73; Stein, Regionale Steuersenkungen auf dem Pru¨fstand des Beihilfenrechts – das EuGH-Urteil Portugal/Kommission (‘Azoren’), EWS 2006, 493; Sutter, EuGH: Beihilfencharakter der Vergu¨tung von Energieabgaben, EuZW 2002, 215; Tutsch, Zula¨ssigkeit der Einfu¨hrung oder Beibehaltung einer Abgabe auf Versicherungsvertra¨ge, ELR 2004, 264; Robertson, State Aid and Reference Policy after GIL Insurance, ECLR 2004, 603; Vesterdorf/Nielsen, State aid law of the European Union, 2009; Weber, Die Kreditanstalt fu¨r Wiederaufbau – eine Fo¨rderbank auf dem Pru¨fstand, Zeitschrift fu¨r das gesamte Kreditwesen, 2006, 882; von Wendland, Public Funding for Research Infrastructures and EU State Aid Rules – Key Issues, Case Examples and State Aid Reform, EStAL 2013, 523; Wenz/Linn, The Liechtenstein Tax Reform from the Perspective of Community Law, EStAL 2009, 453; de Weerth, Deutsche Gewerbesteuer und europa¨isches Beihilferecht – Anmerkung zum Urteil des EuGH vom 11. 9. 2008, C-428 – 434/06, UGT Rioja u. a., IStR 2008, 732; Wissel/Becker, Review of Judgment Laboratoires Boiron, Case C-526/04, EStAL 2007, 101; van der Woude/Olza Moreno, Overview of the Case Law in State Aid Matters: June 2011 to June 2012, EStAL 2013, 246; Zanettin, The Award of UMTS Licences: some Clarifications, EStAL 2008, 79. Zatschler, Review of the Judgment in Case C-88/03, Portugal v. Commission (Azores Tax Regime), EStAL 2006, 779.

1. ‘Certain undertakings or the production of certain goods’ According to Article 107(1) TFEU, the term ‘State aid’ refers only to the transfer of 338 State resources conferring advantages on certain undertakings or the production of certain goods. The selectivity of a measure is therefore one of the defining features of the notion of State aid.850 Thus, measures of a general nature that apply without discrimination to all undertakings and all sectors, i. e. to the entire economy of a Member State are not covered by the definition of aid. The selectivity criterion serves in particular to distinguish between State aid control and the general economic policy of the Member States. Beyond that this constituent element also clarifies that State aid refers only to 339 measures that confer an advantage on undertakings or the production of goods. Support measures for the benefit of non-economic activities are not subject to EU State aid control. 850 ECJ, Cases C-200/97 Ecotrade [1998] ECR I-7907, para. 40; GC, Case T-55/99, CETM v Commission [2000] ECR II-3207, para. 39.

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a) The definition of undertakings. aa) Principles. According to the general definition in European competition law, the concept of an ‘undertaking’ covers ‘any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed.’ 851 In this context, ‘economic activity’ covers any economic activity of an industrial or commercial nature ‘consisting in offering goods and services on a given market’.852 341 ‘Regardless of the legal status’ means, for example, that even municipal enterprises can be regarded as undertakings within the meaning of competition law,853 and that it is not necessary for them to have a legal personality distinct from that of the municipal administration. The European Court of Justice has confirmed this in connection with its interpretation of the term ‘public undertakings’ as used in the Transparency Directive.854 The case concerned Italy’s refusal to supply information relating to the public sector tobacco industry on the grounds that the Amministrazione Autonoma dei Monopoli di Stato (AAMS) was not a public undertaking but part of the State administration. That refusal was unlawful, since with regard to public undertakings the Transparency Directive is intended to enable a clear distinction between the role of the State as a public authority and its role as owner of an undertaking, where the State may carry on economic activities by offering goods and services on the market. In that respect it is of no importance whether the State carries out the said economic activities by way of a distinct body over which it may exercise, directly or indirectly, a dominant influence or whether it carries out those activities directly through a body forming part of the State administration.855 In the latter case the fact that the body is integrated into the State administration implies automatically the exercise of a dominant influence. The fact that a body carrying out economic activities is integrated into the State administration and does not have legal personality separate therefrom does not prevent the existence of financial relations between the State and that body. Through the mechanism of budgetary appropriations, the State disposes by definition of the power to influence the economic management of the undertaking, permitting it to grant compensation for operating losses and to make new funds available to the undertaking, and may therefore permit that undertaking to carry out its activities independently of the rules of normal commercial management, which is precisely the kind of aid relevant situation which the directive seeks to make transparent. 856 342 Economic activities have to be distinguished from situations in which the Member State concerned acts in exercise of its public authority powers. 857 Economic activities do not presuppose the existence of an intention to make a profit,858 although that is 340

851 ECJ, Case C-237/04 Enirisorse [2006] ECR I-2843, para. 28 referring to the ECJ, Cases C-41/90 Ho¨fner and Elser [1991] ECR I-1979, para. 21; C-67/96 Albany [1999] ECR I-5751, para. 77; ECJ, Joined Cases C-180/98 to C-184/98 Pavlov and others [2000] ECR I-6451, para. 74, and Case C-222/04 Cassa di Risparmio di Firenze and others [2006] ECR I-289, para. 107. 852 ECJ, Cases C-237/04 Enirisorse [2006] ECR I-2843, para. 29 with further references; C-343/95 Calı` & Figli v Servizi ecologici porto di Genova [1997] ECR I-1547, para. 16; C-118/85 Commission v Italy [1987] ECR 2599, para. 7. 853 Com., OJ 2005 L 295/44, para. 28 Germany, Technology centres. 854 Commission Directive 2006/111/EC of 16 November 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings (Codified version) OJ 2006 L 318/17. 855 ECJ, Case 118/85 Commission v Italy [1987] ECR 2599, paras. 6–8. 856 ECJ, Case 118/85 Commission v Italy [1987] ECR 2599, paras. 6–13. 857 Concerning State activity and State aid law see GC, Case T-128/98 Ae ´roports de Paris v Commission [2000] ECR II-3929, paras. 107–110, with numerous competition law references. 858 Even charitable undertakings, which – by law – must not make a profit, can also fall within the definition of undertakings as used in competition law; see Case C-244/94 CCMSA [1995] ECR I-4013, para. 21. See also GC, T-347/09, Germany v Commission ECLI:EU:T:2013:418, paras. 48–49, with further references.

176

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II

considered to be an indication for economic activity.859 The levying of a charge for rendering a service or delivering a good by the public entity in connection with the excercise of public powers does not automatically mean that the activity in question is of economic nature.860 Conversely, if a service is provided free of charge this does not prove that the activity concerned is not of an economic nature. 861 The question of whether a State is acting in exercise of its public authority powers 343 does not depend on whether the State acts directly through a body forming part of the public administration or by way of a body on which it has conferred special or exclusive rights.862 In the latter case too, it is necessary to consider the nature of the activities carried on by the public undertaking or body on which the State has conferred special or exclusive rights.863 The same applies in situations where a body has been assigned tasks in the public interest.864 The correct demarcation between economic and non-economic activities is not always 344 evident. At least activities which form part of the essential functions of the State and which by their nature, their aim and the rules to which they are subject, are connected to the exercise of powers which are typically those of a public authority are not of an economic nature justifying the application of the EU competition law.865 Matters which are intrinsically prerogatives of the State are excluded from the application of European competition and Internal Market rules. That applies for example to matters such as ensuring internal and external security (police and army), the administration of justice, the conduct of foreign relations and other exercises of official authority,866 as well as the collection of data to be used for public purposes on the basis of a statutory obligation imposed on the undertakings concerned to disclose such data.867 There is no general consensus within the European Union as to what constitutes these essential State functions, and given the very varied traditions of the Member States it appears unlikely that a definitive list will emerge in the short or medium term. In practice, it is therefore difficult to draw a line between economic activities and non-economic activities.868 The distinction does not hinge on whether the Member State concerned currently reserves the activities for performance by the public sector, as such allocations may have been made arbitrarily.869 859

Case Enirisorse C-237/04 [2006] ECR I-2843, para. 31. GC, T-347/09, Germany v Commission ECLI:EU:T:2013:418, para. 30, with further references. Even though it may be an indication for economic activity, see GC, Case T-309/12 Zweckverband Tierko¨ rperbeseitigung v Commission, ECLI:EU:T:2014:676, para. 66; with reference to ECJ, Case C-138/11 Compass Datenbank GmbH, ECLI:EU:C:2012:449, para. 39. 861 Com., State aid N 37/2003 BBC Digital Curriculum, para. 19. 862 ECJ, Cases C-343/95 Calı` & Figli v Servizi ecologici porto di Genova [1997] ECR I-1547, para. 17; 118/85 Commission v Italy [1987] ECR 2599, para. 8. 863 ECJ, Case 118/85 Commission v Italy [1987] ECR 2599, para. 7. 864 See ECJ, Cases C-475/99 Ambulanz Glo ¨ ckner [2001] ECR I-8089, para. 21; and C-237/04 Enirisorse [2006] ECR I-2843, para. 34. GC, Joined Cases T-231/06 and T-237/06, Kingdom of Netherland and NOS v Commission, [2010] ECR II-5992, para. 94. 865 ECJ, Cases C-364/92 SAT Fluggesellschaft [1994] ECR I-43, para. 30; C-343/95 Calı` & Figli v Servizi ecologici porto di Genova [1997] ECR I-1547, paras. 22–23. 866 Communication from the Commission — Services of general interest in Europe, OJ 2001 C 17/4, paras. 28 et seq., Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest (‘SGEI Communication’), OJ 2012 C 8/4, para. 16. 867 ECJ, Case C-138/11 Compass Datenbank GmbH ECLI:EU:C:2012:449, para. 40. 868 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest (‘SGEI Communication’), OJ 2012 C 8/ 4, paras. 14–15; in that respect see Grabitz/Hilf/Nettesheim/Pernice/Wernicke Article 86 EC para. 16 (with further references). 869 See the early leading case on public employment procurement offices: Case C-41/90 Ho ¨ fner and Elser [1991] ECR I-1979, paras. 21–22. 860

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Art. 107 TFEU

A legal entity may be regarded as an undertaking in relation to only part of its activities.870 In particular , the mere fact that an entity possesses public authority powers with respect to a part of its activities does not mean that it cannot be considered an understanding in respect to its other activities.871 In order to avoid cross-subsidisation – if one and the same body carries out both economic activities and non-economic activities, which can be separated from each other,872 – the State funding of the noneconomic activities will also be subject to Article 107(1) TFEU, unless respective costs and financing of both activities are actually strictly separated by means of separate accounts.873 Proof that the costs have been allocated correctly can be provided for example in the annual financial statements of the body concerned. 874 On the other hand, if that economic activity cannot be separated from the exercise of the public powers, the activities exercised by the entity as a whole remain activities connected with the exercise of those public powers and therefore the entity can not be regarded an undertaking.875 For instance, the procurement of goods and services required for the performance of the main activity of the undertaking does not constitute a separate economic activity but shares the same nature as the main activity. 876 With respect to infrastructure in the broad sense (universities, hospitals, cultural infrastructures like museums and history museums, pp.) the Commission has developed a principle of ancillarity, ‘according to which the existence of a minor economie activity that is directly related to and necessary for the operation of the infrastructure, or that is intrinsically linked to its main non-economic use, will not affect the overall classification of the activity as non-economic.’877 The question of what can be considered merely ancillary may vary from one infrastructure to the other. 346 The mere fact of holding shares, even controlling shareholdings, is not an economic activity, when it gives rise only to the exercise of the rights attached to the status of shareholder or member, as well as, if appropriate, the receipt of dividends, which are 345

870 ECJ, C-82/01 P, Ae ´roports de Paris v Commission [2002] ECR I-9297, para. 74; GC, T-347/09, Germany v Commission ECLI:EU:T:2013:418, para. 28. 871 GC, Case T-309/12 Zweckverband Tierko ¨ rperbeseitigung v Commission ECLI:EU:T:2014:676, para. 53, English version not yet available. 872 Case C-113/07 P SELEX Sistemi Integrati v Commission [2009] ECR I-2207, paras. 72 et seq. 873 See Com., State aid N 560/2001 UK, national heritage fund for Brighton West Pier Trust; Com., OJ 2013 L 166/24 para. 177 Italy, Scheme concerning the municipal real estate tax exemption granted to real estate used by non-commercial entities for specific purposes; with respect to a case of alleged abuse of dominant position (Art. 102 TFEU) see GC, Case T-155/04 SELEX v Commission [2006] ECR II-4797 and clarifications by appeal judgement Case C-113/07 P SELEX Sistemi Integrati v Commission [2009] ECR I-2207, paras. 72 et seq. 874 See section 2.1.1 of the R&D&I framework, OJ 2014 C 198/1. 875 ECJ, Case C-138/11 Compass- Datenbank GmbH ECLI:EU:C:2012:449, para. 38, with reference to Case C-113/07 P SELEX Sistemi Integrati v Commission [2009] ECR I-2207, paras. 72 et seq. In Compass, the ECJ ruled that the maintenance and making available to the public of the data thus collected, whether by a simple search or by means of the supply of print-outs, in accordance with the applicable national legislation, does not constitute an economic activity, since that activity cannot be separated from the activity of collection of the data, which the Court had considered to be an exercise of public powers under the specific circumstances of the case (paragraphs 40–41 of the judgement). These judgements have been rendered with respect to Article 102 TFEU (abuse of dominant position). Confirmed for Article 107(1) TFEU by GC, T-347/09, Germany v Commission ECLI:EU:T:2013:418, para. 29. See also Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, para. 19. 876 ECJ, Case C-205/03 P FENIN v Commission [2006] ECR I-6295, para. 36. ECJ, Case C-138/11 Compass- Datenbank GmbH ECLI:EU:C:2012:449, para. 39 with further references. 877 Commission’s staff working document ‘Analytical grids’ on the application of State aid rules to the public financing of infrastructure projects, September 2015, Annex - Grid 5, page 2, para. 7, downloadable under http://ec.europa.eu/competition/state_aid/studies_reports/state _aid_grids _2015_en.pdf, checked on November 22, 2015.

178

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347–349

II

merely the fruits of the ownership of an asset.878 However, in one case involving a particular constellation the European Court of Justice has ruled against the Commission’s opinion and held that an entity which, owning controlling shareholdings in a company actually exercises that control by involving itself directly or indirectly in the management thereof must be regarded as taking part in the economic activity carried out by the controlled undertaking.879 In that case the European Court of Justice wished to prevent a situation allowing the simple separation of an undertaking into two different entities, the first pursuing directly the former economic activity and the second controlling the first and being fully involved in its management, to deprive the EU State aid rules of their practical effect. The Court took the view that a construction of that kind would enable the second entity to benefit from subsidies or other advantages granted by the State and to use them in whole or in part for the benefit of the first entity, in the interest, of the economic unit formed by the two entities. In a case concerning a State aid scheme the Commission can confine itself to 347 examining the general characteristics of the scheme at issue, without being required to examine each particular case in which it applies. If it is undisputed that the scheme benefits at least also certain undertakings – so that Article 107(1) TFEU is applicable – then that is not called into question by the fact that it may also benefit entities which are not undertakings.880 For the sake of clarity, individual measures under that scheme in favour of other bodies than undertakings do nevertheless not constitute State aid. The concept of economic activity is subject to dynamic interpretation in the light of 348 the development of the Internal Market and in particular in the light of the progress made in liberalising more and more economic sectors.881 The following specific cases can thus be presented only as a snapshot. bb) Specific cases. The administration of the social security system is not an 349 economic activity if certain circumstances prevail. However, the social purpose of a compulsory insurance scheme is not in itself sufficient to preclude its classification as an economic activity.882 The case law on Articles 101 and 102 TFEU recognized that health funds, which when discharging their duties are precluded by the law from influencing the amount of the contributions, the use of assets and the fixing of the level of benefits, fulfil an exclusively social function, based on the principle of national solidarity and non-profit-making, meaning that they are not engaged in economic activity. 883 This case law does also apply to EU State aid law.884 In contrast, insurance companies operating in accordance with the principle of capitalisation have to be regarded as undertakings within the meaning of Article 107(1) TFEU.885 Some schemes combine features of both 878 ECJ, Case C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, para. 111; Com. OJ 2013 L 148/1, para. 179 Germany, Monitoring of winding down of WestLB. 879 ECJ, Case C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, para. 112. 880 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, para. 136. 881 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest (‘SGEI Communication’), OJ 2012 C 8/ 4, paras. 12; e. g. for the banking sector see Report of the European Commission to the Council of Ministers: Services of general economic interest in the banking sector, adopted by the Commission on 17 June 1998 and presented to the ECOFIN Council on 23 November 1998, point 3.3. Download: http:// ec.europa.eu/competition/state_aid/studies_reports/archive/report_bank_en.html. 882 ECJ, Case C-355/00 Freskot [2003] ECR I-5263, para. 77, referring to the judgements in ECJ, Joined Cases C-180/98 to C-184/98 Pavlov and others [2000] ECR I-6451, para. 118, and C-218/00 Cisal [2002] ECR I-691, para. 37. 883 ECJ, Joined Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, paras. 15–18. 884 ECJ, Case C-355/00 Freskot [2003] ECR. I-5263, paras. 78–79. 885 ECJ, Case C-67/96 Albany International [1999] ECR. I-5751, paras. 71–87.

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Art. 107 TFEU

categories. The classification of such a scheme depends on an analysis of various elements and their respective importance.886 350 In the same way, provided by hospitals and doctors are not of an economic nature of the providers form an integral part of the national health system, are based on the principle of solidarity and provide their services free of charge on the basis of universal coverage.887 In contrast, where health care providers offer their services for remuneration, thus competing with each other for patients, these services are classified economic activities.888 351 According to the Commission889 and the Court890, services provided in connection with national education systems are not economic activities. The provision of schools is a public task and school attendance is a duty which can be enforced if necessary.Schools and other institutions of national education systems (e. g. vocational training, 891 private and public primary schools,892 kindergartens893) are excluded from the concept of undertakings within the meaning of competition law894, as their activities form part of the general public duty to promote education and are thus key functions of the State, similar to the police and other public order services. This applies even if the service is offered by private institutions (e. g. boarding schools) as long as they are an integral part of the national education system.895 Insofar as the private schools are not part of the national education system they can be – under certain circumstances – considered undertakings. Their existence does not, however, mean that the institutions of the national education system have also to be considered undertakings any more than the existence of private stewarding and security firms means that the police and public order services are economic activities. The key factor in an individual case is therefore whether the private school concerned is a part of the national education system or not. 352 Accordingly, the ‘classic’ field of activity of tertiary education institutions in the form of university research and teaching is not to be classified as an economic activity either. In its MEMO/06/441896 which addressed frequently asked questions on the former Community Framework for Research, Development and Innovation, the Commission has made it clear that the core activities of universities like teaching and (independent) research do not fall under State aid rules. At the same time the Commission also made 886 Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, para. 23 with reference to ECJ, Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, paras. 33 et seq. 887 GC, Case T-319/99 FENIN [2003] ECR II-357, para. 39 confirmed by ECJ, Case C-205/03P [2006] ECR I-6295, paras. 25 to 28. 888 See ECJ, Case C-157/99 Geraets-Smits and Others [2001] ECR I-5473, paras. 53 to 58 concerning the freedom to provide services; Joined Cases C-180/98 to C-184/98 Pavlov and others [2000] ECR I-6451, para. 75–77; Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest (‘SGEI Communication’), OJ 2012 C 8/4, paras. 23–24. 889 Communication from the Commission on the application of the EU State aid rules to compensation granted for the provision of services of general economic interest (‘SGEI Communication’), OJ 2012 C 8/ 4, paras. 26 et seq. 890 ECJ, Case C-263/86 Humble [1988] ECR 5365, paras. 9, 10, 15–19. 891 ECJ, Case C-263/86 Humble [1988] ECR 5365, paras. 15–19. 892 ECJ, Cases C-318/05 Commission v Germany [2007] ECR I-6957, paras. 65 to 71; C-76/05 Schwartz [2007] ECR I-6849, paras. 37 to 47. 893 Judgment of the EFTA Court of 21 February 2008 in Case E-5/07 Private Barnehagers Landsforbund v EFTA Surveillance Authority. 894 This does not mean that all activities of those entities are a priori: excluded from State aid law, Com., OJ 2013 L 166/24 para. 104 Italy, Scheme concerning the municipal real estate tax exemption granted to real estate used by non-commercial entities for specific purposes. 895 See Com., State aid N 118/2000 France, Aide aux clubs sportifs professionnels, para. 14; also Com., State aid N 644f/2002 Germany, Centres for vocational education, continued training and re-education. 896 Download: http://europa.eu/rapid/press-release_MEMO-06-441_en.htm?locale=en.

180

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352

II

clear that universities do not benefit from a ‘university privilege’ which would fully exempt them from State aid law. The question of whether funding is to be considered to be State aid thus depends on the respective activity of the universities, as is shown by the new Community framework for State aid for research and development and innovation.897 Thus the public financing of non-economic activities carried out by universities and other research organisations does not qualify as State aid. Among the activities which the Commission considers to be of a non-economic character are education for more and better skilled human resources as well as the conduct of independent R&D for more knowledge and better understanding.898 However, where universities perform economic activities (such as renting out infrastructures, supplying services to business undertakings or performing contract research), the public funding of these economic activities will normally entail State aid.899 If the same entity carries out activities of both economic and non-economic nature, the public funding of the non-economic activities will not fall under the concept of State aid only if, in order to avoid cross-subsidisation of the economic activity, the two kinds of activities and their costs and funding can be clearly separated.900 The new 2014 R&D&I Framework has – to some extent – relaxed the application of State aid law with respect to research organisations: – First, where the research infrastructure is used for both, economic and non-economic activities, and is partly publicly and privately funded, the Commission assumes that the public funds are spent for the non-economic activities and the private funds for the economic activities, so that a State aid problem can only occur if the public funds granted for a specific accounting period exceed the costs for the non-economic activities incurered in that period.901 – Second, even if the public funds exceed these costs, the public funding is not considered State aid, if the research organisation or infrastructure is almost exclusively used for non-economic activities and the economic use remains purely ancillary. This shall be the case if the economic activity consumes exactly the same inputs and does not exceed 20 % of the overall annual capacity.902 – Third, the research organisation or infrastructure will not be considered the State aid beneficiary if it acts as a mere intermediary and thus passes on to the final recipients the totallity of the public funding and any advantage acquired through such funding. In order to exclude any advantage to the research body, it must have been either selected through an open tender procedure or the public funding must be available to all entities satisfying State aid rules applying at the level of the final recipients, i. e. the customers of the research entities.903 897

See R&D&I Framework, OJ 2014 C-198/1, point 2.1. See R&D&I Framework, OJ 2014 C-198/1, para. 19; see also Com., State aid NN 54/2006 Czech Republic, Aides a` l’universite´ de Prerov, paras. 15–18. In this decision the Commission considered a tertiary education establishment offering bachelor programmes for high school graduates not to be an undertaking, as the college concerned was part of the national education system, did not engage in activities other than offering course of study and did not seek to offer its services for remuneration; see also Com., State aid N 694/2000 Germany, recherche dans le secteur de la sante´. 899 R&D&I Framework, OJ 2014 C-198/1, para. 21. 900 R&D&I Framework, OJ 2014 C-198/1, para. 18. For cases where application of these principles led to a decision that aid was not present, see for example: Com., State aid N 365/2007 Germany (Land Sachsen-Anhalt), Establishment of Fraunhofer Center for Silicon Photovoltaics Deutschland; Com., State aid N 343/2008 Hungary, Individual aid to the College of Nyı´regyha´za for the development of the Partium Knowledge Centre; Com., State aid, N 617/2008 Denmark, Technology Transfer Institutes; Com., State aid NN 47/2009 Germany, Alleged State aid in favour of the Fraunhofer Institut fu¨r mikroelektronische Schaltungen und Systeme Duisburg. 901 R&D&I Framework, OJ 2014 C-198/1, para. 20, footnote 6. 902 R&D&I Framework, OJ 2014, C-198/1, para. 20. 903 R&D&I Framework, OJ 2014, C-198/1, paras. 22/23. 898

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353–355

Art. 107 TFEU

Schools and workplaces for disabled persons, which offer employment and medical care to disabled persons in order to allow them to pursue an independent life and to resume employment in the open labour market,904 are not considered to be undertakings.905 That can apply even if such institutions offer products produced by and services provided by disabled persons on the market, provided that these economic activities are of an instrumental and ancillary character and are offered only on the local market, that the products are offered at market prices, that the revenues generated are used exclusively for the benefit of the establishment concerned and that the revenues do not cover the costs of functioning.906 354 Similar considerations apply to the funding of the employment of prisoners.907 Regular work is one of the essential measures used for the social rehabilitation of prisoners, and the funding of such employment is thus ancillary to the public authorities’ task of caring for prisoners, even if the prisoners’ products and services are offered on the market. 355 Cultural institutions (such as zoos, theatres and museums) may also be classified as undertakings if they carry out economic activities. They provide a range of very diverse services, usually in exchange for payment and in competition with one another. In the Commission’s (not always consistent) decision practice the following areas have been considered economic activities: cultural centres, museums and public libraries operated by local authorities908 as well as the theatre and circus sector. 909 Moreover, many cultural offers are in competition with more or less comparable offers: Thus, the Commission believes that competition between municipal cultural centres that offer theatre performances and music concerts, and cinemas is conceivable. 910 On the other hand. The Commission takes the view that State aid is not involved, if the culture infrastructure of historic monuments are not used to carry out an economic activity, and that activities through which the State fulfils a genuine public task and responsibility (in the educational, cultural and social areas) are not of an economic nature and in general fall outside the scope of State aid rules.911 Accordingly, the Commission has considered that public libraries can be vehicles for the State authorities to fulfil a genuine public task and responsibility (in the educational, cultural and social areas), in which case there is 110 eco 11 comic activity.912 in a number of other decisions the Commission has ruled that funding for activities by local authorities, associations and churches, which serve the preservation of national cultural heritage on a non-profit basis, do not constitute State aid. The public support in these cases is said not to constitute State aid because the activities supported are purely cultural or heritage353

904 Com., State aid N 558/2005 Poland, Establishments of professional activity for seriously disabled people, para. 5. 905 Com., State aid N 558/2005 Poland, Establishments of professional activity for seriously disabled people. 906 Com., State aid N 558/2005 Poland, Establishments of professional activity for seriously disabled people, paras. 17 et seq. and 54 et seq. 907 Com., State aid N140/2006 Lithuania, Allotment of Subsidies to the State Enterprises at the Correction Houses. 908 Com., State aid N 293/2008 Hungary, Aid for multifunctional community cultural centres, museums, public libraries, paras. 18 et seq. 909 Com., State aid N 704/2007 Spain, Aid to activities in the theatre and circus sector: Region of Valencia, para. 24. 910 Com., State aid N 293/2008 Hungary, Aid for multifunctional community cultural centres, museums, public libraries, para. 19. 911 Commission’s staff working document ‘Analytical grids’ on the application of State aid rules to the public financing of infrastructure projects, September 2015, Annex – Grid 5, page I, para. 4, downloadable under http://ec.europa.eu/competition/state_aid/studues_reports/state_aid_grids_2015_en.pdf checked on November 22,2015. 912 Com., State aid SA.35529 (2012/N) – Czech Republic – Digitization of books in public libraries.

182

Arhold

B. The definition of State aid

356

II

related.913 Likewise, in a ease where publie funds supported renovation measures in order to preserve and revitalise the Polish historie site of the ‘Przemysl Stronghold’ earried out by an association of different municipalities in the fortress region was considered to be of noneconomic nature. The Commission observed that the association nhad been created purely with the aim to protect cultural heritage and to stimulate the development of tourism in the territory of the fortress municipalities. Its activities were not profit driven (it did not perform any commercial activities itself) and were of a very local character (it did not operate outside of the area of the municipalities). Although after the completion of the works certain premises (profiting from the aid) would be used for limited commercial activities (operating the training and conferences rooms, the gastronomy and accommodation facility) not carried out by the association but by third parties, over 80 % of the financing of the total project’s . costs would be used for tasks aimed at the renovation of non-commercially used infrastructure. The Commission eonsidered that the support of the non-commercial activities of the association were no State aid, sinee the association was no undertaking, while the support oftheeconomic activities did not have an impact on trade.914 For a long time, it was somewhat unclear whether regional or local land develop- 356 ment can be considered an economic task falling within the scope of Article 107(1) TFEU. Although there certainly are private competitors, the Commission has not yet registered any complaints against subsidies granted to public sector real estate development companies engaged in buying, developing and selling commercial property, nor has the Commission ever initiated proceedings ex officio.915 Ten years ago the Commission seemed to regard the provision of infrastructure (even infrastructure related to the commercial sector, such as ‘commercial or industrial zones’) as a classic case of a public authority task and analysed such cases only at the level of exploitation, i. e. by considering the question of whether the developed land was sold or leased to undertakings at a market price.916 This also follows from the Commission’s replies to the Court of Auditors’ Special Report No 7/99 concerning the development of industrial sites, in which the Commission explicitly distinguished between two levels: the first concerning the transfer of funds to a regional or local body, tasked with developing and marketing industrial sites (first level), and the other concerning the sale of the land developed by that regional or local authority to businesses willing to relocate there (second level). In that respect the Commission assumed that State aid can exist only at the second level, i. e. if the public authority concerned sells land on more favourable terms than those according to market conditions (discount on the market price). 917 In cases concerning the lease and not the sale of developed land, the Commission has

913 Com., State aid N 5/2005 Danish scheme for tax reduction of donations to cultural institutions; Com., State aid N 123/2005 Hungary, Earmarked scheme for tourism and culture; Com., State aid NN 55/ 2005 Poland, Heritage conservation, as well as Press Release IP/05/979 dated 20 July 2005. On the other hand, see Com., State aid N 276/2007 Hungary, aid measures with a cultural objective under the Regional Development Operational Programmes, in which the Commission approved the State aid measures. 914 Com., State aid SA.34891 (2012/IN) – Poland – State support to Zwia˛zek Gmin Fortecznych Twierdzy Przemys´l, paras. 26–32. 915 Public real estate development companies exist in several of the Member States of the European Union, for details see the Court of Auditors’ Special Report No 7/99 concerning the development of industrial sites, together with the Commission’s replies, OJ 2000 C 68/40. 916 For more on this see Com., OJ 2003 L 66/36 Landesentwicklungsgesellschaft Thu ¨ ringen; also Com., State aid N 644a/2002 and N644b/2002 Germany, Grounds for industry and trade; Com., State aid N 657/ 1999 UK, Business Infrastructure Development; Com., OJ 2000 L 145/27 English Partnerships (EP) under the Partnerships Investment Programme (PIP). 917 See OJ 2000 C 68/40, 43.

Arhold

183

II

357

Art. 107 TFEU

based its findings on whether the levels of rent were at usual market rates and on whether a return on invested capital was generated (positive net return). 918 The second part of the assessment implied another (albeit incomplete) assessment of whether State aid has been granted for the benefit of the public project development companies. There seemed to be no reason why that should not take place in the case of land sales as well. However, on the Commission clarified the issue by adopting a non-aid-decision with respect to a German scheme providing direct grants for the development and revitalisation of land.919 In that decision, the Commission found that the development of land by local authorities is part of their public tasks and therefore outside the realm of EU State aid rules. The German land development scheme was aimed at making land ready for building, ensuring that the area is connected to utility (water, gas, sewage and electricity) and transport networks (rail and roads). It did not concern the construction of buildings or the management of land. The Commission’s examination showed that developers were selected through an open, transparent and non-discriminatory public procurement procedure. Moreover, the land was to be sold either through a tender procedure or after an independent expert evaluation of the land, in line with the Commission’s communication on land sales. This ensured that developers were remunerated on market terms and that purchasers of land paid the market price. Since neither developers nor the final purchasers received an advantage through the measure, there was no State aid involved. Since the decision confirms that land development by public authorities is part of the performance of public duties, namely the provision and supervision of land infrastructure in line with local urban and spatial development plans, it can be concluded that even if the municipalities did not tender the development but carried it out via their own municipal real estate development companies, which received financial support, this could not be State aid either, since they would fulfil only public tasks and no economic activities. In its press release, the Commission has stressed that this decision clarifies that the Leipzig/Halle judgments of the EU Courts, according to which the construction of infrastructure that is inextricably linked with its subsequent economic use constitutes an economic activity in itself and that therefore EU State aid rules apply to the financing of such infrastructure, do not apply to such general local land local development, which remains a pure public task. 920 357 Indeed, the Commission’s State aid assessment of infrastructure measures has been shifting since the cartel law judgement in Ae´roports de Paris. As late as the 1990 s the Commission considered the provision of publicly owned airport infrastructure a public authority task, and therefore focussed entirely on whether access to the infrastructure was non-discriminatory or not. In the Ae´roports de Paris ruling the General Court made it clear that the provision of airport facilities to airlines and various service providers, in return for a fee at a rate freely fixed by the publicly owned undertaking, does constitute an economic activity.921 Since that judgement public investments in infrastructure are assessed under EU State aid law.922 The new approach applies also to other forms of 918 Com. OJ 2002 L 282/57, paras. 15–18 Germany, Industriepark Wo ¨ rth; in that respect see also Com. OJ 2002 L 25/41, para. 33 Netherlands, Reebok, Rotterdam: The Commission defined the minimum requirement as being that the deduction of the project’s costs from the income should result in a positive net present value for the public undertaking as no market rate of return on such investments was available for comparison. 919 Com., State aid SA.36346 Germany – GRW land development scheme for industrial and commercial use. 920 IP/14/332 of 27 March 2014. 921 GC, Case T-128/98 Ae ´roports de Paris v Commission [2000] ECR II-3929, paras. 120–125. 922 Made clear for the first time in Com., State aid NN 45/00 Amsterdam airport – Schiphol. In Joined Cases T-443/08 and T-455/08 Flughafen Leipzig/Halle and others v Commission [2011] ECR II-1311,

184

Arhold

B. The definition of State aid

357

II

infrastructure meant to be exploited economically923, such as the construction of toll motorways, where the Commission has meanwhile moved towards applying the Airport Guidelines924 by analogy.925 Public funding of infrastructure that is not meant to be commercially exploited is in principle excluded from the application of State aid rules.926 Where an originally non-economic infrastructure is later re-assigned to economic use (e. g. where a military airport is converted to civilian use), only the costs incurred for the conversion of the infrastructure to economic use will be taken into account for the assessment under the State aid rules. 927 If an infrastructure is used for both economic and non-economic activities, the Commission wants to apply the rules laid down in para. 20 of the R&D&I Framework928, with the difference that the economic use of the infrastructure can only be considered ancillary when the capacity allocated each year to such acticity does not exceed 15 % of the infrastructure’s overall capacity (instead of 20 % in case of R&D infrastructure). 929 In general, also the operation of sport facilities (including race tracks and off-road parks), leisure parks 930, accommodation facilities, restaurants, safety driving centre, driving schools, multifunctional halls, and cash free payment systems, and their lease to professional or nonprofessional users931, are normally an economic activity for both the owner and operator. Consequently, the construction or renovation of infrastructure which is indissolubly linked to these activities is also an economic activity. By contrast, noneconomic activities include the use of a sport facility at the level of non-professional users932 and the training of youngsters by professional sport clubs if accounts are separated from the accounts for the economic activities. 933 In view of the indissoluble link between the infrastructure and the economic activity for which it is used the construction, upgrade or operation of Nu¨rburgring sport and tourism infrastructure paras. 93–94; upheld on appeal, see ECJ, Case C-288/11 P Flughafen Leipzig-Halle GmbH and others v Commission [2012] ECR, the EU Courts have confirmed that the construction of an infrastructure meant to be exploited commercially is an economic activity itself. For more on this see infra Solte´sz in this Commentary, Part. VII, Chapter K. 923 See GC, Joined Cases T-443/08 and T-455/08 Flughafen Leipzig/Halle and others v Commission [2011] ECR II-1311, paras. 93–94; upheld on appeal, see ECJ, Case C-288/11 P Flughafen Leipzig-Halle GmbH and others v Commission [2012] ECR; concerning the construction and maintenance of pipelines and gas grids, often by a PPP, see for example Com., OJ 2005 L 56/15, Germany, Netherlands and Belgium, construction of a propylene pipeline between Rotterdam, Antwerp and the Ruhr area; Com., OJ 2007 L 143/16, Germany, Ethylene pipeline in Bavaria; as well as Com., OJ 2012 L 166/83, Greece, Aluminium of Greece SA; for port infrastructure see Com., OJ 2011 L 319/92 Latvia, Ventspils Free Port Authority. For the construction of multifunctional arenas see Com., State aid SA.33728 Denmark, Financing of a new Multiarena in Copenhagen; as well as Com., OJ 2013 L 243/19, paras. 50–54 Sweden, Uppsala arena. 924 Guidelines on State aid to airports and airlines, OJ 2014 C 99/3. The Aviation Guidelines specify the conditions under which public financing of airports and airlines may constitute State aid within the meaning of Article 107(1) TFEU as well as the conditions under which it can be declared compatible with the Internal Market. Additionally, it treats the question of SGEI compensation in the aviation sector. 925 E. g. Com., State aid N 462/2009 Poland, Aid for the construction and operation of the A2 Motorway, para. 36. 926 Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, paras. 39–40. 927 Com., OJ 2013 L 309/27, Tampere-Pirkkala Airport. 928 OJ 2014 C-198/1. See above, mn 352. 929 See Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, para. 37. 930 Com., State aid C53/2002, Germany – Space Park Bremen. 931 Com., State aid SA.35440, Germany – Arena Jena. For professional sport infrastructure, see Com., SA.3l722, Hungary – Hungarian tax benefit scheme. For the operation of sport centres for general public against a fee, see Com., SA.33952 – Germany, German Alpine Association. 932 Com., SA.33618, Finland – Uppsala arena, Co., SA.35135, Germany – Arena Erfurt, Com., SA.35440, Gennany – Arena Jena. 933 Corn., State aid – NI 18/2000, France – Support to professional sport clubs.

Arhold

185

II

358–359

Art. 107 TFEU

were considered economic activities for the investors and operators, even if the revenues from the operation of the infrastructure did not cover the costs of its construction and if more than 90% of sport activities at Nu¨rburgring qualified as amateur sport. The latter fact played a role only at the level of users: non-professional users are not undertakings. Indeed, the Nu¨rburgring sport and tourism infrastructure was not general infrastructure, such as a public road which is made available for public use.934 358 The Commission also considers that the provision of infrastructure for tourism is not necessarily outside the scope of the definition of State aid. Instead, one has to assess on a case by case basis what can still be considered as serving the provision of services of general interest and what has to be seen as being done specifically to promote the domestic tourism industry in its competition with other tourist regions. Thus, general infrastructure projects carried out and operated by a municipality such as cycling and hiking paths, car parks, spa gardens etc. may be considered public authority activities and not economic activities.935 Activities which go beyond that, and in particular those which are provided for remuneration such as leisure baths or thermal spas, are economic by nature and can only be exempted from the definition of State aid if they are purely local and incapable of having any impact on trade between the Member States.936 359 The courts have not yet decided the question of whether the activity of subsidy banks is of an economic nature. It may be argued that granting subsidies is per definitionem an exercise of public authority powers and that it thus does not constitute an economic activity. Accordingly, the State support in favour of a subsidy bank or other subsidy institutions, for example through State guarantees to assist raising funds on the market, should not be considered to fall under Article 107(1) TFEU. The question was implicitly answered in the so-called Understanding II between the Commission and Germany relating to ‘institutional liability’ (Anstaltslast) and ‘guarantor liability’ (Gewa¨hrtra¨gerhaftung) for the benefit of the German specialised credit institutions, including the KfW.937 The Commission has agreed that both types of liability (Anstaltslast and Gewa¨hrtra¨gerhaftung) can be retained for the benefit of pure subsidy banks, to the extent that their activities are limited to a very precisely defined catalogue of public subsidy tasks. All commercial activities had to be either abandoned or else isolated from State liability by separating them out into legally independent undertakings free from State support. In a 2004 decision concerning the Finnish Municipality Finance Plc (MFL) the Commission explicitly confirmed for the first time that such special credit institutions938 are not undertakings within the meaning of Article 107(1) TFEU.939 It was considered to be important that MFL may benefit from State guarantees only with respect to its public tasks. Such public tasks include the financing of municipalities and municipal federations (‘in-house’ or ‘closed-cycle’-approach) as well as the distribution of subsidies (financing at preferential terms) at the request of the public authorities. 934

Com., State aid SA.31550 – Germany, Nu¨rburgring, not published yet, para. 174. Com., State aid N610/2001 Germany, Tourism Infrastructure Programme Baden-Wuerttemberg. 936 For the constituent element of impact on trade see Solte ´sz, Part II B VI. 937 Com., State aid E10/2000 Germany, State guarantees for public banks in Germany (Anstaltslast und Gewa¨hrtra¨gerhaftung). 938 Defined in the Report of the European Commission to the Council of Ministers: Services of general economic interest in the banking sector, adopted by the Commission on 17 June 1998 and presented to the ECOFIN Council on 23 November 1998, point 3.2. Downloadable at http://ec.europa.eu/competition/ state_aid/studies_reports/archive/report_bank_en.html. In that report the Commission expressed the opinion that State aid problems can only be dispelled if all the banks compete on the same conditions for the provision of services of general economic interest. The only situation recognized to be a clearly non-commercial activity was the raising of funds for the public sector (point 3.3). 939 Com., State aid N179/2004 Finnish municipal guarantees. 935

186

Arhold

B. The definition of State aid

360–361

II

Such financing concerns, in particular environment-friendly investment, infrastructure, housing and services of general interest. Providing financing to municipal companies or other companies at commercial terms, which could just as well have been provided by any normal commercial bank, is not permitted. Doing that would lead to a distortion of competition with commercial banks that do not enjoy a State guarantee. These principles have subsequently been confirmed, for instance in the decision on the recapitalisation of the Mortgage and Land Bank of Latvia, LHZB. 940 Of course, the application of the banks’ subsidy schemes in relation to their beneficiaries remains subject to the Commission’s State aid control policy.941 Further examples: Economic nature: recruitment agency;942 developing new technolo- 360 gies for the use of coal and providing specialist support services for authorities, public bodies and companies interested in the development of those technologies;943 nature protection foundations or associations (in particular consultancy services, sale of lumber, leasing out agricultural land or tourism);944 public broadcasting945; nature conservation organisations insofar as they carry out economic activities like the sale of wood and the awarding of hunting and fishing leases.946 No economic nature: anti-pollution surveillance with which a body governed by private law has been entrusted by the public authorities in an oil port of a Member State, even where port users must pay fees to finance that activity;947 sewage and waste water disposal by the local authority held to be a classic example of public services of general interest incumbent on local authorities; 948 consumer information which exclusively aims at protecting and informing the consumer, if there is no stimulation whatsoever of the consumer to buy a specific product; 949 the collection of data to be used for public purposes on the basis of a statutory obligation imposed on the undertakings concerned to disclose such data.950 b) The concept of the ‘production of certain goods’. The concept of the ‘production 361 of certain goods’ has to be given a broad interpretation. 951 It covers not just the production of goods, but also the provision of services and thus practically all sectors of the economy, including the independent occupations and professions.952 The defini940 Com., State aid NN 60/2009 Recapitalization of ‘The Mortgage and Land Bank of Latvia’, paras. 30–38. See also Commission, State aid N715/2006 Finland, Tax exemption to Finnvera Oyj, para. 22. 941 Com., State aid NN 60/2009 Recapitalization of ‘The Mortgage and Land Bank of Latvia’, para. 40; Com., State aid N715/2006 Finland, Tax exemption to Finnvera Oyj, para. 29; Com., State aid No. E 10/ 2000 Germany, State guarantees for public banks in Germany (Anstaltslast und Gewa¨hrtra¨gerhaftung), point 2. For more on the implementation in practice at KfW see Weber, Zeitschrift fu¨r das gesamte Kreditwesen, 2006, 882. 942 Especially ECJ, Cases C-41/90 Ho ¨ fner and Elser [1991] ECR I-1979, para. 21; C-67/96 Albany [1999] ECR I-5751, para. 77; Joined Cases C-180/98 to C-184/98 Pavlov and others [2000] ECR I-6451, para. 74, Case C-222/04 Cassa di Risparmio di Firenze and others [2006] ECR I-289, para. 107. 943 ECJ, Case C-237/04 Enirisorse [2006] ECR I-2843, paras. 30, 31. 944 Com., State aid N 277/2003 Germany, Transfer of nature protection land. 945 GC, Joined Cases T-231/06 and T-237/06 Kingdom of Netherlands and NOS v Commission, [2010] ECR II-5993, para. 96. 946 GC, Case T-347/09 Germany v Commission ECLI:E:T:2013:418, para 39, no english version not available yet, see also Hohmann, EStAL 2015, 161. 947 ECJ, Case C-343/95 Calı` & Figli v Servizi ecologici porto di Genova [1997] ECR I-1547, para. 25. 948 Com., State aid N 644f/2002 Germany, Centres for vocational education, continued training and reeducation. 949 Com., State aid Case N 201/02 – Germany, consumer oriented qualification of regional initiatives for supporting of particular services in the field of animation and environmental protection. 950 Case C-138/11 Compass- Datenbank GmbH ECLI:EU:C:2012:449, para. 40. 951 Koenig/Ku ¨ hling/Ritter para. 170. 952 Von der Groeben/Schwarze/Mederer Art 87 EG para. 35; concerning State aid applying to a whole economic sector see ECJ, Case C-66/02 Italy v Commission [2005] ECR I-10901, para. 95.

Arhold

187

II

362–365

Art. 107 TFEU

tion of ‘the production of certain goods’ is aimed at preventing the Member States from hampering the creation of the Internal Market by promoting their own traditionally strong industries/economic sectors.953

2. Selectivity a) General. ‘Selectivity’ is probably the most complex constituent element of the notion of ‘State aid’ within the meaning of Article 107(1) TFEU. Its interpretation can give rise to considerable difficulties because it delimits the Commission’s competence to control State aid from so-called general measures, i. e. measures that fall within the Member States’ general competence for economic policy. The Union may not use State aid control law to justify interfering in the Member States’ general economic policy frameworks.954 The potential negative effects of a wide interpretation of the requirement of selectivity on the right of the Member States to define their general economic policy have been highlighted in the opinions of several Advocate Generals.955 363 Despite or because of that a fairly generous interpretation of the term selectivity has prevailed. If the national scheme concerned grants the State authorities a margin of discretion, the exercise of that margin normally renders the scheme selective 956 (see below under point b)). 364 Schemes are also deemed to be selective if they only benefit undertakings of a certain size – e. g. only large companies957 or only SMEs958 –, only undertakings manufacturing goods,959 only start-ups making an investment of a particular amount or creating a certain number of jobs,960 (material selectivity, see below point c) bb) (c) (2) (c)), only undertakings headquartered in a particular territory (regional selectivity, see below point c) bb) (c) (2) (b)) or undertakings in a particular sector (sectoral selectivity see below point c) bb) (c) (2) (d)). 365 The legislation does not need to be explicitly selective. It is sufficient if a scheme which seems to be generally applicable, is de facto limited to particular undertakings or sectors of production (de facto selectivity for details see below point c) bb) (c) (2) (e)). 362

953

As regards sectoral selectivity see the details below under mn. 433/434. Serious distortions of competition arising from the different national economy policies can be addressed pursuant to Articles 116, 117 TFEU. 955 Prek/Lefe `vre, EStAL 2/2012, p. 335 with references. 956 Cf. ECJ, Cases C-200/97 Ecotrade [1998] ECR I-7907, paras. 39–41; C-256/97 De ´me´nagementsManutention Transport SA (DMT) [1999] ECR I-3913, para. 27; also GC, Joined Cases T-127/99, T-129/ ´ lava and others v Commission [2002] ECR II-1275, paras. 149 et 99 and T-148/99 Territorio Histo´rico de A ´ lava and others v Commission [2002] seq.; Joined Cases T-92/00 and T-103/00 Territorio Histo´rico de A ECR II-1385, paras. 31 et seq. All the cases concerned a Basque tax system establishing a tax credit for certain investments in the Basque Country. The administration was allowed to fix the amount of the allowable investment and to set time-limits for the investment, which the General Court held to be sufficient to establish selectivity. 957 ECJ, Case C-200/97 Ecotrade Srl [1998] ECR I-7907, paras. 39–41; GC, Joined Cases T- 127/99, T´ lava and others v Commission [2002] ECR II-1275, paras. 129/99 and T-148/99 Territorio Histo´rico de A ´ lava and others v Commission 155 et seq.; Joined Cases T-92/00 and T-103/00 Territorio Histo´ rico de A [2002] ECR II-1385, paras. 37 et seq.: the fact that a minimum investment – in this case of ESP 2 500 million – is required to qualify for a tax credit is enough to establish that the measure gives a selective advantage restricted to large undertakings – de facto selectivity. ~ola de Transporte de Mercancı´as (CETM) v Commission 958 GC, Case T-55/99 Confederacio ´ n Espan [2000] ECR II-3207, paras. 40 et seq. 959 As distinct from undertakings supplying services, ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 52. 960 GC, Joined Cases T-92/00 and T-103/00 Territorio Histo ´ lava and others v Commission ´ rico de A [2002] ECR II-1385, paras. 49 et seq. In that case an investment of ESP 80 million and creation of at least 10 jobs. 954

188

Arhold

B. The definition of State aid

366–368

II

Selectivity can exist even if there is no discrimination according to nationality, 961 or according to particular categories of goods or services. 962 The concept of subsidy within the meaning of the WTO Agreement on Subsidies and Countervailing Measures 963 is of no relevance for the definition of State aid set out in Article 107(1) TFEU. 964 The Courts have not followed earlier opinions in the legal community which limited the element of selectivity to a specific non-discrimination rule.965 Since State aid is assessed by its effects and not by its form or objective (effects 366 doctrine) even a combination of consecutive measures which when considered individually are either not granting an advantage or are not selective may constitute State aid, for example if the State concludes an agreement granting to an individual undertaking certain mining fee rates above the statutory fees applicable at the time of its conclusion but guaranteed for the entire duration thereof, whilst having the intention at that time of subsequently exercising its regulatory power, by increasing the fee rate so that other market operators that have not concluded such an agreement are placed at a disadvantage.966 However, if the measures concerned are not closely linked to each other with regard to their chronology and their purpose, then an agreement which a Member State concludes with an economic operator and which does not involve any economic advantage at the time of its conclusion will not later become State aid by the mere fact that, subsequently, conditions external to such an agreement change in such a way that the operator in question is in an advantageous position vis-a`-vis other operators that have not concluded a similar agreement.967 Despite the significant role which selectivity plays in distinguishing aid measures from 367 the Member States’ general economic policies, for a long time the number of cases remained limited. This changed when the Member States’ tax schemes came under the scruting of the Commission’s State aid control. The concept of selectivity is still extremely unclear and even highly disputed between the General Court and the European Court of Justice. The following summary can only give a rough impression of the current state of play.968 b) Discretionary decisions to grant individual ad hoc aid or individual aid in the 368 context of general aid schemes. If the body granting the financial support has a margin of discretion in its decision-making the measure is normally to be considered selective. That is true both in cases where such discretion is granted by virtue of a general aid scheme and in those where, in the absence of such a general scheme, the public body concerned decides to grant a subsidy on an ad hoc basis. The key fact is that the body understanding the measure enjoys a degree of latitude which enables it to adjust its financial assistance having regard to a number of considerations such as, in particular, ~ola de Transporte de Mercancı´as (CETM) v Commission 961 GC, Case T-55/99, Confederacio ´ n Espan [2000] ECR II-3207, paras. 49–50. 962 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 48–49. 963 OJ 1994 L 336, p. 156 et seq. ~ola de Transporte de Mercancı´as (CETM) v Commission 964 GC, Case T-55/99 Confederacio ´ n Espan [2000] ECR II-3207, para. 50. 965 See for instance Ipsen, p. 669, and Ko ¨ nig//Roth/Scho¨n/Scho¨n, p. 111. According to the latter the principle of non-discrimination is at the very heart of the prohibition of State aid. 966 GC, Case T-499/10 MOL v Commission ECLI:EU:T:2013:592, para. 67 referring to ECJ, Joined Cases C-399/10 P and C-401/10 P Bouygues and others v Commission and others ECLI:EU:C:2013:175, paras. 103–104. 967 GC, Case T-499/10 MOL v Commission ECLI:EU:T:2013:592, paras. 64–65, 82; confirmed by ECJ, Case C-15/14 Commission v MOL ECLI:EU:C:2015:362. 968 Prek (judge of the General Court) and Lefe `vre (his re´fe´rendaire), EStAL 2/2012, p. 335, illustrate well the conceptual complexity and incoherence of the case law of the EU courts with respect to this constituent element.

Arhold

189

II

369–371

Art. 107 TFEU

the choice of beneficiaries, the amount of the financial assistance and the conditions under which it is provided.969 If there are guidelines limiting that discretion, selectivity is given if the public authorities may depart from those guidelines where particular circumstances justify that course of action.970 369 The need to interpret the provisions of general schemes (and even to do so on an everyday basis) is not enough to establish the selectivity of the measure concerned, as long as these rules do not grant a margin of appreciation, thereby in effect empowering the State authorities to treat undertakings in the same position differently. The degree of latitude of the competent authority must be limited to verifying the conditions laid down in order to pursue the identifiable objective of the legislation and the criteria to be applied by the authority must be inherent in the nature of the legislation in question. 971 The mere possibility to apply other than these criteria (e. g. criteria of regional or social cohesion policy) is sufficient to render the measure selective. It is not necessary that the authority obliged to apply such criteria.972 Administrative decisions departing from generally applicable rules give rise to the assumption that State aid is involved and thus require detailed investigation.973 This assumption exists at least in cases of exemptions and reliefs. However, in cases in which the national authorities impose charges (in casu mining fees) in order to maintain equal treatment between operators, the simple fact that those authorities enjoy discretion defined by law in setting the charges, cannot be sufficient to establish that the corresponding scheme is selective. 974 370 It is not necessary to demonstrate that the conduct of the authorities is arbitrary.975 With respect to tax settlements the Commission takes the view that a selective advantage may be given: – ‘where, in making disproportionate concessions to a taxpayer, the administration appears to apply a more “favourable” discretionary tax treatment compared to other taxpayers in a similar factual and legal situation; – where it appears that the settlement is contrary to the applicable tax provisions and has resulted in a lower amount of tax. This might be the case, for example, where established facts should have led to a different assessment of the tax on the basis of the applicable provisions (but the amount of tax due has been unlawfully reduced).’976 371 Tax rulings that merely contain an interpretation of the relevant tax law without deviating from the case law and administrative practice are not selective. Tax rulings should therefore only aim to provide legal certainty to the fiscal treatment of certain transactions and should not grant to the undertakings concerned lower taxation than to 969

ECJ, Case C-241/94 France v Commission (Kimberly Clark) [1996] ECR I-4551 para. 23. ECJ, Cases C-241/94 France v Commission (Kimberly Clark) [1996] ECR I-4551, paras. 23, 24; C256/97 De´me´nagements-Manutention Transport SA (DMT) [1999] ECR I-3913, para. 27; C-295/97 Piaggio [1999] ECR I-3735, para. 39. See also Commission, OJ 1998 C 343/10, para. 15 – Communication from the Commission – Framework on training aid; see also recently ECJ, Case C-6/12 P Oy ECLI:EU:C:2013:525, para. 27. 971 ECJ, Case C-6/12 P Oy ECLI:EU:C:2013:525 para. 24. 972 ECJ, Case C-6/12 P Oy, ECLI:EU:C:2013:525, para. 30. 973 Commission, OJ 1998 C 384/3 para. 22 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 974 ECJ, Case C-15/14 P Commission v MOL Magyar Olaj- e ´s Ga´zipari Nyrt. ECLI:EU:C:2015:362, para. 64. 975 GC, Joined Cases T-92/00 and T-103/00 Diputacio ´ lava v Commission [2002] ECR II´ n Foral de A ´ lava 1385, para. 35; see also GC, Joined Cases T-127/99, T-129/99 and T-148/99 Diputacio´ n Foral de A and Others v Commission [2002] ECR II-1275, paras. 144, 149 and 154. 976 Commission, Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, para. 173, downloadable at http://ec.europa.eu/competition/consultations/2014_state_aid_notion/index_en.html, with reference to Commission, State aid C 76/03 Belgium, Umicore SA, OJ 2011 L 122/76, recital 155. 970

190

Arhold

B. The definition of State aid

372–374

II

other undertakings in similar legal or factual situations.977 Rulings allowing taxpayers to use alternative methods for calculating taxable profits, e. g. the use of fixed margins for cost-plus or resale-minus method for determining an appropriate transfer pricing may grant a selective advantage.978 c) Selectivity of general aid schemes. A general aid scheme which does not allow the 372 responsible authority any margin of discretion will nevertheless be selective if it favours ‘certain undertakings or the production of certain goods’, i. e. certain economic sectors. aa) Generally applicable rules – effects-based doctrine. The first judgements on 373 selectivity (initially referred to as ‘specificity’) did not provide fully developed reasonings and were essentially a reflection of the Court’s attempts to minimize the significance of that particular element of the definition of aid.979 In Ecotrade980 and later in Maribel981 the European Court of Justice expressly based its decision on an effects-based approach and emphasized that the selectivity of a measure has to be determined separately from the (political) objectives of the measure (subject to the possibility of justification by the nature and structure of the general system concerned). In its ground-breaking judgement on the Belgian Maribel-programme, a scheme 374 reducing the social security contributions payable by undertakings active in a sector facing especially intense international competition, the Court for the first time expressed a detailed opinion on the selectivity of subsidy programmes which did not allow the authorities a margin of discretion. The sectors of the economy affected included the extraction of non-energy materials, the chemical industry, the metal-processing industry, the precision instrument industry, the optical instrument industry and other manufacturing sectors. The Court stressed that the social character of State measures has no impact on the question of selectivity. Article 107(1) TFEU does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects.982 This so-called effects-doctrine applies to all the constituent elements of the State aid notion983 and thus also to ‘selectivity’. Because the Maribel scheme did not provide the competent authorities with discretionary powers, the European Court of Justice had to decide whether the scheme itself was applicable exclusively to certain undertakings or certain sectors. It held that the restriction of the measures in question to manual workers and only to those manual workers whose working time exceeded a certain number of hours was not sufficient to support the conclusion that the scheme was selective. 984 However, the Court did find it sufficient that the increased reductions were granted only to undertakings belonging to certain manufacturing sectors and to certain other economic sectors. Undertakings belonging to the other manufacturing sectors and undertakings in the tertiary sector 977 Commission, Draft Commission Notice on the notion of State aid pursuant to Article 107(1) TFEU, paras. 175–176, downloadable at http://ec.europa.eu/competition/consultations/2014_state_aid_notion/ index_en.html. 978 See Com., OJ 2003 L 153/40, recitals 43 and 44, Luxembourg Finance Companies; Com., OJ 2003 L 170/20, Luxembourg Coordination centres, mn. 46–47 and 50; Com., OJ 2003 L 282/55, recitals 89 to 95, Belgian Coordination centres and the related ECJ, Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, paras. 96–97; Com., OJ 2004 L 23/1, mn. 50 and 53, French Headquarters and Logistic Centres. 979 ECJ, Case C-200/97 Ecotrade [1998] ECR I-7907, para. 40. 980 ECJ, Case C-200/97 Ecotrade [1998] ECR I-7907, para. 41. 981 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, para. 25. 982 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, para. 25. 983 For the element of advantage see Arhold, in this commentary, Part II, BII. 984 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, para. 28.

Arhold

191

II

375–377

Art. 107 TFEU

and the construction industry were excluded from the benefit of the social contribution reductions. This was sufficient for the existence of selectivity. 985 bb) The current three-stage test – the Gibraltar judgements. In the meantime, and partly in response to the Communications issued by the Commission, the Courts’ rulings on selectivity have become increasingly intricate and more complex in terms of legal theory, but not necessarily more coherent. While it seems that the General Court has been attempting to make it harder for the Commission to prove the selectivity of a measure by allowing the Member States a greater degree of latitude in shaping economic policy, the European Court of Justice in contrast places greater emphasis on its effectsdoctrine. In its 2008 Gibraltar judgement986 the General Court for the first time described the details of the three-stage test to be applied to the question of selectivity. Whereas the three stages have not been challenged by the European Court of Justice judgement in this case, the it did not follow the General Court’s formal approach to these stages but broadened the criteria to be considered, by emphasising – again – the effects-doctrine. 376 The Gibraltar judgement related to the introduction of a new system of corporate taxation in Gibraltar. That system had been introduced in reaction to the Commission’s initiation of a formal State aid investigation of the preceding system. 987 According to the previous rules, tax concessions were available for so-called ‘exempt companies’, i. e. companies without an actual presence in Gibraltar, and for so-called ‘qualifying companies’, i. e. companies with an actual office in Gibraltar (‘a bricks and mortar presence’). In order to qualify for ‘exempt company’ status, a company had to meet a number of conditions. Those conditions included the prohibition of carrying on any trade or business in Gibraltar, other than with exempt companies and with qualifying companies. Subject to some limited exceptions, an exempt company was exempted from payment of income tax in Gibraltar and was liable only to taxation at a fixed sum of GBP 225 per annum. The conditions for the grant of qualifying company status were similar to those necessary for exempt company status. Qualifying companies paid tax at a rate negotiated with the Gibraltar tax authorities of between 2 % and 10 % of profits. These rules had led tens of thousands of letterbox companies from all over the world to settle in Gibraltar. Most of them paid a fee to buy exemption from corporate income tax, had no employees and were frequently managed by a local law firm. That was particularly annoying for Spain as an increasing number of Spanish real estate deals were conducted via such letterbox firms because Gibraltar did not tax profits, which meant that the Spanish tax authorities suffered losses. Even before the formal investigation procedure had been concluded Gibraltar notified the introduction of an entirely new tax regime for all companies in Gibraltar: 377 The system of taxation that was supposed to be introduced by the reform and was to be applicable to all companies established in Gibraltar consisted of a payroll tax, a business property occupation tax and a registration fee: – payroll tax: all Gibraltar companies were to be liable to pay a payroll tax in the amount of GBP 3 000 per employee each year; every ‘employer’ in Gibraltar would be required to pay payroll tax in respect of the total number of its full-time and parttime ‘employees’ ‘employed in Gibraltar’; 375

985 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, paras. 29–31. For more on sectoral selectivity see mn. 433 et seq. 986 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745. 987 Com., State aid NN 51/2000 United Kingdom, Gibraltar qualifying offshore companies; Com., State aid NN 52/2000 United Kingdom, Gibraltar exempt companies.

192

Arhold

B. The definition of State aid

378–380

II

– business property occupation tax (‘BPOT’): all companies occupying property in Gibraltar for business purposes were supposed to pay a tax on the occupation of that property at a rate equivalent to a percentage of their liability to the general rates charged on property in Gibraltar; – registration fee: all Gibraltar companies would have to pay an annual registration fee, of GBP 150 per annum in the case of companies not intended to generate income and of GBP 300 per annum in the case of companies intended to generate income. – Liability to payroll tax together with BPOT was capped at 15 % of profits. The effect of this cap was that companies would have to pay payroll tax and BPOT only if they made a profit, and in an amount not exceeding 15 % of profits. – Certain activities, namely financial services and utility companies were to be subject to a top-up (or penalty) tax on profits generated by them. The top-up tax was supposed to apply only to profits that could be allocated to those activities. – Utility companies were supposed to be charged, in addition to payroll tax and BPOT, a top-up (or penalty) tax on profits from their activities at the rate of 35 % of profits. The Commission initiated the formal investigation procedure also in respect of this 378 new scheme. At the end of that procedure it decided that the new scheme did contain elements of State aid that were incompatible with the Internal Market and which accordingly were not permitted to be implemented. 988 The Commission concluded that the tax reform was both regionally and materially selective. The reform was said to be regionally selective, since it provided for a system of corporate taxation under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the United Kingdom.989 In addition, the following aspects of the tax reform were found to be materially selective: – the requirement that a company must make a profit before it becomes liable to payroll tax and BPOT, since that requirement favours companies which make no profit;990 – the cap limiting liability to payroll tax and BPOT to 15 % of profits, since that cap favours companies which, for the tax year in question, have profits that are low in relation to their number of employees and occupation of business property; 991 – the payroll tax and BPOT, since those two taxes inherently favour companies which have no real physical presence in Gibraltar.992 According to the Commission the material selectivity followed from the analysis of the 379 system as a whole.993 The new system was said to continue providing a tax advantage to companies with the status of exempt companies under the earlier tax regime, in that most of those companies lacked a physical presence in Gibraltar (letterbox companies) and would therefore continue to pay what was in effect a zero tax rate, whereas other operators in Gibraltar would be taxed at a maximum rate of 15 % or 35 % of profits. In its ruling on the action brought by Gibraltar and the United Kingdom, the General 380 Court annulled the Commission Decision on the grounds that the tax regime was neither regionally selective994 nor materially selective. In reaching its judgement the 988

Com., OJ 2005 L 85/1 United Kingdom, Gibraltar government corporation tax reform. Com., OJ 2005 L 85/1, para. 127 United Kingdom, Gibraltar government corporation tax reform. 990 Com., OJ 2005 L 85/1, paras. 128–133 United Kingdom, Gibraltar government corporation tax reform. 991 Com., OJ 2005 L 85/1, paras. 134–141 United Kingdom, Gibraltar government corporation tax reform. 992 Com., OJ 2005 L 85/1, paras. 142–144, 150 United Kingdom, Gibraltar government corporation tax reform. 993 Com., OJ 2005 L 85/1, para. 152 United Kingdom, Gibraltar government corporation tax reform. 994 For regional selectivity see below under point c) bb) (c) (2). 989

Arhold

193

II

381

Art. 107 TFEU

General Court for the first time explicitly applied the three-stage test to ascertain material selectivity: – First stage: Identifying the common or ‘normal’ regime under the tax system applicable in the geographical area constituting the relevant reference framework. – Second stage: Assessing and determining whether any advantage granted by the tax measure at issue may be prima facie selective by demonstrating that the measure derogates from that common regime inasmuch as the measure differentiates between economic operators who, in light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation. 995 – Third stage: If the Commission, in the course of the first two stages of its assessment, has demonstrated the existence of derogations from the common or ‘normal’ tax regime resulting in a differentiation between undertakings, such a differentiation is none the less not selective when it arises from the nature or the overall structure of the system of charges of which it forms part.996 In that regard, given that the differentiations provided for vis-a`-vis the common or ‘normal’ tax regime constitute derogations and are prima facie selective, it is for the Member State to show that those differentiations are justified by the nature and general scheme of its tax system, since they derive directly from the basic or guiding principles of that system. In that context, a distinction must be made between, on the one hand, the objectives attributed to a particular tax regime and which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives. 997 381 The General Court took the view that when assessing a case the order of the three stages must be strictly adhered to.998 If the Commission has failed to carry out the first two stages to review a measure’s selectivity, it cannot embark upon the third and final stage of its assessment, as otherwise it will go beyond the limits of that review. Such an approach would be liable, first, to enable the Commission to assume the role of the Member State with regard to determination of that State’s tax system and of the common or ‘normal’ regime under it, including in relation to the objectives, the tax system’s inherent mechanisms for achieving those objectives and its bases of taxation, and second, thus to make it impossible for the Member State to justify the differentiations in question on the basis of the nature and of the general scheme of the tax system notified, since the Commission would neither have identified the common or ‘normal’ regime nor established that the differentiations constituted derogations from that regime. 999 The General 995 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 143; referring to Commission, OJ 1998 C 384/3, para. 16 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation, and inter alia also to the Opinion of Advocate General Darmon in ECJ, Joined Cases C-72/91 and C-73/91 Sloman Neptun [1993] ECR I-887, paras. 50–72. 996 With further evidence ECJ, Cases C-159/01 Netherlands v Commission [2004] ECR I-4461, para. 42; C-88/03 Portugal v Commission [2006] ECR I-7115, para. 52. 997 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 144. 998 In practice the Commission has meanwhile moved towards applying the three stages test (probably as a result of the Court rulings), see Com., State aid SA.29150 German law on easing of fiscal carryforward of losses – Sanierungsklausel, decision to open the formal investigation procedure, OJ 2010 C 90/ 8, paras. 19–20, with reference to ECJ, Cases C-143/99 Adria-Wien Pipeline [2001] ECR I-8365, para. 41; C-308/01 GIL Insurance [2004] ECR I-4777, para. 68; and C-172/03 Heiser [2005] ECR I-1627, para. 40. For a contrasting approach see the EFTA Surveillance Authority Decision issued immediately after the Adria-Wien judgement, OJ 2003 L 031/36 – Environmental tax measures (Norway), in which the Authority referred to both this judgement and the Maribel judgement and carried out a two stages analysis and found that the sectoral selectivity of the Norwegian system meant it was selective. 999 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 145.

194

Arhold

B. The definition of State aid

382

II

Court also stated that, as EU law currently stands, direct taxation falls within the competence of the Member States, meaning that it is solely the Member States (and possibly infra-State bodies)1000 that have competence to devise systems of corporate taxation which they consider the best suited to the needs of their economies. It held that the application of the EU rules on State aid is without prejudice to the power of the Member States to decide on their economic policy and, therefore, on the tax system – and the common or ‘normal’ regime – which they consider the most appropriate and, in particular, to spread the tax burden as they see fit across the different factors of production.1001 As regards the first stage of the assessment, the Government of Gibraltar asserted 382 that all the above mentioned elements of the tax reform together constituted a tax system in its own right. This system should be treated as the common or ‘normal’ tax regime. It contended that under that regime there was no ‘normal’ rate of taxation, and no ‘principal’ tax and ‘secondary’ or ‘derogating’ tax. A company’s tax burden in a given year was said to be determined on the basis of the following two interacting elements: the number of staff employed and the property occupation, on the one hand, and the profits made by it, on the other. It maintained that the common or ‘normal’ tax regime had been developed in the light of the characteristics of Gibraltar’s economy (limited labour resources and limited real estate).1002 According to the General Court, the Commission already failed during the administrative procedure to examine properly whether the aspects of the tax system introduced by the reform were capable of forming a common or ‘normal’ tax regime in its own right and that it had thus failed to observe the different stages of the three stages analysis in the necessary order. 1003 The General Court further observed that the notified tax system did actually constitute the common or ‘normal’ tax regime.1004 This regime was founded, essentially, on two objectives – namely that of taxing the use of two factors of production scarce in Gibraltar and that of respecting companies’ ability to pay taxes. It held that the argument that there might be ‘purely hypothetical’ situations1005, in which a company making large profits without a physical presence in Gibraltar would not be liable to either payroll tax or BPOT, was not sufficient to demonstrate that the common or ‘normal’ regime could not meet the two different objectives. 1006 It rejected the Commission’s vague assertion that considering any given feature of a system as forming part of the general scheme would amount to accepting an automatic justification for such a system. The General Court held that an approach of that kind fails to observe the binding requirement to carry out the three stages of the assessment in the

1000

See below point c) bb) (c) (2) (b). GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 146, referring to Commission, OJ 1998 C 384/3, para. 13 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 1002 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 164, 169. 1003 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 171–174. 1004 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 175. 1005 In its appeal Spain has pointed out that the result of Gibraltar’s proposed tax reform would be to introduce a system under which 28 798 of the 29 000 companies established in Gibraltar would end up with a ‘zero rate’ of taxation. 1006 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 180. 1001

Arhold

195

II

383–385

Art. 107 TFEU

correct order, and accordingly goes beyond the limits of the review to be conducted by the Commission given the competence of States in tax matters.1007 383 Since the three-stage test has been developed in accordance with previous court rulings and the Commission’s Communications1008 the General Court judgement was appealed not because of general objections to the application of this test but because of the concrete analysis in the specific case. Consequently, the European Court of Justice has maintained in general the concept of the three-stage test, but decided that in the particular case at hand the General Court had misapplied stage one by requesting the Commission to find a normal reference scheme different from the one under assessment and gave final judgement declaring the Commission’s decision lawful, since the tax scheme of Gibraltar constituted a de facto material selective State aid. 1009 384 Concerning the first stage, which consists of determining the reference framework, the European Court of Justice did not consider it necessary to define a ‘normal’ regime in order to demonstrate derogation from the common regime in the second stage. 1010 As a consequence of the effects-based doctrine, the classification of a tax measure as a ‘selective advantage’ must not depend on the regulatory technique used but has to take into account its respective effects. The European Court of Justice noted that the present tax system ‘instead of laying down general rules applying to all undertakings from which a derogation is made for certain undertakings, achieves the same result by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different undertakings.’1011 The reference framework was the tax system at issue as a whole which formally applies to all undertakings but in relation to which offshore companies are, in fact, favoured.1012 385 As a consequence, the second stage consists not only in determining a possible derogation from a generally applicable system (‘derogation-based approach’)1013 but also in an examination of the general de facto applicability of the latter.1014 The reference framework in these cases is necessary to determine the legal and de facto comparability. The European Court of Justice held that the tax system at stake was materially selective, since it made it possible ‘to characterise the recipient undertakings, by virtue of the 1007 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 179–181; for more on the judgment see also Rossi-Maccanico EStAL 2009, p. 63. 1008 As regards the three stages test see also Bousin/Piernas EStAL, 2008, p. 634; in particular Commission, OJ 1998 C 384/3, para. 16 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 1009 In the meantime, the UK has notified a new corporate tax regime for Gibraltar which is based on the territorial principle, i. e. profits or gains of a company or trust from any trade, business, profession or vocation are only taxed if the income is accrued in, or derived from Gibraltar, but excludes passive income, e. g. dividends, royalties as well as interests paid by a bank. In its opening decision, the Commission is of the opinion that this system is materially selective as well, Commission, State aid SA.34914 United Kingdom, Gibraltar Income Tax Act 2010, OJ 2013 C348/184, paras. 28–48. At the end of 2014, it has further extended the formal investigation procedure. 1010 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, para. 91. The judgment, rendered by the Grand Chamber, deviated from the opinion of Advocate General Ja¨a¨sikinen of 7 April 2011 in that case. For a critical view on the Court’s approach see Romariz, EStAL 1/2014, p. 39. 1011 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, paras. 87–88 and 92–93. 1012 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, para. 95. 1013 Opinion of Advocate General Ja ¨a¨skinen in ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, para. 189. 1014 See Lang EStAL 2012, p. 411, 418.

196

Arhold

B. The definition of State aid

386–388

II

properties which are specific to them, as a privileged category.’1015 The specific nature of offshore companies, which do not have employees and do not occupy business premises, lets them avoid taxation because of the specific bases of assessment adopted in the proposed tax reform which are defined by precisely the same criteria that characterise offshore companies.1016 In this case, the fact that offshore companies are not taxed was not a random consequence but inevitable1017. cc) The three stages. The court rulings have caused the Commission itself to apply 386 the three-stage test on a regular basis.1018 Older judgments are referred to in the context of the relevant stages. (1) First stage: Determining the reference framework. In the initial stage the 387 Commission identifies and examines the common or ‘normal’ regime (also referred to as the ‘system of reference’) in the geographical area constituting the relevant reference framework.1019 It can be difficult or even impossible to identify the ‘system of reference’. For example 388 in the case of certain pension obligations of State owned undertakings the position of the undertaking concerned with regard to the obligations at stake is unique. 1020 In such cases the Commission has taken the status quo ante as situation for comparison. 1021 This was probably not consistent with the general assessment approach, according to which it is irrelevant for the application of Article 107(1) TFEU that the situation of the presumed beneficiary of the measure is better or worse in comparison with the situation under the law as it previously stood, or, on the contrary, has not altered over time. 1022 If it is impossible to identify a common or ‘normal’ regime, either the measure is itself the common regime1023 – as in the Gibraltar case – or otherwise it is an ad-hoc-measure and thus per se selective. If there is a regime in existence it must first be examined to check whether it is ‘common’. It must not be selective itself, i. e. it must apply in the same way to all companies and all sectors. That applies both with regard to positive transfers of State resources and to aid granted by foregoing revenue, for example in the form of reductions in the burden of taxes and/or social charges. The Commission made clear in its Tax Notice1024 that in principle the only measures which are general and thus outside the scope of application of the rules on State aid are measures which are open to all economic agents operating within a Member State. They must be effectively open to all companies on an equal access basis, and they may not de facto be reduced in scope through, for example, factors that restrict their practical effect. 1025 That does not 1015 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, para. 104. 1016 The system would have the same effect as exempting letterbox companies from liability to profit based corporation tax, e. g. the reform of the Luxembourg tax system see Wenz/Linn, EStAL 2009, p. 453. 1017 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, paras. 106–107. 1018 See Commission, State aid SA.29150 German law on easing of fiscal carry-forward of losses – Sanierungsklausel, decision opens the formal investigation procedure, OJ 2010 C 90/8, paras. 19–20. 1019 As regards the geographical area constituting the relevant reference framework see point c) bb) (c) (2) (b). 1020 See Arhold in this commentary Part V, Chapter C, III, 5. 1021 For more on this see Van de Casteele/Hocine in Mederer/Pesaresi/Van Hoof, para. 2.185. 1022 See for example GC, Case T-335/08 BNP Paribas v Commission [2010] ECR II-3323, paras. 204 et seq. with further references. 1023 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, para. 95. 1024 Commission notice on the application of the State aid rules to measures relating to direct business taxation, OJ 1998 C 384/3. 1025 So called de facto selectivity, see below at point c) bb) (c) (2) (e).

Arhold

197

II

389–391

Art. 107 TFEU

apply to measures of a purely technical nature. For example, the Commission stated that, provided that they apply without distinction to all firms and to all economic sectors, the following measures are not selective: – setting the rate of taxation; – depreciation rules;1026 – rules on loss carry-overs; – provisions to prevent double taxation or tax avoidance.1027 389 Although these comments were made specifically with tax measures in mind, the principles can be applied to other general State aid schemes.1028 390 For example, the rules relating to national insolvency procedures often confer advantages on companies in insolvency. If and to the extent that such procedures do not exclusively take into consideration the interests of the creditors concerned they are incompatible with the Private Creditor Test,1029 meaning that they confer an economic advantage on the debtor company. At least as far as the creditor is a public undertaking or even the State itself – for example as tax creditor or the creditor for social security contributions this is relevant for the assessment under Article 107(1) TFEU. However, as long as the insolvency proceedure is the same for all undertakings and for all sectors the economic advantage will not be selective, so that even if the measure is incompatible with the Private Creditor Test, it will not constitute State aid. 1030 Other examples are the provisions of national Civil Codes which apply to all companies without distinction. If, for example, there is a valid claim against a public undertaking on the grounds of frustration of contract due to a fundamental change of circumstances, fulfilling the resulting legal obligation to modify the contract cannot be State aid. In that kind of situation the measures concerned are not only not selective; they also do not involve an economic advantage. The contractual partner of the public sector body receives no more than a private undertaking would have received in a similar situation. That is not necessarily true in the case of State liability claims. Yet here again, any claim for compensation will usually lack the element of selectivity. 391 Further general rules can relate, for example, to the use of public or publicly funded infrastructure.1031 Charging fees that do not cover costs or granting use free of charge,1032 constitutes an economic advantage within the meaning of Article 107(1) TFEU, although that advantage will not be selective if the use of the infrastructure is available to all undertakings and sectors on the same terms.1033 One exception is the 1026 Confirmed by GC, Case T-92/02 Stadtwerke Schwa ¨ bisch Hall [2006] ECR II-11; see for depreciation rules also Com., State aid SA.34736 Spain, early depreciation of assets acquired through a financial leasing; Com., OJ 2007 L 112/41, recital 122, France, depreciation of assets leased out by economic interest groupings (EIG’s). 1027 Commission notice on the application of the State aid rules to measures relating to direct business taxation, OJ 1998 C 384/3, para. 13. 1028 See also Schwarze/Ba ¨ r-Bouyssie`re Article 87 TEC, para. 46. 1029 See Arhold, in this commentary Part II, Chapter B, II, 2, b), (4). 1030 See also Mederer/Pesaresi/Van Hoof/Grespan/Santanato, para. 2.445 as well as Bacon, para. 2.122, referring to the fact that in the Magefesa judgement (ECJ, Case C-480/98 Spain v Commission [‘Magefesa’] [2000] ECR I-8717) the finding that aid was present was reached not because the general insolvency rules had been applied but rather because of the way in which the public authorities had exercised their discretion. 1031 In this respect see also Koenig/Ku ¨ hling/Ritter, para. 172. 1032 As a rule there will be no economic advantage if the fees cover the costs, see Com., OJ 1992 L 263/ 15, Germany, Daimler-Benz AG. 1033 For more on this see ECJ, Case C-225/91Matra v Commission [1993] ECR I 3203, para. 29. The provision of public infrastructure free of charge often does not constitute on economic activity, and already for that reason escape Art. 107(1) TFEU, see above mn. 357.

198

Arhold

B. The definition of State aid

392

II

case of de facto selectivity,1034 where the infrastructure is of value only to a certain undertaking or a group of undertakings, for example because the infrastructure has been tailored to meet their specific needs.1035 With respect to the use of public infrastructure, the question arises what the relevant framework shall be if the public operator of an infrastructure has the competence to establish the fees regulation applicable to that infrastructure. With respect to the public airport Lu¨beck, the Commision had opened the formal investigation procedure inter alia with respect to its fees regulation, since it doubted that the fees collected were commercially sufficient in light of the MEOT) and therefore constituted a selective advantage for the users of this airport vis-a´-vis users of competing airports.1036 The owner of the airport (the town Lu¨beek) challenged the opening decision and the General Court annulled the decision as far as the fees regulation was concerned, stating that the relevant framework for the selectivity assessment has to be the fees regulation itself, which, however, applied to all (potential) users without distinction.1037 The Commission has appealed the. judgment arguing that in light of the competition between airports and also between air carriers, the fees regulations of public airports must not escape EU State aid control. 1038 The fear of the Commission seems to be unfounded. If the airport’s fee policy is economically insufficient, it will ask its public owners for financial support, which, if granted, would have to be screened in light of the MEOT. (2) Second stage: Prima facie selective nature of the advantage associated with a 392 measure. With regard to the general or ‘normal’ regime, it is up to the Commission to prove that the advantage associated with the measure in question is selective in nature by showing that the measure constitutes an exception to a general rule (‘derogationbased approach’) and/or that it treats economic operators differently whose actual and legal situation is comparable when assessed in the light of the system of reference’s intrinsic objective (‘comparability’). If that is the case the measure is prima facie selective, subject to a possible justification of the differentiation by the nature and general scheme of the system deriving directly from its basic or guiding principles (see below under point (3). So far the European Court of Justice has chosen a very broad interpretation of the selectivity of schemes. The result is that the only measures that cannot possibly be considered State aid are those which affect all undertakings (see below point (c) Selectivity ratione personae – material selectivity) and sectors of the economy (see below point (d) Selectivity ratione materiae – sectoral selectivity.) in the relevant territory (see below point (b) Regional selectivity (ratione territoriae – regional selectivity) in exactly the same way. Even an apparently innocuous and non-discriminatory measure may in exceptional circumstances be considered to be selective if it is designed in such a way that it de facto favours certain undertakings or sectors of the economy selectively (see below point (e) De facto selectivity.). “However, where the measure at issue, even though it constitutes a derogation from the common or ’normal’ tax regime, is potentially available to all undertakings, it is not possible to compare, in the light of the objective pursued by the common or ’normal’ regime, the legal and factual situation of undertakings which are able to benefit from the measure with that of 1034

For relevant examples from the Commission’s practice see Quigley, p. 49 et seq. Example: Planning of an industrial zone located on a river to meet the specific requirements of the investor, a paper manufacturer Commission, State aid C 20/1994 France, Kimberley Clark OJ 1994 C 170/ 8. In that respect see also Hancher/Ottervanger/Slot, paras. 3–059 to 3–075. 1036 Com., State aid SA.27585 and SA.31149 – Germany, different measures concerning the airport Lu¨beck, decision to open the formal investigation procedure. 1037 GC, Case T-461/12 Hansestadt Lu ¨ beck v Commission, ECLI:EU:T:2014:758, paras. 53 et seq. 1038 Commission’s appeal pending before the Court of Justice: C-524/14 P. 1035

Arhold

199

II

393–394

Art. 107 TFEU

undertakings which cannot benefit from it. It follows [ ... ] that for the condition of selectivity to be satisfied, a category of undertakings which are exclusively favoured by the measure at issue must be identified in all cases and that [ ... ] the mere finding that a derogation from the common or ’normal’ tax regime has been provided for cannot give rise to selectivity.”1039 This was ruled by the Genend Court with respect to a Spanish tax rule providing that, should an undertaking which is taxable in Spain acquire a shareholding in a ’foreign company’, if that shareholding is at least 5% and if the shareholding at issue is held without interruption for at least one year, the goodwill resulting from that shareholding, which is recorded in the undertakings accounts as a separate intangible asset, may be deducted, in the form of an amortisation, from the basis of assessment for the corporate tax for which the undertaking is liable. Under Spanish tax law, the acquisition by an undertaking which is taxable in Spain of a shareholding in a company established in Spain did not allow the goodwill resulting from that acquisition to be recorded separately for tax purposes. The Commission has ’appealed the judgement arguing that it is sufficient that the contested measure favoured certain groups of undertakings that carried out certain investments abroad. 1040 It is doubtful whether this argumentation is sufficient if the Commission can not prove that the measure is de facto selective or grants an indirect selective advantage. With respect to the latter issue, it may be argued that the measure grants an indirect selective advantage to the target undertakings established outside of Spain as it treats investments in those undertakings favourable in comparison to investments in Spanish undertakings.1041 Since the judgement in Adria-Wien the objective of the measure has to be taken into account in that respect. The precise consequences of that requirement have still not been finally clarified. (a) In the light of the objective pursued by the Member State’s system in question. At first glance the expression ‘in the light of the objective pursued by the Member State’s system in question’ seems to contradict the effects-doctrine. It originates from the Commission’s Notice on taxation, which emphasizes that the Member States’ power to decide on the economic policy which they consider most appropriate is not restricted by the condition that measures must be generally applicable. In particular, Member States may spread the tax burden across the different factors of production as they see fit. Provided that they apply the measure without distinction to all firms and to the production of all goods, the measures are not considered to be selective since by reducing the tax burden related to certain production costs they serve general economic policy goals (e. g. research and development (R&D), the environment, training, 1042 employment1043). 394 Even though those comments were originally created for tax measures, the principles they set out can be applied to other general State aid schemes, in particular to schemes involving a positive transfer of State resources. From a State aid law perspective, it makes no difference whether the State foregoes revenue or whether it transfers funds. A State measure that grants the same economic advantage to all undertakings in all sectors of the economy for taking on new employees and which does not allow the national authorities any discretion in its implementation is not selective, 1044 provided that the 393

~a. SA v Commission, ECLI:EU:T:2014:939, para. 44. See also 1039 GC, Case T-219/10 Autogrill Espan related Case C-399/11 Banco Santander and Santusa Holding v Commission, ECLI:EU:T:2014:938. 1040 Appeal Cases before the Court of Justice C-20/15 P and C-21/15 P. 1041 See, to that effect, Case C-156/98 Germany v Commission [2000] ECR I-6857, para. 23. 1042 See Commission, OJ 1998 C 343/10, para. 14 – Communication from the Commission – Framework on training aid. 1043 Commission, OJ 1998 C 384/3, para. 13 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 1044 For a different view see Rossi-Maccanico EStAL 2009, p. 161, 168.

200

Arhold

B. The definition of State aid

395–396

II

boundaries of de facto selectivity are not crossed.1045 It should be added, however, that when confirming the existence of selectivity ratione personae or materiae, be it de jure or de facto, the Courts set the bar relatively low. The need to take account of the objectives of a measure when assessing its selectivity 395 was first explicitly addressed in the Adria-Wien judgement1046. The question referred to the Court concerned the newly introduced Austrian energy tax scheme, according to which a charge was payable on supply and consumption of electricity and gas and to be refundable upon application if the charge exceeded (a total of) 0.35 % of net production value however only to those undertakings which produced physical goods, i. e. undertakings of the primary and secondary sectors, but not of the service sector (tertiary sector).1047 The question referred was whether such a measure could constitute State aid in favour of the undertakings of the primary and secondary sectors. In his Opinion Advocate General Mischo stated that this was not the case, basing his 396 argument on several reasons although failing to draw a sufficiently clear distinction between those reasons. He alleged that the circumstance that the energy tax was newly introduced meant that an exemption from that tax could not be considered to be a relief from the burdens normally borne by undertakings and that therefore there was no economic advantage.1048 He went on to say that the new legislation on energy tax was itself a general system based on objective criteria, and that the exceptions it provided for could thus not be selective in the sense of amounting to a departure from a ‘normal legal system’.1049 The Advocate General examined what would be necessary to determine what was the ‘normal’ rule in such a system, whether different treatment of undertakings could be justified by the nature or general scheme of the system and whether it resulted in distortions of competition in intra-EU trade. 1050 Concerning the last point he argued that the amount of the energy tax, even if limited to a ceiling of 0.35 % of net production value, did mean that the production costs of Austrian undertakings were taxed more heavily than they would have been had those taxes not been introduced and that their competitiveness compared with similar undertakings in other Member States was reduced.1051 According to Advocate General Mischo, a Member State which introduces ecology taxes, without being obliged to do so by EU law, should have a perfect right to proceed in a cautious manner, i. e. to afford special treatment to sectors exposed to particularly stiff international competition. 1052 Moreover, the undertakings in the secondary sector were not in competition with those in the tertiary sector, so that the measure concerned could not distort competition. 1053 1045

For more on the distinction from de facto selectivity see below at point c) bb) (c) (2) (e). ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 41. 1047 The macroeconomic three-sector hypothesis divides the economy into production of commodities, processing of commodities and service sector. In some cases a fourth sector, the information sector, is also posited. 1048 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 38–41 and 62. 1049 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 42–43. 1050 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 51. 1051 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria- Wien Pipeline GmbH [2001] ECR I-8365, para. 68. 1052 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria- Wien Pipeline GmbH [2001] ECR I-8365, para. 72. 1053 Opinion of Advocate General Mischo ECJ, Case C-143/99 Adria- Wien Pipeline GmbH [2001] ECR I-8365, para. 78 (‘Taxing dental surgeons at a higher rate does not provide any advantage for bicycle manufacturers’). A similar approach is taken by Advocate General Kokott in her Opinions in Joined Cases C-128/03 and C-129/03 AEM [2005] ECR I-286 in which she states that the first step has to be to 1046

Arhold

201

II 397

397

Art. 107 TFEU

The Court rejected the Advocate General’s views in toto. The judgement is an excellent example for the Court’s broad interpretation of the element of selectivity. The Court began by emphasizing that even if a measure is classified as State aid that does not in itself mean that it is incompatible with the Internal Market, but merely that it has to be notified to the Commission.1054 It further observed that a State measure which benefits all undertakings in a national territory, without distinction, is not selective and cannot therefore constitute State aid. This would be true in the case of the Austrian measures provided they applied to all undertakings in Austria, regardless of their activity1055 – but that was not the case. Rejecting the arguments advanced by Advocate General Mischo and the intervening Member States involved the Court stated that the supply of energy on preferential terms is an advantage. 1056 Referring to its Maribel judgement it observed that neither the existence of a large number of eligible beneficiary undertakings nor the diversity and size of the sectors to which those undertakings belong provide any grounds for concluding that a State initiative constitutes a general measure of economic policy.1057 It is equally insufficient to argue that the criterion applied is objective.1058 The ECJ ruled that for an assumption of selectivity ‘it is irrelevant that the situation of the presumed beneficiary of the measure is better or worse in comparison with the situation under the law as it previously stood, or has not altered over time’.1059 The ‘only question to be determined is whether, under a particular statutory scheme, a State measure is such as to favour certain undertakings or the production of certain goods within the meaning of Article [107(1) TFEU] in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question’.1060 Even in such a situation, ‘a measure which, although conferring an advantage on its recipient, is justified by the nature or general scheme of the system of which it is part does not fulfil that condition of selectivity’.1061 With respect to the Austrian energy tax this was found not to be the case, since ‘undertakings supplying services may, just like undertakings manufacturing goods, be major consumers of energy and incur energy taxes above 0.35 % of their net production value.’1062 There were no indications to support the conclusion that the rebate scheme was a purely temporary measure aimed at enabling the undertakings concerned to adapt gradually to the new scheme 1063, or that ecological considerations did justify a different treatment as the consumption of energy by undertakings of the secondary sector were just as damaging to the environment. 1064 establish whether and to what extent any parties favoured are in competition with the parties liable to pay the levy. Referring to Advocate General Tizzano (C-53/00 Ferring [2001] ECR I-9067, para. 36) she takes the view that ‘any new tax imposed on a given category of economic operators may be viewed in theory as an advantage conferred upon all operators who are not subject to that tax but are in more or less close competition with the first category’ and that therefore it is very important to analyse the competitive relationships between all of the parties. 1054 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 31. 1055 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 35–36. 1056 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 38–40. 1057 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 48. 1058 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 53. 1059 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 41, with reference to Case 57/86 Greece v Commission [1988] ECR 2855, para. 10. 1060 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 41, with reference to Case 57/86 Greece v Commission [1988] ECR 2855, para. 10, as well as to the Maribel judgement, Case C75/97 Belgium v Commission [‘Maribel’] [1999] ECR I-3671, paras. 28 to 31. 1061 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 42. 1062 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 50. 1063 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 51. 1064 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 52.

202

Arhold

B. The definition of State aid

398–400

II

Even though in the matter at hand the Court did confirm its strict Maribel case law in 398 full,1065 its introduction of the so-called Adria-Wien formula (‘favouring certain undertakings or the production of certain goods in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question’) is regarded as having been the first step towards renewing the theoretical bases for the selectivity test. Both the wording of the Adria-Wien formula and the Court’s examination in this 399 judgement support the view that when addressing the question of whether a particular matter is selective the first step must be to examine the intrinsic objective of the rules governing the measure introduced by the Member State (in Adria-Wien: energy savings caused by increased energy prices effected by taxing energy consumption) and then, in a second step, to investigate whether the undertakings that were treated differently were in fact in a comparable situation with respect to that intrinsic objective. That seemed obvious to the Court, so that it focussed on the third stage, i. e. the examination of whether the selectivity of the measure concerned might have been justified by the nature or general scheme of the system of which it was a part.1066 Subsequent judgements of the European Court of Justice and the General Court slightly differ in the application of these basic principles. While the General Court appears to favour using the Adria-Wien formula in order to allow the Member States a broad margin of discretion in areas of the law that have not yet been harmonized at European level, the European Court of Justice continues to stick closely to its effects-doctrine. 1067 In detail: In 2002 and 2003, the European Court of Justice rendered judgments concerning 400 selectivity of a Spanish subsidy scheme,1068 following a judgment by the General Court on the same scheme in the year 2000.1069 The disputes related to a Commission Decision concerning the Spanish Plan Renove Industrial system of aid for the purchase of commercial vehicles.1070 The system was intended to facilitate the renewal of Spain’s outdated and environmentally harmful commercial vehicle fleet. In its decision the Commission found that as the subsidies were granted in the form of compensation to assist natural persons or SMEs to purchase commercial vehicles they had to be considered selective since they were not granted to all types of undertakings. 1071 Spain was of the opinion that the measure was not selective, as it formed part of a system aimed at protecting the environment, promoting traffic safety and the renewal of the vehicle fleet. It did however not deny that the measure expressly excluded large firms. It argued that the intent and purpose of the system had made it necessary to exclude large firms as they regularly renewed their fleets anyway, and thus did not need to receive financial support.1072 The European Court of Justice began by taking a similar approach to that adopted in Adria-Wien and determined that the measure had been selective as it had ‘expressly excluded large undertakings, even if they had purchased or were likely to 1065 See also the EFTA Surveillance Authority Decision No 149/02/COL regarding Norwegian environmental tax measures, OJ 2003 L 31/36, issued very soon after the Adria-Wien judgement, referring that judgement and to the Maribel judgement but continuing to apply a two stage test and concluding that as the Norwegian measure was sectorally selective it fulfilled the condition of specificity. 1066 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, paras. 42–53. 1067 ECJ, Case, C-169/08 Presidente del Consiglio dei Ministri [2009] ECR I-10821, paragraphs, 36–37, 62. 1068 ECJ, Cases C-409/00 Spain v Commission [2003] ECR I-1487; C-351/98 Spain v Commission [2002] ECR I-8031. ~ola de Transporte de Mercancı´as (CETM) v Commission 1069 GC, Case T-55/99 Confederacio ´ n Espan [2000] ECR II-3207, paras. 39 et seq. 1070 Com., OJ L 329/23, Spain – Spanish Plan Remove Industrial. 1071 Com., OJ L 329/23, Spain – Spanish Plan Remove Industrial. 1072 ECJ, Case C-409/00 Spain v Commission [2003] ECR I-1487. paras. 35–36.

Arhold

203

II

401–403

Art. 107 TFEU

purchase a new commercial vehicle during the period of application of the aid scheme and therefore contributed, in the same way as natural persons and SMEs, to the aim of renewing vehicles on the road.’1073 That meant that, as far as the objectives of the scheme were concerned the various groups of undertakings were in the same situation. The European Court of Justice also held that the differentiation was not justified by the nature and structure of the system of charges. The extrinsic objectives (protection of the environment and traffic safety) pursued by the measure at issue (renewal of the vehicle fleet) were not a decisive factor for the assessment of selectivity. 1074 401 In the judgments relating to the subsidy schemes of the Spanish provinces1075 the Adria-Wien formula is not even mentioned, presumably because the scope of these regulations was so broad (applying to unspecified investment activities) that differentiation was irrelevant at that level. A formula frequently used by the Court is: ‘It would render the provisions of [Article 107(1) TFEU] nugatory if the pursuit of an economic or financial policy objective, such as the promotion of investment, were capable of removing a measure from their scope. In accordance with consistent case-law it must therefore be held that the objective pursued by the tax measures at issue cannot enable them to escape classification as State aid within the meaning of [Article 107(1) TFEU].’1076 402 In its judgement in GIL Insurance,1077 a case dealing with higher rates of tax introduced by a British tax on insurance premiums with the stated aim of combating avoidance of value added tax in connection with repair and maintenance contracts, the Court did mention the Adria-Wien formula but chose to review justification directly in terms of the nature and structure of the scheme concerned, and to confirm such justification for the first time.1078 403 In a dispute relating to the Netherlands emission trading scheme for nitrogen oxides (NOx) the General Court dealt with an ecologically motivated scheme. 1079 Emission allowances were allocated free of charge to the participant undertakings, in amounts corresponding to the emission standard determined by statute for their respective facilities.1080 The question in dispute was whether the allocation of tradable emission allowances constituted an economic advantage within the meaning of Article 107(1) TFEU; the EU Courts confirmed that it did.1081 Both the Netherlands and Germany as intervener questioned the selectivity of the measure at issue arguing that it was binding on approximately 250 large industrial undertakings (the largest emitters of NOx) which did not belong to any particular economic sector. Since all large facilities had to comply with the same standard, according to the Adria-Wien formula that group of undertakings was not favoured selectively.1082 The Commission also referred to the Adria-Wien judgement 1073

ECJ, Case C-409/00 Spain v Commission [2003] ECR I-1487. para. 50. ECJ, Case C-409/00 Spain v Commission [2003] ECR I-1487. paras. 51–55. 1075 e.g. GC, Joined Cases T-269/99, T-271/99 and T-272/99 Territorio Histo ´ rico de Guizpu´zcoa and others v Commission [2002] ECR II-4217, Joined Cases T-346/99, T-347/99 and T-348/99 Territorio ´ lava and others v Commission [2002] ECR II-4259. Histo´rico de A 1076 e. g. GC, Joined Cases T-346/99, T-347/99 and T-348/99 Territorio Histo ´ lava and others v ´ rico de A Commission [2002] ECR II-4259. para. 54; referring to ECJ, Cases C-241/94 France v Commission [1996] ECR I-4551. para. 20; C-75/97 Belgium v Commission (‘Maribel’) [1999] ECR I-3671, para. 25; as well as GC, Case T-55/99 CETM v Commission [2000] ECR II-3207, para. 53. 1077 Case ECJ, C-308/01 GIL Insurance Ltd and Others [2004] ECR I-4777, paras. 68 et seq. 1078 See point c) bb) (c) (3) (b) below. 1079 GC, Case T-233/04 Netherlands v Commission (NO ) [2008] ECR II-591; for more on this see also x Che´rot, Revue des droits de la concurrence 2008, p. 148. 1080 More on State aid and emission trading see Arhold, in this commentary Part VII, chapter D, IV. 1081 GC, Case T-233/04 Netherlands v Commission (NO ) [2008] ECR II-591, para. 74; a finding which is x confirmed by the ECJ, (C-279/08 P Commission v Netherlands (NOx) Case [2011] ECR I-7671, paras. 87–91). 1082 GC, Case T-233/04 Netherlands v Commission (NO ) [2008] ECR II-591, paras. 79–80. x 1074

204

Arhold

B. The definition of State aid

404

II

to demonstrate that the fact that the beneficiary undertakings belonged to different sectors did not mean that the scheme was a measure of general economic policy. The Commission asserted that the condition of selectivity was fulfilled even simply by the fact that not all undertakings were able to obtain emission allowances in line with their emissions, but only a very restricted group of such Dutch undertakings which had an installed thermal capacity of more than 20 MWth.1083 However, the General Court held that the Adria-Wien formula led to the finding that the granting of such allowances is not a derogation from a general scheme and therefore not selective. That was the first case in which the General Court dismissed the element of selectivity on the grounds of the Adria-Wien formula.1084 The case differs from the earlier judgements of the General Court. The emissions trading system was in fact a completely new scheme, which not only conferred an advantage on the beneficiaries in the form of emission allowances granted free of charge but at the same time imposed a burden on them in the form of requirements to achieve reductions in emissions (dynamic cap). The Commission was said to have failed to provide evidence showing the existence of a general scheme which would apply to undertakings in a legal and factual situation comparable to that of the undertakings which were subject to the measure in question but which did not offer the advantage of the tradability of the NOx emission allowances. According to the General Court, it was up to the Commission to prove that the Dutch general laws on environmental management and the reduction of atmospheric pollution, which applied to all undertaking regardless of their participation in the NOx trading scheme, were such as to place other undertakings in a comparable legal and factual situation to that of the undertakings concerned which were subject to environmental obligations in the form of a dynamic cap system of their emission standard.1085 Therefore, both with regard to the objective pursued and the specific obligations imposed on large industrial facilities by the measure in question (the dynamic cap system), the General Court held that the legal and factual situation of the undertakings subject to the NOx emission ceiling could not be regarded as comparable to that of undertakings to which that ceiling did not apply. 1086 It further argued that the limited scope of application of the NOx trading system could if need be also be justified by the nature and structure of the system. 1087 The Commission challenged the judgment on the grounds of mistakes in the assessment of selectivity. 1088 In its judgement1089 the European Court oj Justice set aside the General Court’s 404 judgement and confirmed the Commission’s decision. According to the European Court of Justice, the General Court erred in law concerning the Commission’s burden of proof regarding the comparable factual and legal situation.1090 Since it was agreed between the parties that every undertaking the operations of which produce NOx emissions had to comply with obligations regarding limitation or reduction of those emissions, whether or not it fell within the measure in question, the possibility of participating in the trading systems as such constituted an advantage not enjoyed by other undertakings in 1083

GC, Case T-233/04 Netherlands v Commission (NOx) [2008] ECR II-591, paras. 82–83. The court furthermore took the view that the scheme was also not selective due to the nature and structure of the scheme, see below point (3). 1085 GC, Case T-233/04 Netherlands v Commission (NO ) [2008] ECR II-591, paras. 89, 91–92. x 1086 GC, Case T-233/04 Netherlands v Commission (NOx) [2008] ECR II-591, paras. 88–93. 1087 See below point (3). 1088 ECJ, Case C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671. In the meantime the x Commission had already been attempting to interpret the judgment under appeal narrowly, see for example Com., OJ 2009 L 345/18, paras. 41 et seq Denmark, Modification of the CO 2 tax for quotaregulated fuel consumption in the industry. 1089 Case ECJ, C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671. x 1090 Case ECJ, C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671, paras. 62–67. x 1084

Arhold

205

II

405–406

Art. 107 TFEU

a comparable situation.1091 In that regard, the Commission was not required to go into any more detail, since in the case of an aid scheme, it may confine itself to examining the characteristics of the scheme in question in order to determine whether it is likely to benefit certain undertakings.1092 An analysis of the overall balance for each group of undertakings (burden resulting from the obligation to reduce emissions by more than the average amount on the one hand and the advantage from the grant of free emission allowances on the other) was not necessary for that purpose. The ECJ did not take into account whether the undertakings participating in the trading system were subject to stricter emission reduction standards than the others – a fact not clear either in the General Court judgement or in the ECJ judgement.1093 The participation in the trading systems constituted a selective economic advantage as they had the choice between monetising the economic value of the emission reduction they achieve or, as the case may be, avoiding the risk of having to pay fines when they exceed the NOx emission limit by buying emission allowance from other undertakings participating in the system. 1094 The European Court of Justice also held that the limited scope of application of the emissions trading system was not justified by the nature and general scheme of the system in question. The differentiation was based on a single quantitative criterion, that is to say total installed thermal capacity of more than 20 MWth. That cannot be regarded as characteristic to a scheme intended to reduce industrial pollution. 1095 Each NOx emission is ecologically harmful regardless of the size of the emitter. 1096 405 Although the General Court did apply the Adria-Wien formula in a case involving an Italian tax scheme for the benefit of investment vehicles specialising in the shares of smalland medium-capitalisation companies (‘small- and mid-caps’), it did so without examining the first stage.1097 It held there was not only a selective advantage for the benefit of the specialised investment vehicles since the measure was intended to be limited to welldefined investment vehicles fulfilling specific conditions and thus to favour certain investment vehicles which despite offering alternative forms of investment were in a comparable legal and factual situation.1098 In addition there was a selective advantage conferred on small- and medium-capitalisation undertakings, as the plaintiffs failed to adduce evidence to establish the impossibility of comparing the situation of collective investment in smalland mid-caps with that of collective investment in other companies.1099 406 The Adria-Wien formula was applied shortly afterwards by the General Court in the case of another Italian tax scheme to promote the listing of companies, again without applying the first stage (it was not disputed that the general scheme was the legislation on company income tax). According to the scheme, undertakings that were admitted to trading on European stock exchange within a 15-month period were to be granted advantages, including a reduced rate of company income tax. The General Court held the scheme to be prima facie selective, in that it only benefited undertakings that obtained a listing before expiry of a relatively short deadline, and excluded all other undertakings from the advantages conferred by the scheme, regardless of whether they 1091

Case ECJ, C-279/08 P Commission v Netherlands (NOx) [2011] ECR I-7671, paras. 63, 64 et seq. Case ECJ, C-279/08 P Commission v Netherlands (NOx) [2011] ECR I-7671, para. 65. 1093 For more see Prek/Lefe `vre EStAL 2012, p. 335, 341. 1094 Case ECJ, C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671, para. 63. x 1095 Case ECJ, C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671, para. 76. x 1096 Opinion of Advocate General Mengozzi in ECJ, Case C-279/08 P Commission v Netherlands (NO ) x [2011] ECR I-7671, para. 55. 1097 GC, Case T-445/05 Associazione italiana del risparmio gestito (‘Assogestioni’) and Fineco Asset Management SpA (‘Fineco’) v Commission [2009] ECR II-289, para. 148. 1098 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, paras. 150–153. 1099 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, paras. 168 et seq. 1092

206

Arhold

B. The definition of State aid

407

II

were companies that were already listed or companies that did not or could not satisfy the conditions required for listing during the period covered by the aid scheme. 1100 The European Court of Justice confirmed this judgement. The brief application of the aid scheme, which excluded from the conferred advantages all undertakings which could not satisfy the conditions required during the period covered by the scheme, qualified the scheme as selective. Referring to its effects-doctrine, the European Court of Justice held that the objective pursued by the scheme – effectively to promote the listing of companies, albeit for a limited period of time due to the limited State budget – was not to be taken into consideration.1101 In its judgment concerning the introduction of an environmental tax (levy on 407 aggregates) in Northern Ireland the General Court relaxed the Adria-Wien formula in a number of aspects as far as environmental levies are concerned. It held that, given the current state of EU law, the Member States should be free to introduce sector-specific environmental levies in order to attain certain environmental objectives. In particular, the Member States should be free, in balancing the various interests involved, to set their priorities as regards the protection of the environment and, as a result, to determine which goods or services would be subject to an environmental levy. According to the General Court, the mere fact that an environmental levy constitutes a specific measure, which extends to certain designated goods or services, and cannot be seen as part of an overall system of taxation which applies to all similar activities which have a comparable impact on the environment, shall not mean that similar activities, which are not subject to the levy, benefit from a selective advantage.1102 In particular, the fact that an environmental levy imposed on certain specific products does not apply to those similar activities does not put it in the same position as a measure of tax relief taking the form of an exception to the system of burdens normally imposed on undertakings, since an environmental levy can be distinguished precisely by its particular scope and purpose, and thus cannot in principle be related to any overall system.1103 The General Court ruled that when assessing the State aid aspects of an environmental levy the Commission is obliged to take account of the environmental protection goals pursuant to Article 6 EC (now Article 11 TFEU), which had to be included in the system for controlling State aid.1104 The General Court’s judgement indicated that selectivity has to be construed more narrowly in cases involving the introduction of environmental levies, so as to allow the Member States more leeway to introduce such charges by stages. On appeal, the European Court of Justice rejected this new approach and returned the case to the General Court together with a reference to the principles that had applied to date, according to which the objectives pursued by State measures were not sufficient to exclude those measures outright from classification as ‘State aid’ within the meaning of Article 107 TFEU (effects-doctrine).1105 The General Court was held to have disregarded Article 107(1) TFEU by holding that, in balancing the various interests involved, the Member States are free to set their priorities for environmental protection and accordingly to determine the goods or services on which to impose an environmental levy.1106 The need to take account of environmental protection requirements, however legitimate, does not justify the exclusion of selective measures, even specific ones such as environmental levies, from 1100 GC, Case T-211/05 Italy v Commission [2009] ECR II-2777, para. 120–121 confirmed by ECJ, Case C-458/09 P Italy v Commission [2011] ECR I-179, paras. 56–60. 1101 ECJ, Case C-458/09 P Italy v Commission [2011] ECR I-179, para. 60. 1102 GC, Case T 210/02 British Aggregates (‘BAA’) v Commission [2006] ECR II-2789, para. 115. 1103 GC, Case T 210/02 British Aggregates (‘BAA’) v Commission [2006] ECR II-2789, para. 116. 1104 GC, Case T 210/02 British Aggregates (‘BAA’) v Commission [2006] ECR II-2789, paras. 117–118. 1105 ECJ, Case C-487/06 P BAA v Commission [2008] ECR I-10515, paras. 84 et seq. 1106 ECJ, Case C-487/06 P BAA v Commission [2008] ECR I-10515, para. 86.

Arhold

207

II

408–409

Art. 107 TFEU

the scope of Article 107(1) TFEU, as environmental objectives may in any event usefully be taken into account at the stage of assessing whether the State aid measure concerned is compatible with the Internal Market pursuant to Article 107(3) TFEU. 1107 The European Court of Justice, blurring the boundaries between the second and the third stage, stated that the only situations in which a differentiation between undertakings could be considered justified in the light of the nature or structure of the system are those in which the undertakings concerned are clearly in a different position with regard to the aims of the scheme. That was not the case with regard to the Irish levy, as the justification given for certain incoherencies between its scope and the environmental goals being pursued included reasons without a bearing on environmental protection, such as the attempt to preserve the international competitiveness of particular sectors. 1108 408 After the European Court of Justice had referred back the case to the General Court, the General Court applied the three-stage test of selectivity in an exemplary way. The General Court identified and examined the common or ‘normal’ regime applicable as a reference framework which was the taxation of the commercial exploitation in the United Kingdom of a material as an ‘aggregate’.1109 This meant that the UK was not bound to introduce a levy on all forms of mineral extraction as the UK had sufficiently proven that the objective of the levy was the aim of shifting demand which was only possible for aggregates.1110 The General Court then applied the Adria-Wien formula by identifying a differentiation between aggregates derived from materials which were exempt from the levy and other materials which were subject to the levy which both were in a comparable situation in so far as both types of aggregates were used and exploited commercially. 1111 In a third stage, the General Court held that the United Kingdom had failed to demonstrate that the tax differentiation associated with the exemption of some aggregates was justified on the basis of the ‘normal’ taxation principle underpinning the levy or on the basis of the environmental objective inherent to the introduction of the levy. 1112 Consequently the General Court annulled the Commission decision. In the meantime, the Commission has adopted a new decision in which each material exempted from the levy was examined to determine whether it was in a comparable situation (stage 2), i. e. whether it could be used as an aggregate, and whether a derogation was nonetheless justified by the inner structure of the scheme (stage 3), i. e. whether it benefited the aim of shifting demand, coming to the conclusion that with respect to certain materials the measure was not selective and thus no State aid, while with respect to other materials, the formal investigation was opened.1113 Finally, the Commission took the decision that all but one of the exemptions, exclusions and tax reliefs from the aggregate levy introduced in the UK in 2002 were free of State aid,1114 since these exemptions contributed to the environmental goal pursued by the levy, namely to maximise the use of recycled aggregate and other alternatives to freshly extracted aggregate. 1115 409 The European Court of Justice has addressed a case involving a Sardinian regional tax on stopovers for tourist purposes made by aircraft or boats which was intended to be imposed only on undertakings with a tax domicile outside the territory of the Region of 1107

ECJ, Case C-487/06 P BAA v Commission [2008] ECR I-10515, para. 92. ECJ, Case C-487/06 P BAA v Commission [2008] ECR I-10515, para. 88. 1109 GC, Case T-210/02 RENV BAA v Commission [2012] ECR, paras. 49–60. 1110 GC, Case T-210/02 RENV BAA v Commission [2012] ECR, para. 66. 1111 GC, Case T-210/02 RENV BAA v Commission [2012] ECR, paras. 62–81. 1112 GC, Case T-210/02 RENV BAA v Commission [2012] ECR, paras. 82–91. 1113 Com., OJ 2013 C 348/162, UK, Aggregates Levy, non-aid, the decision was challenged by BAA, the case is pending under Case Number T-101/14. 1114 Com., State aid Case SA.34775 – UK, British aggregates levy. 1115 Decision of 28 july 2015, Com., State aid SA.34775 – UK, Aggregates levy. 1108

208

Arhold

B. The definition of State aid

410–413

II

Sardinia. Advocate General Kokott applied the Adria-Wien formula and found there to be prima facie selectivity, arguing that both ‘resident and non-resident operators of private aircraft and recreational craft find themselves in the same situation because the private aircraft and recreational craft stopping over in Sardinia pollute the environment irrespective of their provenance and the tax domicile of their operators’.1116 Like the Commission in the BAA case, Advocate General Kokott thus based her opinion not on the intrinsic goal pursued by the measure, namely increasing the cost of landing boats or aircraft, but rather on the extrinsic goal, which was the protection of the environment. The Court agreed with her opinion.1117 In the 3M Italia judgement, the European Court of Justice denied the selectivity of a specific tax amnesty applicable only to tax payers who met certain specific conditions, since the tax payers benefitting from the amnesty were not in a comparable factual and legal situation to those tax payers which did not benefit from it. 1118 A newly introduced law provided for proceedings pending before the court giving judgement at final instance in tax matters (‘Corte suprema di cassazione’) to be concluded in return for a payment of a sum equivalent to 5 % of the value of the claim, where those proceedings originated in an application made at first instance more than 10 years ago before the date of entry into force of that provision and the tax authorities had been unsuccessful at first and second instance. According to the Court, the measure applied generally to all taxpayers who were parties to tax proceedings before the Corte suprema di cassazione, whatever the nature of the tax at issue, when those proceedings met the above mentioned conditions.1119 The fact that only taxpayers satisfying those conditions could benefit from the measure could not in itself render the measure selective, since in the light of the measure’s objective (addressing the excessive length of court proceedings) the tax payers excluded from the amnesty were not in a comparable factual and legal situation to those taxpayers who met the conditions.1120 These examples of cases decided by the EU Courts display a certain latitude with regard to the distinction between the second and third stages. Legal commentators distinguish between the fundamental principles of a (tax) scheme (justification of a differentiation by nature or inner structure or system inherence) and the specific extrinsic goal being pursued (which determines the comparability at the second stage).1121 Currently it appears that the only reason for making such a distinction is the Courts’ reversal of the burden of proof at the third stage. Following the BAA-case law it is however certain that a scheme cannot be exempted from the scope of Article 107(1) TFEU only because of its aims, since that would be incompatible with the effects-doctrine. A scheme cannot be classified as non-selective simply because it is aimed at pursuing a particular goal recognized by EU law. Conversely, a measure is not automatically selective simply because it serves a goal the EU considers undesirable. On the other hand, an objective consisting in favouring the competitive situation of particular sectors or undertakings cannot justify a differentiation. The regulatory purpose within the meaning of the Adria-Wien formula has to be a general economic policy goal, such as protection of the environment, job security, research and development, etc., in other words goals that can in principle be of 1116 Opinion of Advocate General Kokott in ECJ, Case C-169/08 Presidente del Consiglio dei Ministri [2009] ECR I-10821, paras. 136–138. 1117 ECJ, Case C-169/08 Presidente del Consiglio dei Ministri [2009] ECR I-10821, paras. 62, 36–37. 1118 ECJ, Case C-417/10 3M Italia [2012] ECR, para. 42. 1119 ECJ, Case C-417/10 3M Italia [2012] ECR, para. 41. 1120 ECJ, Case C-417/10 3M Italia [2012] ECR, para. 42. 1121 Jaeger, in this commentary Part VI, chapter III.

Arhold

209

410

411

412

413

II

414–415

Art. 107 TFEU

relevance to all undertakings and sectors. The schemes thus have to be correspondingly general. Some1122 want to admit only those goals that do not at the same time have an (additional) impact on competition, and accordingly to ignore all (secondary) goals pursued by a measure that are also relevant to competition, i. e. those aiming at improving the competitive position of certain undertakings. Separate political goals may however be taken into consideration.1123 There must be a rigorous assessment of whether the differentiation made by the national legislation is actually justified when considered in the light of the regulatory purpose. As the current case law demonstrates, this can present considerable difficulties. 414 The situation which illustrates this dilemma most clearly is the assessment of regional selectivity. Even following the Azores judgement, a national scheme intended to apply only to a part of the territory of the Member State concerned is considered to be selective per se. In the light of the Adria-Wien formula the correctness of this approach is, however, questionable. In view of the purpose which usually underlies schemes of that kind – harmonizing living standards within a Member State (cohesion) – differentiating between investment activities according to geographical factors appears non selective as the compared areas are not in a comparable factual situation. So far no reason has been given to show why the Adria Wien case law should not be applicable to regional aid schemes as well. Simply referring to Article 107(3)(a) TFEU does not seem to be sufficient. This exemption provision would remain applicable to regional promotion schemes which are sectorally and/or materially selective or which are applied at the discretion of the relevant authorities. 415

(b) Regional selectivity (ratione territoriae). According to the initial Court rulings and the practice of the Commission before the Azores case law, a scheme which was in itself generally applicable should become selective simply by virtue of the circumstance that its direct or indirect beneficiaries included only undertakings within a certain region of the Member State concerned, e. g. all the undertakings in the new German La¨nder1124 or in certain Territorios Histo´ricos of Spain1125 (so-called regional selectivity). The reason seemed to be obvious: Article 107(3)(a) and (c) TFEU set out certain criteria for the justification of regional aid. Despite that, doubts have always existed as to the correctness and at least as to the extent of this doctrine of regional selectivity.1126 The EU State aid regime is in particular intended to prevent subsidies granted by Member States from distorting trade between the Member States. It thus appears somewhat paradoxical to subject otherwise generally applicable tax concessions to Article 107 TFEU if they apply only within certain regions of a Member State, but to exempt them from the scope of the EU State aid control regime if they are applied to the whole of the territory of that Member State. A priori the second type of situation has a greater negative impact on trade between the Member States than a regionally limited tax concession. The upshot of the doctrine of regional selectivity is to favour smaller Member States to the detriment of larger States, which tend to have a 1122

See for instance Bartosch, EuZW 2010, p. 12(14). Bartosch, EuZW 2010, p. 12(15). 1124 ECJ, Case C-156/98 Germany v Commission [2000] ECR I-6857, paras. 23–34. 1125 See the exemplary reasoning in Opinion of Advocate General Saggio, ECJ, Joined Cases C-400/97, C401/97 and C-402/97 Juntas Generales de Guipu´zcoa und Diputacio´n Foral de Guipu´zcoa [2000] ECR I-1073, paras. 35–37: ‘If this were not the case, the State could easily avoid the application, in part of its own territory, of provisions of Community law on State aid simply by making changes to the internal allocation of competence on certain matters, thus raising the ‘general’ nature, for that territory, of the measure in question.’ In the early 80s Germany already claimed that regional aid measures did not necessarily fall within the scope of Article 107(1) TFEU: ECJ, Case 248/84 Germany v Commission [1987] ECR 4013, para. 14. 1126 See for example, Arhold, EStAL 2002, p. 2 (33). 1123

210

Arhold

B. The definition of State aid

416–418

II

greater need to harmonise the various standards of living within their territory. This way, State aid law is an obstacle to efficient and rational cohesion policy. The current case law still fails to take this aspect into proper account. Before the Azores case law it was also unclear under which circumstances a regionally 416 limited general scheme was to be considered selective if it was established by the competent regional public authority of a Member State within the scope of its regulatory and financial powers. Originally the Commission was of the opinion that – as is otherwise usually the case under EU law – it is the State as a whole which has to be considered when deciding the question of selectivity, and that any possibly existing internal divisions of powers have to be ignored:1127 ‘The Commission found that the selectivity of a measure was based on a comparison between the advantageous tax treatment granted to certain firms and the treatment that applied to other firms within the same reference framework, which it defined as the territory of a Member State.’ 1128 It took some time before the Courts were required to consider this question. The 417 first judgments made by the General Court on certain tax measures in the territories ´ lava, Vizcaya and Guipu´zcoa of the Spanish Basque Country, which had enjoyed a of A degree of partial autonomy in tax matters ever since the 19th century, did also consider the question of whether the regional specificity of those measures meant that they could be seen as selective when considered against the national reference framework. However, the Commission and the Court considered the relevant scheme to be selective already because of material selectivity of the scheme, so that the question was not relevant for the outcome of the decision or the judgement and was therefore left open.1129 Since then the European Court of Justice has defined the principles governing regional selectivity more precisely in its landmark Azores judgement. The Azores judgement and subsequent case law. The proceedings related to the 418 Commission State aid decision concerning the special income tax reductions in the Autonomous Region of the Azores.1130 According to the Portuguese constitution, the island territories of the Azores and Madeira are autonomous regions with a special political and administrative status and their own government. The autonomous regions are entitled to collect tax revenues of their own as well as to receive a share in the tax revenues of the Federal State, in accordance with the principle of effective national solidarity. Moreover, the legislative assemblies of these territories have a range of exclusive powers, including the power to operate their own tax system in accordance with conditions set out in a framework act to be passed by the national parliament and to modify national tax rates to suit the specific characteristics of the region. In Law No 13/98 the Portuguese State precisely defined the conditions of that financial autonomy, inter alia by setting out the following principles and objectives: – financial solidarity effected by means of transfers of budget funds to harmonize economic and social conditions with those in the rest of the territory of the State. – national personal income tax and corporation tax constitute revenue of the autonomous regions under the conditions it determines itself; in particular, the regional 1127 See for example, Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 17. 1128 Report on the implementation of the Commission notice on the application of the State aid rules to measures relating to direct business taxation, COM C(2004)434, para. 32. Download: http://ec.europa.eu/ competition/state_aid/studies_reports/studies_reports.html. 1129 GC, Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histo ´ lava and others v ´ rico de A Commission [2002] ECR II-1275; as well as Joined Cases T-92/00 and T-103/00 Territorio Histo´ rico de ´ lava and others v Commission [2002] ECR II-1385, para. 27. A 1130 Com., OJ 2003 L 150/52 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal.

Arhold

211

II

419–420

Art. 107 TFEU

legislative assemblies are authorised to reduce the rates of income and corporation tax applicable in their territories.1131 419 By introducing a Regional Legislative Decree the regional authorities reduced tax rates under the powers devolved to them, applicable automatically to all economic operators (20 % in the case of income tax and 30 % in the case of corporation tax). The Commission initiated a State aid investigation, which resulted in a decision that the reductions in tax rates were State aid, and in part (as far as the financial sector was affected) 1132 incompatible with the Internal Market. The subsequent Court proceedings turned on the question of whether the autonomous tax measures adopted by the Azores Region were selective. In view of the fact that the measures were applicable to all undertakings equally, the only form of selectivity at issue was regional selectivity. In the reasons for its decision the Commission followed the line set out in its Tax Notice and stated that the only measures which are not selective are those which are applied throughout the whole of the Member State.1133 It based its opinion on the following considerations: – The text of the EC Treaty showed that the reference framework in which to make the necessary comparison with other firms had to be the whole of the economy of the Member State.1134 – If distinctions based solely on the body that decides the measure were to be allowed that would remove all effectiveness from Article 107 TFEU. 1135 – The tax reductions were only available for the Azores and not for all Portuguese regions.1136 420 Portugal, on the other hand, asserted that the reference framework in such a case would have to be the autonomous tax policy of the region concerned.1137 The Commission countered by arguing that the reduction in tax revenue for the region concerned, resulting from the reduced tax rates, was indirectly offset at budgetary level by transfers made by the central State in accordance with the principle of financial solidarity. 1138 In its judgement the European Court of Justice recalled its settled case law, according to which the question of selectivity requires assessment of whether, under a particular statutory scheme, a State measure is such as to ‘favour certain undertakings or the production of certain goods’ in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question,1139 and added that such an analysis is also required in respect of a measure adopted not by the national legislature but by an infra-State authority. 1140 The determination of the reference framework has a particular importance in the case of tax measures, since the very existence of a selective advantage may be established only when 1131 Com., OJ 2003 L 150/52 para. 7 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1132 The tax reductions for the other sectors were cleared as regional aid under the derogation in Article 107(3)(a) TFEU; Com., OJ 2003 L 150/52, paras. 38–39 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1133 Com., OJ 2003 L 150/52, para. 24 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1134 Com., OJ 2003 L 150/52, para. 26 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1135 Com., OJ 2003 L 150/52, para. 27 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1136 Com., OJ 2003 L 150/52, paras. 31, 33 – Scheme adapting the national tax system to the specific characteristics of the Autonomous Region of the Azores, Portugal. 1137 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 39. 1138 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 43. 1139 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 54; referring to ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 52. 1140 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 55.

212

Arhold

B. The definition of State aid

421

II

compared with ‘normal’ taxation. The ‘normal’ tax rate is considered to be the rate in force in the geographical area constituting the reference framework. 1141 However, in respect of the definition of the reference framework the Court chose 421 not to agree with the extreme position adopted by the Commission. Rather, it observed that the reference framework does not necessarily have to be the whole Member State1142, as it ‘is possible that an infra-State body enjoys a legal and factual status which makes it sufficiently autonomous in relation to the central government of a Member State, with the result that, by the measures it adopts, it is that body and not the central government which plays a fundamental role in the definition of the political and economic environment in which undertakings operate. In such a case it is the area in which the infra-State body responsible for the measure exercises its powers, and not the country as a whole, that constitutes the relevant context for the assessment of whether a measure adopted by such a body favours certain undertakings in comparison with others […].’1143 Although the Court accepted that Article 107(3)(a) and (c) TFEU indicates that benefits whose scope is limited to part of the territory of a Member State may under certain circumstances constitute selective benefits, that did not allow one to infer that such a measure is necessarily selective within the meaning of Article 107(1) TFEU solely because it is applicable only in a limited geographical area. 1144 After having disposed of the Commission’s extreme position and allowed State aid law to quasi break through the national cordon, the Court had to develop criteria to be applied when answering the question of which cases of regional differences in taxation should be considered to be selective. In that respect it chose to follow the distinction proposed by Advocate General Geelhoed1145 who outlined three distinct scenarios, which were later specified in the judgments concerning the autonomous territories of the Basque Country as well as Gibraltar: – Lack of devolution scenario: The central government decides unilaterally that the applicable national tax rate should be reduced within a certain region. According to the Court, that type of measure is clearly selective, as it only applies to a part of the territory for which the tax legislator is responsible. 1146 – Symmetrical devolution scenario: A model in which the competence to decide on taxation is split between various bodies, i. e. one where all local authorities at a particular level (regions, districts or others) have the autonomous power to set the tax rate for their geographical jurisdiction.1147 Such a measure is said to be not selective

1141

ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 56. ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 57; confirmed by Joined Cases C-428/06 to C-434/06 Unio´n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 47. 1143 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 58; confirmed by Joined Cases C-428/06 to C-434/06 Unio´n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 48. 1144 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 60. 1145 Opinion of Advocate General Geelhoed in ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 50 et seq. 1146 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 61, 64. 1147 Independently of whether with or without reference to a ‘national’ tax rate, as pointed out by of Advocate General Geelhoed in ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 52. The differences in the rates of trade tax levied by the various municipalities in Germany are a typical example for a symmetrical devolution scenario, see Arhold EuZW 2006, p. 717; also de Weerth IStR 2008, p. 732. One example for a very far-reaching system of symmetrical devolution can be seen in the Swiss model in which the municipalities, cantons and the federation itself have the right to levy taxes and are entitled to a share of direct taxation, in particular taxes on income, for more on this see Feld 2004. 1142

Arhold

213

II

421

Art. 107 TFEU

because it is impossible to determine a normal tax rate capable of constituting the reference framework.1148 – Asymmetrical devolution scenario: A regional or local authority adopts, in the exercise of sufficiently autonomous powers, a tax rate lower than the national rate and which is applicable only to undertakings present in the territory within its competence. The Court held that in such a situation the legal framework appropriate to determine the selectivity of a tax measure may be limited to the geographical area concerned where the infra-State body plays a fundamental role in the definition of the political and economic environment in which the undertakings of its territory operate. 1149 In other words: the infra-State body must be sufficiently autonomous (the fundamental role is a consequence of the autonomy and not a precondition for that autonomy1150 or an additional fourth condition).1151 As regards the decision as to when that is the case, the Court again followed the Opinion of Advocate General Geelhoed. Thus, the infra-State body has to be ‘truly autonomous’, i. e. it must be cumulatively1152 – institutionally autonomous: it has to have its own constitutional, political and administrative status separate from that of the central government. Such a status is of a general nature, but must apply especially to the measure concerned. – procedurally autonomous: the decision must be taken by the local authority pursuant to a procedure where the central government does not have any power to intervene directly in setting the tax rate (or any other disputed aid measure). The key factor is the decision-making procedure concerning the actual measure in question, and not an overall assessment of the totality of the authority’s regulatory powers. 1153 Such procedural autonomy does not preclude the establishment of a conciliation procedure in order to avoid conflicts, provided that the final decision taken at the conclusion of that procedure is adopted by the infra-State body and not by the central govern1148 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 64. The Commission explicitly recognised that principle in the proceedings and appears to have done so in practice earlier in isolated cases; for more references see Com., State aid N 198/2005, para. 44 – Fiscal aid for job creation in assisted areas (IRAP reductions — Law No 80/2005, Article 11 lit b); the national legislation on the IRAP set out that all the regions of Italy would have the power to adjust the basic tax rate of 4.25 % by up to one percentage point either way. Despite that, Italy subsequently notified legislation adopted by the Region of Sicily under which Sicily did not limit its intervention to the margin of autonomous discretion established by national law but used its power to introduce tax rates for certain sectors and taxpayers that were different from and lower than the standard regional tax rates. The Commission considered that the measure was sectorally and materially selective and decided to prohibit it as State aid, see Com., OJ 2007 L 183/41, para. 39 – Italy, Aid scheme under Law No 17/2004 (Article 60) of the Region of Sicily. 1149 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 65–66; confirmed by Joined Cases C-428/06 to C-434/06 Unio´n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 49–50. 1150 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 55. 1151 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 86–87, 105–106; in ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, paras. 110, 186; the question of regional selectivity was not relevant for the outcome of the decision and was left open. 1152 Opinion of Advocate General Geelhoed in ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 54–56; and accordingly also ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 67–68; confirmed by Joined Cases C-428/06 to C-434/06 Unio´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 51–52, and GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 85–86. 1153 For more on this see GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 90–95, where the GC analyses solely the company taxation sector which falls within the category defined as being Gibraltarian domestic matters.

214

Arhold

B. The definition of State aid

421

II

ment.1154 Similarly, the requirement for an infra-State body to take into account the economic balance between the different parts of the national territory when adopting tax legislation merely defines the limits of that body’s powers and does not impair its procedural autonomy as such, even if the concepts used to define those limits, such as that of economic balance, may be developed in the context of interpretation as part of judicial review.1155 The essential criterion for the purpose of determining whether procedural autonomy exists is not the extent of the competence, which the infra-State body is recognised as having, but the possibility for that body, as a result of that competence, to adopt a decision independently, in other words, without the central government being able directly to intervene as regards its content. 1156 Judicial review by the administrative courts does not in itself have any effect on the procedural autonomy. The existence of judicial review is inherent in the existence of the rule of law.1157 Again, even if the central authority does retain a residual power of last resort that is not in itself incompatible with procedural autonomy, at least not if those rights have never or only exceptionally been exercised in the relevant sector. 1158 – Economically and financially autonomous: The lower tax rate applicable within the region must not be cross-subsidised or financed by central government, so that the economic consequences of these reductions are borne by the region itself. 1159 Accordingly, there must be no compensation mechanism, i. e. a causal relationship between a tax measure adopted by the autonomous region and the amounts assumed by the central State.1160 However, financial compensation may also be hidden and become apparent only from the actual examination of the financial flows existing between the infra-State body concerned, the Member State which it comes under and the other regions of that Member State. That examination may indicate that a tax reduction decision adopted by the infra-State body results in larger financial transfers in its favour, because of the calculation methods used in order to determine the amounts to be transferred (e. g. hidden compensation in sectors such as social security or the guarantee of minimum public services by the central State). 1161 The mere existence of a financial transfer cannot in itself call economic and financial autonomy into question, as the regime would otherwise become a dead letter, since it would be very difficult to conceive of an infra-State body which does not receive any financial support, in whatever form, from central government. 1162 1154 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 96. 1155 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 103. 1156 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 107. 1157 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 79–83. 1158 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 95, 99. 1159 Opinion of Advocate General Geelhoed in ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 54; as an example of financial autonomy see footnote 38 of this Opinion: The powers in the Scotland Act 1998 allowing Scotland to reduce, or increase, the basic UK rate of income tax for taxpayers in Scotland by up to three pence in the pound, without the exercise of that power attracting any compensatory claw-back by or subsidy from the UK central government. 1160 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, para. 129. 1161 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 133–134. 1162 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 106.

Arhold

215

II

422–425

Art. 107 TFEU

These conditions of institutional autonomy, procedural autonomy and economic and financial autonomy are the only conditions which must be satisfied in order for the territory falling within the competence of an infra-State body to be the relevant framework in order to assess whether a decision adopted by that body is selective in nature.1163 The provisions of national legislation that are of relevance to these conditions must be taken into account in accordance with the way they are interpreted and enforced by the national courts. The existence of a system for central judicial review does not lead to the loss of sufficient autonomy. The purpose of reviewing the legality of acts is to enforce compliance with the pre-established limits on the areas of competence of the different State authorities, organs or bodies, not to determine those limits. 1164 423 As regards the disputed tax reductions in the Azores case, the Court accepted that the Azores had sufficient institutional and procedural autonomy but not economic and financial autonomy. The reduction in tax revenue which may have resulted, for the Azores region, from reductions in tax rates was – according to the Commission’s statements which were not invalidated by the Portuguese government – in any event offset by a centrally managed financing mechanism.1165 As a result the selectivity of the measure was confirmed and the action was dismissed. 1166 424 The first judgement to address the question of regional selectivity in the wake of the Azores judgement was made in a case involving the Autonomous Community of the Basque Country and its three Territorios Histo´ricos.1167 The European Court of Justice first identified the Territorios Histo´ricos together with the Autonomous Community of the Basque Country as the infra-State body to be taken into consideration, in order to assess whether this infra-State body enjoyed sufficient autonomy to be used as a reference framework against which to assess the selectivity of a measure issued by one of those Territorios Histo´ricos.1168 It provided the national court with numerous pointers (already reflected in the principles outlined above) to use in its assessment of whether the Basque Country did enjoy sufficient autonomy. 425 According to the General Court, the British Crown Colony of Gibraltar is sufficiently autonomous. The reference framework corresponds exclusively to the geographical limits of the territory of Gibraltar, so that no comparison can be made between the tax regime applicable to companies established in Gibraltar and that applicable to companies established in the United Kingdom for the purpose of establishing a selective advantage 422

1163 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja [2008] ECR I-6747, para. 60; GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 87–88. 1164 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 80–82. 1165 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 75–76. According to Article 32 of Law No. 13/98, the application of that principle gives rise to a duty incumbent on both the central and regional authorities to promote the correction of inequalities arising from insularity by reducing local tax burden and by an obligation to ensure an appropriate level of public services and private activities. 1166 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 77–79. For more on the judgment see also Di Bucci, Proceedings of the 4th Experts’ Forum held in Brussels on 18 and 19 May 2006, p. 53; Jaeger RiW 2007, p. 120; Nicolaides EStAL 2006, p. 119, and EStAL 2007, p. 43; Sa´nchezRydelski ELR 2006, p. 402; Stein EWS 2006, p. 493; Zatschler EStAL 2006, p. 779; Glaser EuZW 2009, p. 363; da Cruz Vilaça EStAL 2009, p. 443. 1167 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747. 1168 ECJ, Joined Cases C-428/06 to C-434/06 Unio ´ n General de Trabajadores de La Rioja (UGT-Rioja) [2008] ECR I-6747, paras. 65–75. It was important that they were considered jointly, as the Territorios Histo´ricos did not themselves have the necessary degree of autonomy.

216

Arhold

B. The definition of State aid

426–427

II

favouring the former.1169 The separate constitutional status was not disputed.1170 As regards procedural autonomy the Court was satisfied that company taxation falls within the category of defined domestic matters and that executive competence in relation to those matters rests with Gibraltar’s Council of Ministers. The Court held that the powers of the British Governor of Gibraltar, which have never been exercised in the field of taxation, are means enabling the United Kingdom to assume its responsibilities as colonial power towards the population of Gibraltar and to perform its obligations under international law (Chapter XI Article 73 of the Charter of the United Nations) and should not be seen as granting an ability to intervene directly as regards the content of a tax measure adopted by the Gibraltar authorities.1171 Finally, the Commission failed to demonstrate that financial support from the United Kingdom had any causal link with the financial effects of the measure.1172 The grounds of appeal, in which Spain criticised in particular a deficient application of the principles set out in the Azores judgement and a failure to take account of the circumstance that pursuant to Article 349 TFEU Gibraltar is not part of a Member State, were not addressed by the Court, since it had already established material selectivity and therefore did not have to deal with regional selectivity.1173 Excursus: The case of a lack of devolution. In its Azores case law the Court has 426 attempted to achieve a compromise between the conflicting interests of the Commission in maintaining an efficient State aid control policy and the Member States’ interest in designing and maintaining their own domestic constitutional arrangements. In doing so it has also made it clear that central government measures that are limited to particular geographical areas of the State are always selective. Strictly speaking, the case under consideration did not oblige the Court to adopt a position on this question at all. The approach taken by the Court is not really convincing, either. According to the wording of Article 107(1) TFEU, selectivity has to relate to certain undertakings or the production of certain goods and not to certain regions. There is no obvious reason why a Member State should be barred from pursuing a policy of regionally diversified taxation, provided it is applied to all undertakings and sectors of the economy in equal measure. By doing so the Member State would ultimately be pursuing the same goal within its national territory which the EU pursues for the territory of the EU, namely that of harmonizing living standards. It is of course possible for a measure to be limited in geographical terms in such a way that it is de facto applicable only or essentially to certain undertakings or sectors of production. The difficulty of assessing de facto material selectivity in individual cases may make it appear impracticable to dispense with the criterion of regional selectivity entirely. On the other hand, the criterion of regional selectivity does also have the effect of making it much more difficult for more centralized Member States to pursue effective cohesion policies. 1174 This aspect was raised by Banco Commercial dos Acores in the action it filed against 427 the Commission’s Azores decision in early 2003, which was not decided until late 2009, 1169 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 115. 1170 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 89. 1171 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, paras. 93–99. 1172 GC, Joined Cases T-211/04 and T-215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II-3745, para. 112; with regard to the judgement see also Rossi-Maccanico EStAL 2009, p. 63. 1173 ECJ, Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I-11113, paras. 110, 186. 1174 For more on this see Arhold EuZW 2006, p. 717.

Arhold

217

II

428–430

Art. 107 TFEU

in which it argued that where the financial constitution of a Member State aims at achieving cohesion that circumstance always has to be taken into account by the Commission, i. e. also in the case of a lack of devolution or of asymmetrical devolution with an insufficient degree of autonomy on the part of the regional authority adopting the measures. According to Article 229 of the Portuguese Constitution, the objective of harmonizing living standards and of ensuring economic and social development, with a particular view to the correction of inequalities derived from the autonomous regions’ insular nature, has the force of constitutional law. The Commission’s examination of the selectivity of the scheme should therefore have taken into account that the way in which the Portuguese tax system was designed reflected those constitutional objectives.1175 Indeed, considering the broad manner in which recent court rulings have applied the Adria-Wien formula, allowing even secondary objectives (such as protection of the environment) to be taken into account when deciding whether the undertakings or sectors of production affected by a measure actually are in a comparable factual and legal situation, the question inevitably arises as to why the cohesion objective should not be taken into account at the second stage of the examination. Bearing in mind that as far as the cohesion objective is concerned the undertakings in the various regions of the Member State quite obviously find themselves in differing situations, would it not be logical to allow Member States to distinguish between those undertakings? The example shows the problems caused by the general acceptance of extrinsic objectives. 428 The General Court rejected the argument with reference to the reasoning in the Azores case,1176 where the European Court of Justice had considered the question of whether to take cohesion into account when assessing justification on the grounds of the nature and internal structure of the system of taxation. The European Court of Justice had rejected that approach and argued that a distinction must be made between, on the one hand, the objectives attributed to a particular tax scheme which are extrinsic to it and, on the other, the mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives. The fact that a measure is undertaken on the basis of a regional development or social cohesion policy was not sufficient in itself to justify adopting the measure within the framework of that policy. 1177 (c) Selectivity ratione personae – material selectivity. Measures that are expressly intended to apply only to certain undertakings are selective ratione personae or materially selective, i. e. if they are to apply only to undertakings that have certain characteristics, such as a particular nationality. However, a measure can be considered to be materially selective even if it does not discriminate on the grounds of nationality. 1178 Unlike the situation that applies to the ‘specific subsidy’ as used in the WTO Agreement on Subsidies and Countervailing Measures,1179 the application of objective criteria or conditions (i. e. ‘criteria or conditions which are neutral, and which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise’) is not enough to rule out the selectivity of a measure. 1180 430 Thus, selectivity can result from various quite different criteria, such as the circumstance that a measure conferring an advantage is limited to 429

1175

GC, Case T-75/03 Banco Commercial dos Açores v Commission [2009] ECR II-143, para. 58. GC, Case T-75/03 Banco Commercial dos Açores v Commission [2009] ECR II-143, paras. 75–77. ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, paras. 80–84. ~ola de Transporte de Mercancı´as (CETM) v Commission 1178 GC, Case T-55/99 Confederacio ´ n Espan [2000] ECR II-3207, paras. 48–49. 1179 Annexe 1A to Council Decision 94/800/EC of 22 December 1994, OJ 1994 L 336/1. 1180 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, paras. 150–152. 1176 1177

218

Arhold

B. The definition of State aid

431

II

– undertakings of a particular size, for example only SMEs1181 or only large undertakings;1182 – undertakings that are part of an international group of companies, 1183 for example undertakings with subsidiaries in at least four different States; 1184 – undertakings of a certain legal form – a legal person governed by public law or a foundation;1185 – newly established undertakings with a minimum level of capitalisation and a minimum level of investment;1186 – investment vehicles specialising in low-caps listed on European stock exchanges; 1187 – undertakings with a particular level of energy consumption1188 or a particular installed thermal capacity (‘Leistungsbedarf’) with substantial NOx emissions. 1189 There are many other conceivable examples, such as a restriction in favour of under- 431 takings in economic difficulty.1190 Concerning the German scheme on the fiscal carryforward of losses in case of restructuring of companies in difficulty (‘Sanierungsklausel’) the Commission decided that a provision that under certain conditions excludes companies in difficulty from the prohibition of carrying forward losses in case of changes in the shareholding is selective.1191 The German government argued that companies in difficulty were not in a comparable factual and legal situation with other undertakings. 1192 The Commission dismissed this argument by emphasising that the objective of a tax system has to be established at the level of the system of reference. The reference framework was the provision that barred companies, which change their owner, from carrying forward their losses. The objective pursued was to prevent the abuse of the possibility to carry forward losses foreseen by the German tax system by way of trafficking losses through empty shell companies. In the light of this objective, all companies with ownership change were in a comparable factual and legal situation.1193 As the objective of the exemption for the companies in difficulty was that of tackling the global financial and economic crisis and thus extrinsic to the tax system it could not justify the differentiation. 1194 Several actions ~ola de Transporte de Mercancı´as (CETM) v Commission 1181 GC, Case T-55/99 Confederacio ´ n Espan [2000] ECR II-3207, para. 42; confirmed by ECJ, Case C-351/98 Spain v Commission [2002] ECR I-8031, para. 40; and concerning the follow-up scheme Case C-409/00 Spain v Commission [2003] ECR I-1487, paras. 49–50. 1182 ECJ, Case C-200/97 Ecotrade [1998]. ECR I-7907, para. 38. 1183 See Luja EStAL 2009, p. 473. 1184 ECJ, Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I5479, para. 122; for a case of an aid-free measure aimed at reducing the difference in tax treatment between two instruments of intra-group financing, i. e. equity and debt, see Com., OJ 2009 L 288/26, paras. 83 et seq. Netherlands, Groepsrentebox. 1185 ECJ, Case C-222/04 Cassa di Risparmio di Firenze and others [2006] ECR I-289, paras. 135–136, 138. 1186 GC, Joined Cases T-346/99, T-347/99 and T-348/99 Territorio Histo ´ lava and others v ´ rico de A Commission [2002] ECR II-4259, para. 43. 1187 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, para. 150. 1188 Opinion of Advocate General Jacobs in ECJ, Case C-368/04 Transalpine O ¨ lleitung in O ¨ sterreich and others [2006] ECR I-9957, paras. 2, 27, 70. 1189 ECJ, Case C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-7671, para. 76. x 1190 For more on this Arhold EStAL 2011, p. 71. 1191 Com., OJ 2011 L 235/26, para. 73, German law on easing of fiscal carry-forward of losses – Sanierungsklausel. 1192 Com., OJ 2011 L 235/26, para. 70, German law on easing of fiscal carry-forward of losses – Sanierungsklausel. 1193 Com., OJ 2011 L 235/26, para. 71, German law on easing of fiscal carry-forward of losses – Sanierungsklausel. 1194 Com., OJ 2011 L 235/26, paras. 83–89, German law on easing of fiscal carry-forward of losses – Sanierungsklausel.

Arhold

219

II

432

Art. 107 TFEU

for annulment from companies concerned are still pending before the General Court. 1195 An action for annulment filed by Germany failed due to deadline expiry.1196 In the meantime, upon application by an aid beneficiary, a national financial court, the FG Mu¨nster, suspended the implementation of the Commission’s decision against this company in an order for interim relief.1197 It voiced severe doubts as to the validity of the Commission’s decision: – With respect to the first stage of determining selectivity – the definition of the reference framework – the FG Mu¨nster doubted that the German provision which limits the possibility for companies to carry forward losses where changes in shareholding have taken place, could be considered to be the normal framework. Rather, the Court suggested the normal reference framework should be the basic principle in German tax law that losses may actually be forwarded. 1198 – It further doubted whether the Sanierungsklausel was selective given that the measures would be granted to every company in economic difficulties. No differentiation between companies of different branches or sizes would be made. 1199 432 A similar question concerning the carry-forward of losses was raised in a Finnish court case which referred the question to the European Court of Justice. As in the German tax system the carrying forward of losses is generally allowed in Finland.1200 The Finnish law provides that the carry-forward of losses is however generally prohibited in cases of changes in shareholding.1201 The Finnish tax system provides for exceptions from the prohibition where this is necessary for the continuation of the activities of the company. Authorisation to go ahead with loss deduction for undertakings which have undergone a change of ownership can be granted upon application.1202 The Finnish court asked inter alia – whether in the interpretation of the criterion of selectivity, in particular in order to determine the reference group, it is necessary to take into account the general rule on the deductibility of established losses or the provisions concerning changes of ownership; – whether, assuming that prima facie selectivity could be established, the authorisation for loss deduction may be regarded as justified by the fact that it is a mechanism inherent in the tax system itself which is necessary for example in order to prevent tax evasion; – when assessing possible justification and whether the system is a mechanism inherent in the tax system, what importance must be given to the extent of the discretion of the tax authorities? Is it necessary, as regards the mechanism inherent in the tax

1195 Applications in GC, Cases T-629/11 Biogas Nord Anlagenbau v Commission; T-628/11 Biogas Nord v Commission; T-627/11 ATMvision v Commission; T-626/11 Sky Deutschland and Sky Deutschland Fernsehen v Commission; T-621/11 SinnLeffers v Commission; T-620/11 GFKL Financial Services v Commission; T-619/11 CB v Commission; T-614/11 Garner CAD Technic and Others v Commisssion; T613/11 VMS Deutschland v Commission; T-612/11 Treofan Holdings and Treofan Germany v Commission; T-610/11 Wagon Automotive Nagold v Commission; T-586/11 Oppenheim v Commission; T-287/11 Heitkamp BauHolding v Commission. 1196 GC, Case T-205/11 Germany v Commission [2012] ECR paras. 51–52; for more on this case see Arhold, EStAL 2014, p. 14. Confirmed by ECJ, Case C-102/13 P, Germany v Commission ECLI:EU:C:2014:2054. 1197 FG Mu ¨ nster 9 V 357/11 K, G. 1198 FG Mu ¨ nster 9 V 357/11 K, G para. 67. 1199 FG Mu ¨ nster 9 V 357/11 K, G para. 68. 1200 ECJ, Case C-6/12 P Oy [2013] ECR paras. 4–5. 1201 ECJ, Case C-6/12 P Oy [2013] ECR para. 6. 1202 ECJ, Case C-6/12 P Oy [2013] ECR para. 7.

220

Arhold

B. The definition of State aid

433–435

II

system itself, that the body applying the law has no discretion and that the conditions for the application of the derogation are set out precisely in the legislation. 1203 Since the referring court had not submitted all the information necessary to identify 433 the reference framework, the European Court of Justice did not answer the question of whether these double exception systems concerning the loss carry-forward can be considered as prima facie selective.1204 It did, however, provide some guidance on the third stage (justification due to the nature or inner structure of the tax system) 1205 and about the permissible degree of latitude for the competent authority. 1206 (d) Selectivity ratione materiae – sectoral selectivity. By using the term ‘production of 434 certain goods’ Article 107(1) TFEU sets out explicitly that a measure of sectoral nature is selective,1207 which means that aid can be selective even if it is applicable in the same way to all the undertakings of an entire sector of the economy.1208 The same is true of measures that favour several sectors of the economy. The term ‘production of certain goods’ has to be construed broadly and not, for example, as equivalent to the competition law definition of affected markets. Sectoral selectivity cannot be ruled out simply because the measure concerned favours a great number of undertakings nor because those undertakings belong to sectors of the economy that differ in nature or importance, 1209 since it suffices that certain sectors of the economy are exempted from the measures. The assertion that budgetary restrictions necessitate a progressive generalisation is not enough to obviate the selective nature of a measure which does not apply to all economic sectors, since otherwise the prohibition of State aid might be easily circumvented. 1210 The distinction from material selectivity is not clear-cut and in any case not 435 important. The Courts have considered measures sectorally selective for instance where the measures were restricted to: – undertakings in the textile sector;1211 – the export sector;1212 – all sectors of the economy that are exposed to international competition; 1213 – undertakings in the primary and secondary sectors, but not the service sector (tertiary sector);1214 – the medical sector;1215 – the banking sector.1216

1203

ECJ, Case C-6/12 P Oy [2013] ECR para. 15. ECJ, Case C-6/12 P Oy [2013] ECR paras. 19–21. 1205 For more details see below point c) bb) (c) (3). 1206 For more details see above point b). 1207 See also Commission, OJ 1998 C 384/3, para. 18 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 1208 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, para. 155; ECJ, Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-7611, para. 53; Case C-148/04 Unicredito Italiano [2005] ECR I-11137, para. 45, with further reference. 1209 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, paras. 32–33; Case C-172/ 03 Heiser [2005] ECR I-1627, para. 42. 1210 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, paras. 40–43. 1211 ECJ, Case C-173/73 Italy v Commission [1974] ECR 709, para. 15. 1212 Joined Cases 6/69 and 11/69 Commission v France [1969] ECR 561, para. 21; as well as Case 57/86 Greece v Commission [1988] ECR 2855, para. 8. 1213 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, paras. 5, 29–30. 1214 ECJ, Case C-143/99 Adria-Wien Pipeline GmbH [2001] ECR I-8365, para. 50. 1215 ECJ, Case C-172/03 Heiser [2005] ECR I-1627, para. 41. 1216 ECJ, Case C-148/04 Unicredito Italiano [2005] ECR I-11137, para. 46; Case C-66/02 Italy v Commission [2005] ECR I-10901, para. 96. 1204

Arhold

221

II

436–439

Art. 107 TFEU

(e) De facto selectivity. According to settled case law, if measures that, although apparently open to all economic operators within a particular territory, do in actual practice favour certain sectors of the economy, certain economic operators or a certain category of economic operators they are nevertheless considered to be selective. De facto selectivity can exist in particular if a measure, despite being applicable de jure to all undertakings and sectors of the economy in the same way, is of a nature that means that one or several particular sectors of the economy benefit especially (de facto sectoral selectivity). This is well illustrated by the case of GEMO which involved the provision of a public carcass disposal service free of charge to the owners and holders of carcasses of dead animals or batches of dead animals weighing more than 40 kilograms in total and to slaughterhouses. In theory the scheme was open to all undertakings and all sectors, in practice it was used essentially (indeed almost exclusively) by animal farmers and slaughterhouses,1217 for whom the free service was an economic advantage, especially in the light of the polluter pays principle. 437 Another example which has been considered by the Courts and the Commission is that of selectivity based on the gender of employees. In one case, Italy introduced a scheme reducing the level of employers’ sickness insurance contributions of undertakings by 4 % in the case of male employees and by 10 % in the case of female employees. The Commission took the view that such a scheme was selective, since it favoured certain Italian sectors of production in which the use of female labour was particularly important, such as the textile, clothing, footwear and leather industries, and that it therefore amounted to a State aid.1218 Indeed, financial support for the struggling textile industry was probably the true objective. Italy subsequently did not even challenge the recovery decision issued by the Commission and was then held to have failed its obligations to implement the decision.1219 438 Not only de facto sectoral selectivity but also de facto material selectivity exists if the actual wording of a provision is not limited, but de facto the measure applies only to certain undertakings. One example illustrating the broad reach of the concept is that of the requirement of a minimum investment in order to qualify for a tax credit. De jure the tax credit may be available to all undertakings and sectors according to the same conditions. However, if the minimum investment required to qualify is high enough application of the measure is restricted in practice to undertakings with significant financial resources. According to both the Commission and the Courts, that is enough to consider the measure to be de facto materially selective. 1220 439 Another example concerned the reductions in capital tax which Italy granted to undertakings which became listed at an European stock exchange by a specified deadline. Both the Commission and the General Court took the view that the measures at issue were selective as in practice they actually favoured companies registered in Italy by comparison with companies not registered there, since the tax incentive, granted as an 436

1217

ECJ, Case C-126/01 GEMO [2003] ECR I-13769, para. 38. Com., OJ 1980 L 264/28 – Italy, partial taking-over by the State of employers’ contributions to sickness insurance schemes; for a critical comment see Mederer/Pesaresi/Van Hoof/Van de Casteele/ Hocine, para. 2.190–2.195: the scheme was said not to have been de facto selective, as all the undertakings in all sectors received the same reduction in respect of female employees. This argument is not convincing in itself, as it relates only to the purely legal aspect of the situation. The question was, however, whether the differences in employee structure between the individual sectors was actually so great as to justify describing the scheme as de facto selective. For more on this topic see also Commission, State aid N 41/ 1999 Denmark, Modification of a scheme for flat rate taxation for experts recruited abroad. 1219 ECJ, Case 203/82 Commission v Italy [1983] ECR 2525. 1220 GC, Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histo ´ lava and others v ´ rico de A Commission [2002] ECR II-1275, paras. 155–157; as well as Joined Cases T-269/99, T-271/99 and T-272/ 99 Territorio Histo´rico de Guizpu´zcoa and others v Commission [2002] ECR II-4217, para. 57. 1218

222

Arhold

B. The definition of State aid

440–441

II

exception to the normal rules governing tax treatment, was available to all undertakings taxable in Italy which were admitted to listing on a regulated market, and thus mainly benefitted companies registered in Italy. Moreover, such Italian companies benefitted from tax relief applied to worldwide profits, whereas other non-Italian companies which also benefitted from the aid scheme qualified only for tax relief on profits generated in Italy.1221 This last argument illustrates the (excessively) extensive interpretation of de facto selectivity by the EU Courts: in practice national capital tax schemes will always impact undertakings headquartered in the taxing State more than undertakings elsewhere. The consequence would be that any reduction of the existing rate of capital tax could constitute a selective advantage, a conclusion which not even the Commission considers reasonable.1222 On the contrary, in its Tax Notice the Commission takes the view that the fact that some firms or some sectors benefit more than others from a particular measure does not necessarily mean that they are caught by the competition rules pursuant to Article 107(1) TFEU. For example, measures designed to reduce the taxation of labour for all firms will de facto have a relatively greater effect on labour-intensive industries than on capital-intensive industries, without necessarily being selective for that reason. 1223 It is doubtful whether all the aforementioned examples live up to this maxim. (3) Justification due to the nature or inner structure of the (tax) system. Even if the 440 Commission has checked and decided at the first two stages that there is differentiation of undertakings in a comparable factual and legal situation that do benefit certain undertakings or sectors, the advantage conferred is nevertheless not selective, if the differentiation results from the nature or inner structure of the system. (a) Principles. As illustrated above, the question of selectivity has often arisen in 441 connection with schemes introduced in the context of national tax1224 or social security systems, although there have been a few cases – in particular as regards de facto selectivity – involving other fields such as the provision of infrastructure or other measures supposedly in the general interest, as well as the insolvency regulations of the Member States, and more recently also with regard to the introduction of emission trading allowances. As far as systems of taxation and social security are concerned the EU Courts recognized early on that certain kinds of differentiation are necessary due to the nature or internal structure of the system concerned. 1225 This potential justification was settled case law even prior to the Gibraltar judgement and is also reflected in the Commission’s Tax Notice. Thus, measures which are necessary for the functioning of the system due to economic reasons are considered justified. 1226 The examples for cases of justified differentiation referred by the Commission’s Tax Notice include the following: 1221 Commission decision [2006] OJ L 94/42, para. 30 – Aid scheme C 8/2004 implemented by Italy in favour of newly listed companies, confirmed by GC, Case T-211/05 Italy v Commission [2009] II-2777, paras. 122–123; as the measure was selective in several ways the ECJ had based its reasoning on selectivity because of the brief application period, ECJ, Case C-458/09 P Italy v Commission [2011] ECR I-179, paras. 56, 58–60, 62. 1222 For more on this see in particular Commission, State aid E 2/1998 Proposal for appropriate measures concerning Irish corporation tax (ICT,) OJ 1998 C 395/19. 1223 Commission, OJ 1998 C 384/3, para. 14 – Commission Notice on the application of the State aid rules to measures relating to direct business taxation. 1224 For a more detailed discussion of the State aid law aspects of the tax sector see Jaeger, in this commentary Part VI. 1225 As regard social security systems see ECJ, Cases C-173/73 Italy v Commission [1974] ECR 709, para. 15; and C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, para. 33. 1226 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 22.

Arhold

223

II

442–444

Art. 107 TFEU

– The progressive nature of an income tax scale or profit tax scale is justified by the redistributive purpose of the tax.1227 – Profit tax: cooperatives which distribute all their profits to their members are not taxed at the level of the cooperative when tax is levied at the level of their members. 1228 – It is inherent in the logic of the tax system that taxes paid in the State, in which the company is resident for tax purposes, should be taken into account. 1229 442 According to the Tax Notice, certain exceptions to the tax rules are, however, difficult to justify by the logic of a tax system. This is, for example, the case if non-resident companies are treated more favourably than resident companies1230 or if tax benefits are granted to head offices or to firms providing certain services (for example, financial services) within a group.1231 443 The Tax Notice states that it is important to distinguish between, on the one hand, the external objectives assigned to a particular tax scheme (in particular, social or regional objectives)1232 and, on the other, the objectives which are inherent in the tax system itself, namely to collect revenue to finance State expenditure. 1233 A measure which creates an exception to the application of the general tax system may be justified by the nature and overall structure of the tax system if the Member State concerned can show that that measure results directly from the basic or guiding principles of its (tax) system. 1234 444 While the General Court hat occasionally taken a rather broad interpretation of the concept of the nature or general structure of the system, the European Court of Justice normally takes a stricter approach. Example: In the case of the NOx-emissions trading system in the Netherlands the General Court considered that the fact that only the largest emitters were allowed to participate in the system providing emission allowances free of charge was not selective when viewed in the light of the purpose of the system.1235 Even if one were to take the view that the measure in question differentiated between undertakings and was, therefore, prima facie selective, in the present case that differentiation arose from the nature or overall structure of the scheme of which it was part, as the beneficiary undertakings were determined on the basis of their significant emissions of NOx and of the specific reduction standard to which they were subject. According to the General Court, ecological considerations justified distinguishing undertakings which emit large quantities of NOx from other undertakings. Again 1236, the General Court alleged that the interpretation of the constituent element of selectivity within the meaning of Article 107 (1) TFEU must take into account Article 11 TFEU 1227 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 24; confirmed by GC, Joined Cases T-127/99, T-129/99 and T-148/99 ´ lava and others v Commission [2002] ECR II-1275, para. 164. Territorio Histo´rico de A 1228 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 25; ECJ, Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-7611, paras. 71–72. 1229 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 26. 1230 Which was de facto the case in the Gibraltarian tax system, see supra point c) bb). 1231 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 26. 1232 Confirmed by GC, Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histo ´ lava ´ rico de A and others v Commission [2002] ECR II-1275, paras. 164–168. 1233 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 26; confirmed by ECJ, Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-07611, para. 69, with further references. 1234 ECJ, Case C-88/03 Portugal v Commission (‘Azores’) [2006] ECR I-7115, para. 81. 1235 See supra point c) bb) (c)(2). 1236 As in GC, Case T-210/02 BAA v Commission [2006] ECR II-2789.

224

Arhold

B. The definition of State aid

445–446

II

(integration of environmental protection requirements). 1237 On appeal, this reasoning was rejected by the European Court of Justice. The differentiation was based on a single quantitative criterion, the total installed thermal capacity of more than 20 MWth. That cannot be regarded as inherent to a scheme intended to reduce industrial pollution, 1238 since each NOx emission is ecologically harmful regardless of the size of the emitter. 1239 The Member State had failed to show that this distinguishing criterion was actually justified by the nature and the general scheme in question for any other reason. 1240 Member States are thus free to pursue employment or investment policy goals, albeit only insofar as the measures deployed apply equally to all undertakings/economic sectors in the same way.1241 If, however, specific measures were to be excluded from the scope of Article 107(1) TFEU for reasons related to the creation or preservation of jobs or the promotion of investments, this provision would no longer have any practical effect, since State aid is often granted precisely in order to create or save jobs or to promote economic development.1242 Therefore, in accordance with settled case law, a measure cannot escape classification as State aid within the meaning of Article 107(1) TFEU simply because of the purpose pursued.1243 The temporal limitation of a prima facie selective rule is a sure indication that the 445 rule concerned is not part of the general structural rules that may be justified by the nature or general structure of the scheme in question.1244 However, the limited temporal application of a general tax measure does not mean that measure can be characterised as selective if the limitation is inherent to the measure and the application period appears sufficient to allow all beneficiaries to whom this measure applies to seek to benefit from it.1245 In view of the circumstance that the differentiations within a reference framework – 446 be it by means of derogation or by using another regulatory technique having the same effects – constitute an exception and that they are thus prima facie selective, it is up to the Member State to justify them. The State has to prove that the differentiations within the system are justified ‘by the nature or general scheme’ of the system, i. e. whether they derive directly from the basic or guiding principles of that system. 1246 It is up to the courts to carry out the necessary comprehensive review of the characterisation of a measure as State aid which includes the examination whether a differentiation was due to the nature or general scheme of the system of which it formed part. Nevertheless, this judicial review can be limited in cases where the appraisals by the Commission are technical or complex in nature – a finding which itself is revisable by the courts. 1247 1237

GC, Case T-233/04 Netherlands v Commission (NOx) [2008] ECR II-591, para. 99–101. ECJ, Case C-279/08 P Commission v Netherlands (NOx) [2011] ECR I-7671, para. 76. 1239 Opinion of Advocate General Mengozzi in ECJ, Case C-279/08 P Commission v Netherlands (NO ) x [2011] ECR I-07671, para. 55. 1240 ECJ, Case C-279/08 P Commission v Netherlands (NO ) [2011] ECR I-07671, paras. 77–78. x 1241 ECJ, Case C-75/97 Belgium v Commission (Maribel) [1999] ECR I-3671, paras. 37–39. 1242 GC, Case T-445/05 Assogestioni and Fineco v Commission [2009] ECR II-289, para. 170. 1243 GC, Joined Cases T-127/99, T-129/99 and T-148/99 Territorio Histo ´ lava and others v ´ rico de A Commission [2002] ECR II-1275, para. 168. 1244 GC, Case T-222/04 Italy v Commission [2009] ECR II-1877, para. 65 (concerning a three-year income tax exemption). 1245 ECJ, Case C-417/10 3M Italia ECLI:EU:C:2012:184, para. 43. 1246 Commission Notice on the application of the State aid rules to measures relating to direct business taxation [1998] OJ C 384/3, para. 23. Settled case-law, e. g. ECJ, Case C-159/01 Netherlands v Commission [2004] ECR I-4461, para. 46; GC, Case T-222/04 Italy v Commission [2009] ECR II-1877, para. 65I; ECJ, Case C-452/10 P BNP Paribas v Commission ECLI:EU:C:2012:366, para. 121. 1247 ECJ, Case C-452/10 P BNP Paribas v Commission ECLI:EU:C:2012:366, paras. 102 et seq. with further references. 1238

Arhold

225

II

447–449

Art. 107 TFEU

Even if a differentiation is justified by the nature or inner structure of the system which it forms part of, it is also necessary to ensure that those differentiations are consistent with the principle of proportionality and do not go beyond what is necessary, in that the legitimate objective being pursued could not attained by less farreaching measures.1248 448 Moreover, it is necessary to ensure compliance with the requirement that a benefit must be consistent not only with the inherent characteristics of the (tax) system in question but also as regards the manner in which that system is implemented. It is therefore for the Member State concerned to introduce and apply appropriate control and monitoring procedures in order to ensure that specific (tax) measures introduced to the benefit of certain undertakings are consistent with the logic and general scheme of the system and to prevent the misuse of the differentiation. 1249 447

449

(b) Specific cases. The first time1250 that the European Court of Justice confirmed that a differentiated system of taxation was justified due to its nature and structure was in the case of a national system of tax on insurance – GIL Insurance.1251 The case concerned British legislation on value added tax transposing Article 13 of the Sixth VAT Directive, under which supplies of insurance and related services were originally exempted from VAT. In 1994 the VAT was replaced by a special Insurance Premium Tax (IPT) introduced as a tax on the receipt of insurance premiums by an insurer. In 1997, the standard rate of IPT was increased to 4 %, and a new ‘higher rate’ of IPT was introduced at 17.5 %. The higher rate corresponded at the time to the standard rate of VAT in the United Kingdom and applied only to insurance premiums relating to domestic appliances, motor cars and travel. As regards travel, the higher rate applied only to travel insurance sold through travel agents, whereas travel insurance sold directly by insurers was subject to the standard rate. As regards domestic appliances, the higher rate applied only where the insurer was connected with the supplier of the appliance, or where the insurance was arranged through the supplier, or where the supplier was paid a commission on the provision of insurance. Similar insurance sold through insurance brokers or directly by insurance companies was subject to the standard rate. The reason given for the introduction of the higher rate was to prevent ‘value-shifting’, which might have enabled suppliers of domestic appliances to take advantage of the exemption from VAT on supplies of insurance services by manipulating the prices attributed to the appliances and the corresponding insurance. More specifically, the concern was to prevent avoidance of VAT in connection with service contracts for the repair and maintenance of domestic appliances that took the form of contracts of insurance ancillary to the contracts of sale or rental of such appliances. Advocate General Geelhoed initially wished to solve the problem by adopting a new approach based on a differentiation between Articles 107 et seq. and Article 116 et seq. TFEU. He argued that the procedures under Articles 116 and 117 TFEU should apply with regard to public measures imposing a burden, whereas for distortions of competition caused by granting specific advantages Article 107 et seq. TFEU should apply. He added that State aid control policy is characterised by more rigorous provisions, more thorough supervisory machinery and wide implementing and monitoring powers for the Commission, and that therefore a clear distinction should be 1248

ECJ, Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-07611, para. 75. ECJ, Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-07611, paras. 73–74. 1250 The ECJ considered this to be a possibility in the referred Case C-355/00 Freskot [2003] ECR I5263, para. 86. The issue was held to be one for the referring national court to decide. 1251 ECJ, Case C-308/01 GIL Insurance Ltd and Others [2004] ECR I-4777, paras. 73–78. 1249

226

Arhold

B. The definition of State aid

450–451

II

drawn between the two competences.1252 As a newly introduced higher rate of tax was a burden and not an advantage the measure was not State aid, but rather a distortionary measure that had to be assessed in terms of Articles 116 et seq. TFEU. 1253 The Court did not agree with that approach, preferring to rule – for the first time – that the measure in question was justified by the nature and the general scheme of the system. To that extent the Court accepted that the higher rate of IPT and the VAT formed part of an inseparable whole, which had been the aim pursued in introducing the higher rate, i. e. that the rate was introduced to counteract the practice of taking advantage of the difference between the standard rate of IPT and that of VAT by manipulating the prices of rental or sale of appliances and of the associated insurance. Such conduct would have given rise to a loss of income in terms of VAT receipts and to shifts in the conditions of competition in the domestic appliance sector. In that respect the Court observed that the measure did not constitute a derogation from the general system of taxation of insurance in the United Kingdom.1254 In its AEM and AEM Torino judgment, the European court of Justice has also 450 recognised that a different treatment under a national system of public charges (in casu increased charges for access to and use of the national electricity transmission system) that is intended to offset the advantage created for certain undertakings as a result of the implementation of a directive may be justified by the nature and general scheme of the system of charges in question.1255 In its 2007 judgment in Bouygues Te´le´com the General Court once again took the view 451 that a measure in question was not selective as it was justified by the nature and general scheme of the system, this time laid down by the relevant European Directive. 1256 The dispute related to the two stage granting of licences for the introduction of UMTS mobile and wireless communication systems in France. As only two applications were received by the first deadline (SFR and FT Mobile, which was later renamed Orange), the French authorities – after having provisionally issued the first two licences, with respect to which the successful bidders demanded and were given an assurance of equal treatment with the operators who would ultimately be granted a licence – considered a supplementary call for applications necessary to ensure genuine competition. The second call for applications ended with Bouygues Te´le´com being granted the third licence for a substantially lower price. In order to ensure equal treatment, the original financial terms for the first two licences were thereupon revised down retrospectively. Bouygues sought to challenge that measure by lodging a complaint with the Commission, which decided that the measure did not entail aid elements as no relevant selective advantage had been granted. The complaint filed against the decision was dismissed by the General Court on the grounds that the French State’s partial abandonment of claims against Orange and SFR did not mean that it granted a selective advantage, as the nature and general scheme of the system justified the foregone of resources.1257 The General Court focused in particular on the assumption that the Community framework for telecommunications services was based 1252 Opinion of Advocate General Geelhoed in ECJ, Case C-308/01 GIL Insurance Ltd and Others [2004] ECR I-4777, para. 65. 1253 Opinion of Advocate General Geelhoed in ECJ, Case C-308/01 GIL Insurance Ltd and Others [2004] ECR I-4777, paras. 86–87. 1254 For more on the judgment see Tutsch, ELR 2004, p. 264; as Robertson, ECLR 2004, p. 603; Heidenhain EStAL para. 67. 1255 ECJ, Joined Cases C-128/03 and C-129/03 AEM and AEM Torino [2005] ECR I-2861, paras. 38–43. 1256 GC, Case T-475/04 Bouygues and Bouygues Te ´le´com v Commission [2007] ECR II-2097, paras. 111– 112. 1257 GC, Case T-475/04 Bouygues and Bouygues Te ´le´com v Commission [2007] ECR II-2097, paras. 108– 112.

Arhold

227

II

452

Art. 107 TFEU

on equal treatment of operators for the award of licences and the calculation of any fees and that it left the Member States free to choose the procedure for the award of licences, provided that the principles of freedom of competition and equality of treatment were respected.1258 On appeal, the European Court of Justice agreed with the Opinion of Advocate General Trstenjak and rejected the General Court’s reasoning. The appeal failed nonetheless, as the Court found that the waiving of claims was not imputable to the State because of the obligatory nature of the rules of EU law that caused the measure. 1259 The requirements of secondary EU law had made the reduction inevitable. The French authorities had to choose between three options open to them: re-commencing the entire procedure ab initio; launching a new call for additional applications without retroactively amending the amount due from Orange and SFR by way of UMTS licence fees; or launching a new call but with a retroactive amendment of those fees. The option of recommencing the procedure ab initio would have made it impossible to meet the deadline fixed by EU law for the introduction of the UMTS services. Similarly, the option of requiring Orange and SFR to pay fees substantially higher than those charged to Bouygues Te´le´com would have constituted a violation of the prohibition on discrimination under EU law as neither Orange nor SFR had yet entered the market. In other words, the application of either one of those two options would not have enabled the French authorities to comply with the requirements of EU law. In those circumstances, the third option, i. e. waiver of the claims at issue as a result of the retroactive alignment of the UMTS licence fees due from Orange and SFR with those charged to Bouygues Te´le´com, was the only one compatible with EU law, meaning that the waiver could not be considered to be imputable to the State. 452 In the P Oy judgement1260 concerning the carry-forward of losses in cases of change of ownership the European Court of Justice stated that an exception to the prohibition on the deduction of losses in the case of a change of ownership, if established as the reference framework, may be justified by the nature or general scheme of the system of which it forms part if the exception is guided by objectives such as avoiding trade in losses.1261 If the exception is based on regional development or social cohesion policy objectives which are unrelated to the tax system, its prima facie selectivity cannot be justified by the inner structure of the tax system.1262

V. Distortion of competition Bibliography: Bacon, European Community law of State aid, 2009, 93; Bartosch, Die neuen Gruppenfreistellungsverordnungen im EG-Beihilfenrecht, NJW 2001, 921; Jaeger, Systemfragen des More EconomicApproach im Beihilferecht, WuW 2008, 1064; Kahl, Das o¨ffentliche Unternehmen im Gegenwind des europa¨ischen Beihilferegimes, NVwZ 1996, 1082; Koenig/Ku¨hling, Reform des EG-Beihilfenrechts aus der Perspektive des mitgliedstaatlichen Systemwettbewerbs – Zeit fu¨r eine Neuausrichtung?, EuZW 1999, 517; Lefe`vre Staatliche Ausfuhrfo¨rderung und das Verbot wettbewerbsverfa¨lschender Beihilfen im EWG-Vertrag, 1977; Lu¨bbig/Ehlers, Beihilfenrecht der EU, 2. Aufl. 2009; Mederer/Pesaresi/Van Hoof, EU Competition Law Vol. IV – State Aid, 1. Aufl. 2008, Book one, Part 1, Chapter 6; Meyer, Ende gut, alles gut? – Zum Abschluss der Beihilfepru¨fung der deutschen Rundfunkgebu¨hren durch die Europa¨ische Kommission, EWS 2007, 341; Nicolaides/Kekelekis/Kleis, State Aid Policy in the European Community: Principles and Practice, 2. Aufl. 2008, Chapter I; Nordmann, Die neue de-minimis Verordnung im EG-Beihilfenrecht, GC, Case T-475/04 Bouygues and Bouygues Te´le´com v Commission [2007] ECR II-2097, para. 108. ECJ, Case C-431/07 P Bouygues and Bouygues Te´le´com v Commission [2009] ECR I-2665, paras. 98–104; as well as Opinion of Advocate General Trstenjak in Case C-431/07 P Bouygues and Bouygues Te´le´com v Commission [2009] ECR I-2665, paras. 114–117. 1260 ECJ, Case C-6/12 P Oy ECLI:EU:C:2013:525. 1261 ECJ Case C-6/12 P Oy ECLI:EU:C:2013:525 paras. 22, 26, 32. 1262 ECJ Case C-6/12 P Oy ECLI:EU:C:2013:525 paras. 27–30. 1258 1259

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EuZW 2007, 752; Rengeling, Das Beihilfenrecht der Europa¨ischen Gemeinschaften, KSE Bd. 32, 23; id., Grundlagen des Subventionsrechts und Kompetenzen aus der Sicht von Bund und La¨ndern, ZHR 152 (1988), 455; Sanchez-Rydelski, Handbuch EU Beihilfenrecht, 1. Aufl. 2003, 72; Sinnaeve, Die ersten Gruppenfreistellungen: Dezentralisierung der Beihilfenkontrolle?, EuZW 2001, 69; id., The Complexity of Simplification: The Commisssion’s Review of the de minimis Regulation, EStAL 2014. 261.

1. General Article 107(1) TFEU prohibits any aid ‘which distorts or threatens to distort compe- 453 tition’. This criterion is closely interlinked with the requirement that such aid ‘affect trade between Member States’ in Article 107(1) TFEU. Since anything that affects trade between Member States also threatens to distort competition, the Court of Justice has often examined both of these criteria jointly.1263 This approach differentiates State aid law from European antitrust law, which has meanwhile drawn a strict distinction between the criterion ‘affects trade between Member States’ and the criterion of ‘distortion of competition’. Some of the more recent higher court decisions on State aid law also separate the two prerequisites. 1264 The criterion of distortion of competition hardly has the effect of limiting the scope 454 of application of State aid law at all. The very wording of Article 107(1) TFEU makes it clear that this hurdle cannot be especially high. A potential distortion of competition is sufficient (‘threatens to distort’). Accordingly, this criterion has not effectively restricted the application of the State aid rules, as will be shown more clearly in the following. It is only of slight importance in the decision-making practice and generally plays only a minor role in the Commission’s reasoning.1265 This is in stark contrast to Article 101(1) TFEU, in which this criterion plays a much 455 more central role. It is for this reason that the case law has deliberately not drawn any parallels between these two areas of law.

2. Requirements for the existence of a distortion of competition a) Starting point. In a certain sense, ascertaining the existence of a distortion of 456 competition is virtually automatic, i. e. it is generally deemed to exist. According to the consistent case law, the Commission is not obliged to prove an actual distortion of competition, but merely has to examine whether the State aid is liable to distort competition.1266 Any grant of aid to an undertaking exercising its activities in the Community market can, in the assessment of the Community courts, bring about a distortion of competition.1267 The point of departure here is the Philip Morris case law, according to which 457 competition is already distorted if a measure mitigates the burden imposed on a beneficiary undertaking and thereby strengthens its position as regards competing undertakings.1268 1263

Cf. for example ECJ, C-66/02, – Italy v Commission ECR 2005, I-10901, mn. 112 et seqq. GC Case T-222/04 Italy v Commission [2009]II-1877, mn. 38. 1265 Cf. Commission, OJ 2008 L 239/32 – Privatisation of Bank Burgenland, where the Commission (in a recovery decision!) completely dispenses with the substantiation of the distortion of competition. 1266 ECJ Case C-184/04 Unicredito Italiano [2005] ECR I-11137, mn. 54; GC Case T-222/04 Italy v Commission [not yet in official ECR], mn. 38; ECJ Cases C-66/02 Italy v Commission [2005] ECR I-10901, mn. 111; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 44. 1267 GC Cases T-92/00 and T-103/92 Diputacio ´ lava v Commission [2002] ECR II-1385, ´ n Foral de A mn. 72; T-222/04 Italy v Commission [not yet in official ECR], mn. 43. 1268 ECJ Cases 730/79 Philip Morris v Commission [1980] ECR 2671, mn. 11; 295/85 France v Commission [1987] ECR 4393; mn. 24; C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, mn. 131; C-53/00 Ferring [2001] ECR I-9067, mn. 21. 1264

Solte´sz

229

II 458

458–461

Art. 107 TFEU

According to sporadic decisions, in case of wrongfully granted State aid (i. e. aid that has not been notified), the Commission is subject to a less comprehensive duty to investigate, i. e. it should not be obliged to demonstrate the real effect of such aid on the competition, since such an obligation would favour those Member States which grant aid in breach of the duty to notify pursuant to Article 108(3) sentence 3 TFEU to the detriment of those Member States that have already notified the aid in advance. 1269 This is an impermissible petitio principii, as a granting of aid is only in violation of the ‘standstill clause’ in Article 108(3) sentence 3 TFEU if any distortion of competition exists at all. Consequently, there cannot be any room for a distinction between unnotified and notified State aid within the framework of the criterion of distortion of competition. Accordingly, the more recent case law correctly does not take this approach, but examines the question of distortion of competition before ruling that the standstill clause applies.1270

b) Appreciability (‘de minimis’). aa) Meaning. The Community courts have frequently found that neither the relatively small amount of aid nor the relatively small size of the undertaking which receives it does not as such exclude the possibility of a distortion of competition.1271 Nonetheless, the Community lawmakers have introduced with the ‘de minimis Regulation’ (EC) No. 1407/20131272 a statutory exception to the prohibition of aid for small amounts of aid. This rule is based on the general enabling Regulation (EC) No. 994/98 of the Council.1273 State aid that meets the prerequisites set forth in the de minimis Regulation are deemed to be measures that do not meet the criteria set forth in Article 107(1) TFEU and thus are not subject to the notification obligation pursuant to Article 108(3) sentence 3 TFEU Treaty. 460 The de minimis Regulation does not make it clear whether in cases of ‘de minimis’ aid there is no ‘distortion of competition’ or the aid does not ‘affect trade between Member States’.1274 The arguments against the presence of a distortion of competition would appear to be more compelling, but the CJEU occasionally examines the prerequisites of the de minimis Regulation with regard to the effect on trade between Member States.1275 461 A legitimate question that is repeatedly raised is whether this legal exception is consistent with the TFEU. In point of fact, the Court of Justice has repeatedly stated that the Commission does not have to power to bindingly interpret Article 107(1) TFEU. 1276 Nonetheless, the CJEU appears to operate on the assumption that the predecessor to the de minimis Regulation – a simple communication from the Commission – is to be accepted as a valid legal rule,1277 so that must apply all the more to the current de minimis Regulation, which was enacted as a formal legal instrument. In numerous 459

1269 ECJ Case C-301/87 France v Commission [1990] ECR I-307, mn. 33; GC Cases T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 67; T-55/99 CETM v Commission [2000] ECR II-3207, mn. 76 et seqq., mn. 103. 1270 ECJ Case C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 32. 1271 ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 39; GC Case T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 46. 1272 OJ 2013 L 352/1, which has replaced the previous de minimis Regulation 1998/2006, OJ 2006 L 379/5. 1273 OJ 1998 L 142/1. 1274 Cf. Recital 32 of Regulation 1407/2013. 1275 ECJ Case C-172/03 Heiser v Finanzamt Innsbruck [2005] ECR I-1627, mn. 29 et seqq. 1276 ECJ Case C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 37. 1277 Cf. for example ECJ Cases C-382/99 The Netherlands v Commission [2002] ECR I-5163, mn. 22 et seqq.; C-409/00 Spain v Commission [2003] ECR I-1487, mn. 69 et seqq.; ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 40 et seq.; ECJ Case C-99/02 Italy v Commission [2002] ECR I-2289, mn. 93 et seq.

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judgments, the courts have also examined the minimis Regulation and/or its predecessor regulation. Where they are found not to apply, then only because they fail to meet certain individual prerequisites, that is to say, their validity as such is never fundamentally called into question.1278 There is a certain contradiction between the CJEU’s implicit assumption that the de minimis rule establishes a legal exemption from Article 107(1) TFEU and the repeated formulaic thesis of the Community courts that neither the relatively small amount of aid nor the relatively small size of the undertaking receiving the aid automatically excludes the possibility of a distortion of competition. 1279 So the case law is inconsistent, to say the least. For the practice, however, one can assume that at least the Commission considers 462 itself to be bound to the de minimis Regulation, and thus this dogmatic dispute will not really play a decisive role.1280 In this context it is also interesting that the de minimis Regulation has retroactive 463 affect, i. e. aid measures granted before 2014 which did not meet the conditions of the previous de minimis Regulation, can benefit from a general “amnesty”.1281 bb) ‘De minimis’ aid. The de minimis Regulation applies if the total amount of State aid granted to an undertaking does not exceed EUR 200 000 in a period of three fiscal years. The Regulation contains detailed provisions on the calculation of the cash value of these measures and essentially applies both to individual aid (ad hoc) and aid that is granted on the basis of a general regulation. The de minimis Regulation does not apply for certain sectors (e. g. the fishing industry and aquaculture, the primary production of agricultural products, exportrelated activities).1282 However, different from the previous de minimis Regulation which had excluded aid to undertakings in difficulty1283, the new de minimis rule allows companies undergoing financial difficulties to receive de minimis aid, only some “blatant cases” of undertakings that are clearly in difficulty, remain excluded 1284. This is a major improvement in terms of simplification given that this test (firm in difficulties) was of a very complex nature and raised many questions, which seemed somehow disproportionate considering the small amounts of aid at stake. Since 2006 some fundamental changes have been made in comparison with previous regulations, in particular Regulation (EC) 69/2001.1285 For example, the de minimis ceiling has been increased from EUR 100 000 to EUR 200 000.1286 Additionally, resources of Community origin must be taken into account when calculating the amount of the aid (e. g. co-financing by ERDF).1287 For the purpose of the calculation whether the de minimis threshold has been reached, all aid which has been granted to a “single undertaking” has to be added. The new de

1278 ECJ Cases C-278/00 Greece v Commission [2004] ECR I-3997, mn. 70 et seqq.; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 58; C-280/00 Altmark Trans [2003] ECR I-7747, mn. 80. 1279 ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 39; GC Case T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 46; ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 81. 1280 Sinnaeve EStAL 2014, 261, 262. 1281 Article 7(1) of the de minimis Regulation. For details see Sinnaeve EStAL 2014, 261, 272. 1282 Cf. the differentiated provision in Article 1 and in Recitals 5 ff. of the de minimis Regulation. 1283 Recital 7 of the “old” de minimis Regulation 1998/2006. 1284 See Article 4(6) a) of the de minimis Regulation. For details see Sinnaeve EStAL 2014, 261, 269. 1285 OJ 2001 L 10/30. 1286 Article 3(2) of the de minimis Regulation. A lower ceiling exists for undertakings that do business in the realm of the road transport sector: EUR 100,000/3 fiscal years. 1287 Article 2(5) of the de minimis Regulation.

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minimis Regulation has now, for the first time, introduced a definition what constitutes an “undertaking”, hereby basically including all companies of a group.1288 The new de minimis Regulation also includes for the first time provisions which apply in mergers or acquisition scenarios. In this case for the purpose of determing the threshold all de minimis aid granted to any of the parties before has to be taken into account. However, any de minimis aid lawfully granted before the transaction shall remain lawful1289, that means even if the EUR 200,000 threshold is being exceeded (by adding all de minimis aid granted to both parties), the amounts which have been lawfully received in the past under the de minimis rule are not put into question (but the merged entity cannot receive additional de minimis aid)1290. If, on the other hand one undertaking splits into two or more separate undertakings, de minimis aid granted prior to the split has to be allocated to the undertaking that benefited from it, which is in principle the undertaking taking over the activities for which the de minimis aid was used. If such an allocation is not possible, the de minimis aid shall be allocated proportionately.1291 The three-year period in this regard is flexible, i. e. every time de minimis aid is granted, it is necessary to ascertain the total de minimis aid granted not only in the ongoing fiscal year, but also in the preceding two fiscal years (on a “rolling basis”). 1292 The Commission deems the time of the granting in this context to be the moment at which the legal right to receive the aid was conferred on the undertaking, and not the possibly later date of the disbursement of the funds.1293 Should the total amount of aid granted with a given measure exceed the de minimis ceiling, it is not possible to lay claim to a pro rata release; rather, the benefits conferred by the Regulation will be completely forfeited. In order to ensure that the total amount of aid granted within the framework of the de minimis rule to one and the same undertaking does not exceed the EUR 200 000 ceiling within a period of three fiscal years, the de minimis Regulation provides for stringent monitoring and transparency obligations. Specifically, the respective Member State may not grant the aid until it has received a declaration from the undertaking listing all other de minimis aid it has received in the fiscal year involved, as well as in the previous two fiscal years, and it has verified that the new aid will not raise the total amount of de minimis aid to a level above the de minimis ceiling.1294 Since the aid recipient must take into account all of the State aid that went to its subsidiaries (in the context of the de minimis Regulation, the term ‘undertaking’ comprises the entire group), complying with these principles entails a considerable administrative expense for the aid recipient. Therefore, it frequently is not really practical for large undertakings to avail themselves of de minimis aid. The Member State can, however, escape these requirements, by setting-up a (non-compulsory) central register for all de minimis measures.1295 cc) Limitation to ‘transparent State aid’ – determination of the ‘de minimis’ aid element. The de minimis Regulation is applicable only to ‘transparent aid’, i. e. aid in 1288

Article 2(2) of the de minimis Regulation. Article 2(8) of the de minimis Regulation. 1290 See Sinnaeve EStAL 2014, 261, 271. 1291 Article 2(9) of the de minimis Regulation. 1292 Cf. Recital 10 of the de minimis Regulation. 1293 Cf. Article 3(4) of the de minimis Regulation. This is a general legal principle, cf. Commission, OJ 2002 L 307/1 (18) – Graf von Henneberg, as well as the ‘old de minimis Regulation’, OJ 2001 L 10/30, Recital 5. 1294 Cf. specifically Article 6(1) of the de minimis Regulation. 1295 Article 6(2) of the de minimis Regulation. 1289

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respect of which it is possible to calculate precisely the gross grant equivalent of the aid ex ante without a need to undertake a risk assessment (Article 4 of the de minimis Regulation). This limitation to ‘transparent aid’ corresponds to a general, more recent policy of the Commission that block exemptions apply only to a very restricted extent to the loans, capital injections, and above all guarantees, which are very popular with the Member States.1296 Under the new de minimis Regulation, aid comprised in loans are only treated as 475 transparent de minimis aid where the gross grant equivalent has been calculated on the basis of market interest rates prevailing at the time of the grant. 1297 Aid comprised in capital injections are not considered as transparent de minimis aid, unless the total amount of the public injection does not exceed the de minimis ceiling (which is seldom the case).1298 Aid comprised in risk capital measures are likewise not considered as transparent de minimis aid, unless the risk capital scheme concerned provides capital only up to the de minimis ceiling to each target undertaking.1299 dd) Treatment of guarantees under the de minimis Regulation. One tightening-up 476 of the rules that plays a very important role for State aid practice is the ‘safe harbour’ rule for guarantees pursuant to Article 4 (6) of the de minimis Regulation. Under this rule, guarantees are treated as ‘transparent’ de minimis aid if the guaranteed part of the loan1300 does not exceed EUR 1.5 million per undertaking and the duration is limited for five years.1301 Additionally, there is a further option for the Member States: guarantees are also 477 considered as transparent if, before implementation, the methodology to calculate the gross grant equivalent of the guarantees has been accepted following notification of this methodology to the Commission, and the approved methodology explicitly addresses the type of guarantees and the type of underlying transactions at stake in the context of the application of this Regulation.1302 ee) Cumulating of aid. Under the previous rules (before 2006), it was possible to carry 478 out a generous cumulation of de minimis aid with other State aid. Since de minimis aid does not comprise State aid within the meaning of Article 107(1) TFEU, it was not to be taken into account in the examination of compatibility pursuant to Article 107(3) TFEU. Thus, the ‘first de minimis’ Regulation 69/2001 provided the Member States with a certain amount of leeway. In its fifth Recital, it allowed de minimis aid to be granted alongside an approved or a released aid, regardless of the intended purpose. 1303 Accordingly, Member States could always – as icing on the cake, so to speak – grant de minimis aid in addition to an (often considerable) approved aid measure. 1304 The new ‘de minimis Regulation’ now imposes a strict prohibition of cumulation. 479 Pursuant to Article 5(2), de minimis aid may not be cumulated with State aid in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding that fixed by a block exemption Regulation or Decision adopted by the Commission. 1296

Cf. also Article 7(3) of the Regulation (EC) No. 800/2008, OJ 2008 L 214/3. For details see Article 4(3) of the de minimis Regulation. 1298 Article 4(4) of the de minimis Regulation. 1299 Article 4(5) of the de minimis Regulation. 1300 This provision does not apply for guarantees that are not assumed for a loan, such as guarantees on equity transactions, cf. Recital 18 of the de minimis Regulation. 1301 For details see Article 4(6) of the de minimis Regulation. Exceptions apply in the road transport sector: sum of EUR 750,000. 1302 Cf. end of Article 4 (6))(d) of the de minimis Regulation. 1303 For details see Sinnaeve EStAL 2014, 261, 271. 1304 Cf. for exampleCommission, N 512/2007 – Germany, Abalon Hardwood Hessen GmbH. 1297

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This is supposed to prevent circumvention of the maximum aid intensities provided in different TFEU legal instruments.1305 Thus, the earlier practice in granting subsidies as described above is no longer permissible.1306 480 Even though the cumulation of de minimis aid with other State aid is strictly forbidden, it seems possible to grant, after recovery of illegal aid, immediately new de minimis aid. It is however not possible to generally deduct the de minimis amount from aid to be recovered, since an aid measure is to be considered as indivisible. 1307 c) Cases outside the ‘de minimis’ rule. Outside of the scope of application of the de minimis Regulation, the criterion of distortion of competition has scarcely attained any practical importance.1308 This is conditioned by both the postulate of the case law that the Commission is not obliged to prove an actual distortion of competition, as it is sufficient if the aid is liable to distort competition1309, and the Philip Morris case law, according to which the financial strengthening of an undertaking leads automatically to a distortion of competition.1310 Consequently, in the Commission’s practice, it hardly spends any effort at all on substantiation. 482 As a rule, the case law and Commission practice expressly dispense with a definition of the relevant product and the relevant geographic market1311 – although this is actually supposed to take place. Nor, according to the case law, is it necessary to examine the market structure and the competitive relationships; 1312 specifically, the Commission need not perform an analysis of the competitive relationships supported by statistics. 1313 What it ultimately winds up with is a summary representation of the competitive relationships and a more or less plausible substantiation of the actual or threatened distortion of competition. Various earlier decisions that had placed more stringent requirements on a description of the market situation1314 have most likely meanwhile been overtaken by this more recent case law. This – rather slipshod – treatment of economic contexts in relation to the criterion of distortion of competition conflicts to a certain degree with the oft-propagated ‘new economic approach’. 483 Operating aid generally leads to a distortion of competition.1315 The situation is similar in markets that are characterised by intense competition, 1316 as well as markets that are characterised by redundancies and/or overcapacities. 1317 The fact that an economic sector 481

1305

Recital 12 of the de minimis Regulation. Sinnaeve EStAL 2014, 261, 271. 1307 It is, however, clear that aid can lack an appreciable effect (i. e. not lead to a distortion of competition), even if the conditions of the de minimis regulation are not fulfilled, see Sinnaeve EStAL 2014, 261, 263. 1308 Sinnaeve EStAL 2014, 261, 263. 1309 ECJ Cases C-148/04 Unicredito Italiano [2005] ECR I-11137, mn. 54; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 44. 1310 ECJ Cases 730/79 Philip Morris v Commission [1980] ECR 2671, mn. 11; C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, mn. 131. 1311 GC Case T-298/97 Alzetta Mauro v Commission [2000] ECR II-2319, mn. 95. 1312 GC Case T-298/97 Alzetta Mauro v Commission [2000] ECR II-2319, mn. 95. 1313 GC Case T-204/97 EPAC v Commission [2000] ECR II-2267, mn. 85. 1314 ECJ Cases C-329/93, C-62/95 and C-63/95 Germany v Commission [1996] ECR I-5151, mn. 53. 1315 ECJ Cases C-494/06 P Commission v Italy [2009] I-3639, mn. 54; C-288/96 Germany v Commission [2000] ECR I-8237, mn. 77 et seq., 85; C-156/98 Germany v Commission [2000] ECR I-6857, mn. 30; GC Cases T-55/99 CETM v Commission [2000] ECR II-3207, mn. 83; T-214/95 Vlaamse Gewest v Commission [1998] ECR II-717, mn. 43; T-459/83 Siemens v Commission [1995] ECR II-1675, mn. 48, 77. 1316 GC Cases T-214/95 Vlaamse Gewest v Commission [1998] ECR II-717, mn. 46; T-298/97 Alzetto Mauro v Commission [2000] ECR II-2319. 1317 ECJ Cases 62/87 E ´ xecutif Region Wallon v Commission [1988] ECR 1573, mn. 13; C-142/87 Belgium v Commission [1990] ECR I-959, mn. 37; C-278/92 Spain v Commission [1994] ECR I-4103, 1306

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has been liberalised, is likewise, from the point of view of the Community bodies, means that the aid is liable to have an actual or potential effect on competition. 1318 In order to establish the existence of distortion of competition, it is not necessary to 484 prove that the beneficiary of the aid uses it to offer lower prices or better conditions. Even if the terms offered by the aid recipient are not more favourable than those of its non-subsidised competitors, this does not exclude the presence of aid. The decisive question is therefore not whether the aid recipient ‘undercuts’ its competitors, 1319 but merely if the recipients of the aid are granted an advantage. This is welcome in principle, since an unfair distortion of competition can already consist of the fact that the aid recipient does not charge the (higher) prices to which it would have been compelled under normal market conditions. It goes without saying that it is even less necessary to prove that competitors suffer 485 damage due to the granting of aid.1320 Nor is it of any relevance if the Member State granting the aid alleges it did so merely for the purpose of offsetting an objective competitive disadvantage of the domestic undertaking. 1321 The lack of a distortion of competition would theoretically be conceivable in those 486 cases in which the recipient of the State measure is active in a sector that is not subject to competition.1322 In such cases, however, the recipient would generally fail to meet the definition of an ‘undertaking’ anyway, since in the field of competition law, the term ‘undertaking’ comprises an entity engaged in an economic activity1323, i. e. the offering of goods or services on a given market1324. Since this definition of an undertaking is normally not met by activities that are non-competitive, for that very reason, Article 107(1) TFEU would not apply in the first place. The case law has examined whether the activity of a given undertaking is competitive in isolated cases, but then only in connection with the question of distortion of competition. On this point, it was very stringent, as could be expected. For example, the CJEU clarified that physicians are also subject to economic competition.1325 In this context, it is sufficient to establish the presence of distortion of competition if the relevant sector is ‘characterised by competition to a certain degree’ or the market ‘is open to competition’. And even if competition is lacking in a certain area, the aid recipients involved could always expand into other markets that are open to competition, thus bringing about distortions in other sectors.1326 The mere fact that the public authorities have decided to assign a certain service to an in-house provider, but not to an independent (private) third party, does not exclude a possible distortion of competition.

mn. 41; C-305/88 Italy v Commission [1991] ECR I-1603, mn. 26; Immenga/Mestma¨cker/Ehricke WettbR, Volume 1 of Part 1, Art 87(1) TEC, mn. 110. 1318 ECJ Case C-409/00 Spain v Commission [2003] ECR I-1487, mn. 75. 1319 Cf. ECJ Case C-494/06 P Commission v Italy [2009] I-3639, mn. 50. 1320 ECJ Case C-372/97 Italy v Commission [2004] ECR I-3679, mn. 62. 1321 ECJ Case C-372/97 Italy v Commission [2004] ECR I-3679, mn. 67. 1322 Cf. on this issue GC Case T-222/04 Italy v Commission [not yet in official ECR], mn. 58. For example, in case of legal monopolies, see Commission Decision, N 356/2002, OJ 2002 C 232/2, para. 57– 77 – United Kingdom – Network Rail,. 1323 ECJ Cases C-309/99 Wouters ECR I-1577, mn. 46 et seq.; C-41/90 Ho ¨ fner and Elser [1991] ECR I1979, mn. 21. 1324 ECJ Cases 118/85 Commission v Italy, [1987] ECR 2599, mn. 7; C-35/96 Commission v Italy [1998] ECR I-3851, mn. 36; C-475/99 Ambulanz Glo¨ckner [1998] ECR I-8089, mn. 19; C-218/00 Cisal v INAIL [2002] ECR I-717, mn. 22 et seq.; C-180-184/98 Pavlov anda [2000] ECR I-6451, mn. 74 et seq. 1325 ECJ Case C-172/03 Heiser v Finanzamt Innsbruck [2005] ECR I-1627, mn. 57. 1326 GC Case T-222/04 Italy v Commission [not yet in official ECR], mn. 51 et seqq.

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d) Obligation to state reasons. The mild substantive criteria for the presence of a distortion of competition are also reflected in the requirements for the (formal) obligation to state reasons for decisions. To substantiate a distortion of competition, it suffices if the Commission lists in its decision the circumstances that led it to make that decision. To this end, the decision need only state the purpose of the undertaking (i. e. the market involved), as well as the market position of the undertaking, and make a general reference to the distorting effect of State aid on competition. 1327 488 If the aid is granted in a liberalised sector in which the distortion of competition associated with the granting of aid is obvious, the Commission can limit itself to a brief statement of reasons. In such cases it is sufficient to state that the aid reduces the financial burden of the beneficiary undertaking, thus strengthening its competitive position in relation to its competitors.1328 If the Commission makes reference in its statement of reasons to guidelines it has published and these guidelines explain in more detail that a certain kind of State aid (in the specific case, operating aid) automatically leads to distortions of competition, this connection need not be explained in detail in the decision.1329 487

VI. Effect on trade between Member States Bibliography: Bacon, European Community law of State aid, 2009, 93; Heidenhain, Editorial zum Urteil “Heiser”, EuZW 2005, 289; Klein/Haratsch, Mitgliedstaatliche Regionalfo¨ rderung insbesondere zugunsten kleiner und mittlerer Unternehmen (KMU) aus der Sicht des EG-Rechts, EWS 1997, 410; Knopf, Europarecht und kommunale Selbstverwaltung, DVBl 1980, 106; Koenig/Ku¨hling, Grundfragen des EGBeihilfenrechts, NJW 2000, 1065; Mederer/Pesaresi/Van Hoof, EU Competition Law Vol. IV – State Aid, 1. Aufl. 2008 Book one, Part 2, Chapter 7; Modlich, Der zwischenstaatliche Handel in Art 92 I EGV, EWS 1996, 405; Mu¨ller-Graff, Die Erscheinungsformen der Leistungssubven- tionstatbesta¨nde aus wirtschaftlicher Sicht, ZHR 152 (1988), 403; Nicolaides/Kekelekis/Kleis, State Aid Policy in the European Community: Principles and Practice, 2. Aufl. 2008, Chapter I; Niemeyer/Hirsbrunner, Anstaltslast und Gewa¨hrtra¨gerhaftung bei Sparkassen und die Zwischenstaatlichkeitsklausel in Art. 87 EG, EuZW 2000, 364; Rengeling, das Beihilfenrecht der Europa¨ischen Gemeinschaften, KSE Bd. 32, 23 ff; Sanchez-Rydelski, Handbuch EU Beihilfenrecht, 1. Aufl. 2003, Kapitel 2 § 1, 74; Schwarze/Weitbrecht, Grundzu¨ge des europa¨ischen Kartellverfahrensrecht 2004; Solte´sz, Die Zwischenstaatlichkeitsklausel(n) im Europa¨ischen Kartell-und Beihilfenrecht – Parallelen, Gegensa¨tze und Perspektiven, Recht und Wettbewerb, Festschrift fu¨r Rainer Bechtold zum 65. Geburtstag 2006, 501.

1. General Article 107(1) TFEU prohibits aid granted by a Member State only ‘in so far as it affects trade between Member States’. On the basis of the Philip Morris case law 1330, a broad interpretation of the interstate clause has been established. The criteria placed on interstate trade are extremely mild. As with the criterion of distortion of competition, the question of whether aid ‘affects trade between Member States’ leads to the very points of examination that the Commission almost routinely affirms. Nowadays, the Commission’s practice almost completely dispenses with determining and evaluating the specific effects on trade between Member States. In fact, on occasion the Commission goes so far as to not even mention this criterion.1331 490 The prohibition on restraints of trade in Article 101(1) TFEU contains a similar requirement. Under this provision it is necessary that the actions involved ‘may’ affect 489

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GC Case T-171/02 Regione autonoma della Sardegna v Commission [2005]ECR II-2123, mn. 73 et seqq. GC Case T-55/99 CETM v Commission [2000] ECR II-3207, mn. 76 et seqq., 100 et seqq. 1329 ECJ Case C-288/96 Germany v Commission [2000] ECR I-8285, mn. 84 et seqq. 1330 ECJ Case 730/79 Philip Morris v Commission [1980] ECR 1980, 2671, mn. 11. 1331 Cf. Commission, OJ 2008 L 239/32 – Privatisation of Bank Burgenland (a recovery decision!). 1328

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trade between Member States. As with the question of distortion of competition (which is likewise a criterion in Article 101(1) TFEU), however, the clause on aid which ‘affects trade between Member States’ in Article 107(1) TFEU plays an entirely different role than it does in antitrust law. Accordingly, neither the case law nor the Commission have drawn parallels between the two provisions.

2. Application in practice a) Point of departure. Article 107(1) TFEU prohibits aid ‘in so far as it affects trade 491 between Member States’. Taken precisely, this language presumes an actual effect. However, the case law has never drawn such a conclusion at any time. Objectively, it allows any potential effect on trade between Member States to suffice for fulfilment of the criterion defined in the Article 107(1). According to the consistent case law, the Commission is in fact not obliged to provide proof that the aid has an actual effect on trade between the Member States, but merely has to examine whether it is likely to affect such trade.1332 b) Requirement of appreciability? In contrast to Articles 101 and 102 TFEU, under 492 the case law, the concept of ‘effect on trade’ in Article 107 TFEU do not require appreciability. Any aid that is granted to an undertaking that is active in the Community can affect the trade between Member States. 1333 The Community courts have determined on several occasions that neither the relatively small amount of aid nor the relatively small size of the undertaking which receives it excludes as such the possibility of an effect on trade between Member States or the possibility of a distortion of competition.1334 The mere granting of aid to an undertaking that trades with other Member States would therefore automatically lead to the conclusion of an effect on such trade without any specific examination.1335 c) Criteria for determining effect on trade between Member States. The point of 493 departure for determining an effect on the trade between Member States is – as with the question of distortion of competition – the Philip Morris case law, according to which an effect on the trade between Member States already exists if a measure mitigates the burden imposed on a beneficiary undertaking and thereby strengthens its position as regards competing undertakings from other Member States. 1336 In this connection, the fact that an economic sector was liberalised on the Community level is likely to create an actual or potential effect of the aid on the competition as well as affect trade between Member States.1337 A strong indication of an effect on trade between Member States is if the sector involved is characterised by strong competition. 1338 1332 ECJ Cases C-148/04 Unicredito Italiano [2005] ECR I-11137, mn. 54; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 44; GC Case T-222/04 Italy v Commission [not yet in official ECR], mn. 38; ECJ Case C-494/06 P Commission v Italy, not yet in official ECR, mn. 50. 1333 GC Cases T-92/00 and T-103/92 Diputacio ´ lava v Commission [2002] ECR II-1385, ´ n Foral de A mn. 72; T-222/04 Italy v Commission [not yet in official ECR], mn. 43. 1334 ECJ Cases C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 41; C280/00 Altmark Trans [2003] ECR I-7747, mn. 81; C-278/00 Greece v Commission [2004] ECR I-3997, mn. 69; C-372/97 Italy v Commission, [2004] ECR I-3679, mn. 53. 1335 Cf. for example ECJ Case C-278/00 Greece v Commission [2004] ECR I-3997, mn. 70 et seq. 1336 ECJ Cases 730/79 Philip Morris v Commission [1980] ECR 1980, 2671, mn. 11; 295/85 France v Commission [1987] ECR 4393, mn. 24; C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, mn. 131; C-53/00 Ferring [2001] ECR I-9067, mn. 21. 1337 ECJ Cases C-409/00 Spain v Commission [2003] ECR I-1487, mn. 75; C-222/04 Ministero dell’Economia e delle Finanze et al. di Firenze anda [2006] ECR I-289, mn. 142. 1338 ECJ Cases C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 42; C278/00 Greece v Commission [2004] ECR I-3997, mn. 70 et seq.; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 54; C-409/00 Spain v Commission [2003] ECR I-1487, mn. 76 et seq.

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In particular, an effect on trade between Member States within the meaning of Article 107(1) TFEU is assumed if undertakings from various Member States are in competition with each other in the given market, e. g. if the products involved are the subject of trade between the Member States or the services are offered across borders.1339 In the rare cases in which absolutely no intra-Community trade exists, the case law deems the test not to be met.1340 495 The beneficiary does not need to be involved in intra-Community trade itself, 1341 as aid granted by a Member State to an undertaking may help to maintain or increase domestic activity, with the result that undertakings established in other Member States would have less chance of penetrating the market of the Member State concerned. 1342 This should already be assumed if a Member State grants aid to an undertaking which contributes to the maintenance or increase of domestic production with the result that undertakings established in other Member States have less chance of exporting their products to the market in that Member State1343. Consequently, even a small amount of aid to a relatively small undertaking could trigger an effect on trade 1344, as there is no presumption that State aid to small and medium-sized enterprises (SME) would not have an effect on trade between Member States.1345 Moreover, the strengthening of an undertaking that had not been involved in intra-Community trade up to that point could put it in a position to penetrate the market of another Member State. 1346 496 The effects of aid schemes on trade between Member States have only been cursorily examined by the courts. The case law generally requires that an aid scheme, by its nature, benefit undertakings that are involved in intra-Community trade1347 (whereby the number of recipient undertakings and the exact amount of the aid granted need not be ascertained1348). For all intents and purposes, however, with the Philip Morris formula it would most likely be possible to argue that just about any aid scheme would affect trade between Member States due to a foreclosure effect. 497 Aid that may be of a relatively small amount on an individual level, but is potentially open to all, or a great number of, undertakings in a sector, can have effects on the trade between Member States if the sector has a large number of small undertakings. 1349 The fact that an aid scheme is generally also available to branches of undertakings from other Member States does not run counter to the assumption of an effect on trade between Member States.1350 494

1339 GC Cases T-447/93, T-448/93 and T-449/93 AITEC v Commission [1995] ECR II-1971, mn. 138 et seq. 1340 GC Case T-67/94 Ladbroke Racing v Commission [1998] ECR II-1, mn. 161. 1341 ECJ Cases C-393/04 and C-41/05 Air Liquide Industries v Serain and Lu ¨ ttich [2006] ECR I-5293, mn. 35; C-148/04 Unicredito Italiano SpA v Agenzia delle Entrate [2005] ECR I-11137, mn. 58. 1342 ECJ Case C-148/04 Unicredito Italiano SpA v Agenzia delle Entrate [2005] ECR I-11137, mn. 58. 1343 ECJ Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-4103, mn. 40; C75/97 Belgium v Commission [1999] ECR I-3671, mn. 47; Faber DVBl. 1992, 1346, 1353. 1344 GC Case T-230/95 BAI v Commission [1999] ECR II-139, mn. 77. 1345 GC Case T-298/97 Alzetta Mauro v Commission [2000] ECR II-2319, mn. 85. 1346 ECJ Cases C-66/02 Italy v Commission [2005] ECR I-10901, mn. 117 et seq.; C-494/06 P Commission v Italy [not yet in official ECR], mn. 57; C-222/04 Ministero dell’Economia e delle Finanze et al. di Firenze anda [2006] ECR I-289, mn. 143; C-148/04 Unicredito Italiano SpA v Agenzia delle Entrate [2005] ECR I-11137, mn. 58. 1347 ECJ Case 248/84 Germany v Commission [1987] ECR 4013, mn. 18. 1348 GC Case T-298/97 Alzetta Mauro v Commission [2000] ECR II-2319, mn. 87. 1349 ECJ Cases C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 43; C372/97 Italy v Commission [2004] ECR I-3679, mn. 57; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 57. 1350 ECJ Case C-66/02 Italy v Commission [2005] ECR I-10901, mn. 123.

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Even if the State measure only has a partial effect on the trade between Member 498 States, a negative decision by the Commission must always affect the entire amount of aid granted.1351 d) Trade with non-Member States. Trade between Member States can also be 499 affected if the aid recipient predominantly sells its products in non-Member States. This is due to the interdependence between the markets on which the undertakings in the Community are active, as well as the fact that the aid recipient can change its strategy at any time and begin to supply the Community market.1352 The more recent case law, however, has clarified that in such cases, stricter require- 500 ments are to be placed on the inference of an effect on trade between Member States. Particularly where the aid is not directly connected with the activity of the beneficiary undertaking in the Community, but is supposed to finance penetration into the market in non-Member States, it is not sufficient to invoke the recipient’s involvement in intraCommunity trade and its financial strengthening as an indication of an effect on the trade between Member States. Rather, additional factors must be present. Indirect effects on the intra-Community trade cannot be presumed, but must be specifically demonstrated.1353 e) Aid recipient with regional or local area of activity. Aid can affect trade between 501 Member States even if the beneficiary is only active on a local or regional basis and is not involved in trade across borders. The CJEU has repeatedly found that the question of whether aid is capable of affecting trade between Member States does not depend on the local or regional character of the services supplied or the scale of the field of activity concerned.1354 An illustrative example from the most recent case law on this subject is the Heiser 502 case, in which aid was to be found to exist even in the case of a slight tax benefit that was granted to an orthodontist working in Tirol1355. While conceding that this aid was ‘far’ below the de minimis ceiling, the Court then contented itself with pointing out that it ‘it is not inconceivable’ that orthodontists in Austria might be in competition with orthodontists in other Member States. The case law and Commission practice are equally stringent when it comes to the 503 area of public transport services. According to the Altmark judgment, it is by no means impossible that a public subsidy granted to an undertaking that which provides only local or regional transport services and does not provide any transport services outside its State of origin may nonetheless have an effect on trade between Member States. In point of fact, if a Member State grants a public subsidy to an undertaking, the supply of transport services by that undertaking may for that reason be maintained or increased, with the result that undertakings established in other Member States would have less chance of providing their transport services in the market in that Member State. 1356 The Commission has gone along with this stringent assessment completely in its subsequent 1351

ECJ Case C-66/02 Italy v Commission [2005] ECR I-10901, mn. 112 et seq. ECJ Case C-142/87 Belgium v Commission [1990] ECR I-959, mn. 35 et seqq. Cf. also ECJ Case 310/85 Deufil v Commission [1987] ECR 901, mn. 9 et seqq. 1353 ECJ Case C-494/06 P Commission v Italy [not yet in official ECR], mn. 60 et seqq. 1354 ECJ Cases C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 40; C280/00 Altmark Trans [2003] ECR I-7747, mn. 82; C-372/97 Italy v Commission [2004] ECR I-3679, mn. 60. 1355 ECJ Case C-172/03 Heiser v Finanzamt Innsbruck [2005] ECR I-1627, mn. 29 et seqq. 1356 ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 77 et seqq., with reference to ECJ Cases 102/87 France v Commission [1988] ECR 4067, mn. 19; C-305/89 Italy v Commission [1991] ECR I-1603, mn. 26. 1352

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decisions.1357 However, this is in contradiction to its earlier practice, in which it had ruled that public transport services do not involve trade between Member States. 1358 In the case of cableways, on the other hand, the Commission differentiates between cableways used for sporting activities in tourist resorts (effect on trade between Member States), cableways for purely local use (no effect on trade between Member States) and cableways which mainly satisfy general transport needs (effect on trade between Member States in view of the increasing liberalisation of the transport sector). 1359 A (virtually incomprehensible) contradiction to the extremely stringent evaluation of local public transport can be found in the Commission’s decision on the subsidising of a public swimming pool in Dorsten in Westphalia1360: The Commission ruled here that in view of the limited catchment area, this swimming pool did not provide any infrastructure services that were being traded across borders. The swimming pool was to be distinguished from the subsidising of a large recreational part which is designed for a national or even international market. However, this is not entirely consistent, since on the basis of the Philip Morris case law, a limited local sphere of influence does not in fact preclude the applicability of the interstate clause. On the contrary, it is sufficient if the aid puts the recipient in a position to maintain or increase its production, with the result that its competitors from other Member States have less chance of entering this market 1361. Such an argument would also be conceivable in the case of swimming pools, which could likewise be operated by foreign investors. The Commission also found that support rendered for the restoration of cultural monuments1362 did not constitute State aid – without addressing the Philip Morris formula in detail – even though the Brighton West Pier, which was the subject of the dispute, was unquestionably being used in a commercial manner, and thus came into question as an investment for foreign investors. Museums or other cultural infrastructure which do not attract visitors from other Member States have generally a purely local impact and are therefore unlikely to affect trade between Member States.1363 The same applies to news or media servives which, for linguistic and geographical reasons, have a locally restricted audience 1364 or to a conference centre, where the aid is unlikely to divert users from centres in other Member States 1365. There is also a certain amount of tension between the Commission’s practice in this regard and its decisions regarding the financing of public amusement parks, where it found that the interstate clause did apply, since such an attraction could ‘at least potentially affect tourist flows’.1366 According to the Commission, such parks increase tourist facilities in the region, particularly since the advertising for a given park shows how to get there from major European towns.1367 The Commission had therefore 1357

Cf. for example Commission, OJ 2009 L 97/14, mn. 86 et seqq. – Busunternehmen Su¨dma¨hren. Commission, XXIXth Report on Competition Policy, mn. 242 – Public transport in the lagoon area of Venice. 1359 Commission, N 860/01 – Austria, revitalising project of the Mutterer Alm. 1360 Commission, N 258/00 – Public swimming pool Dorsten. 1361 ECJ Cases 102/87 France v Commission [1988] ECR 4067, mn. 18 et seq.; C-305/89 Italy v Commission [1991] ECR I-1603, mn. 26. 1362 Commission, NN 17/02 – Brighton West Pier. 1363 Commission, N 630/2003 – Local Museums Sardinia; Commission, SA.34466 – Cyprus, Center for Visual Arts and Research,. 1364 Commission, N 458/2004 – Editorial Andaluza Holding; Commission, SA.33243 – Jornal de Madeira. 1365 Commission, N 486/2002 – Congress hall inVisby. 1366 Commission, OJ 2004 L 61/66(69) – Space Park Bremen; Commission, N 640/99 – France, Eurodisney; Commission, N 132/99 – Parco Navi. 1367 Commission OJ 2001 C 300/2, mn. 8 – Terra Mı´tica, SA. 1358

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presumed that the interstate clause would apply for a marina, which involved trade across borders.1368 The same principles apply for hotels with international guests.1369 The Commission likewise found that private French theatres1370 have an effect on trade between Member States, since they could attract an international audience. In a decision on Irish hospitals1371, the Commission found that there was no effect on trade between Member States. Although it assumed in its statement of reasons that hospitals are undertakings within the meaning of Article 107(1) TFEU1372, and thus a potential effect on trade between Member States could exist, in the specific case at hand it found that the granting of aid was free of discrimination (independent of the nationality of the operator), that the aid provided only a slight incentive to enter the Irish market and that the subsidies served to offset a shortage in medical services. This reasoning can certainly not be generalised, since these elements apply to a great number of aid schemes. In view of the increased liberalisation of the hospital sector and its practice on Article 106(2) TFEU (the Monti package) 1373, the Commission would certainly decide differently today.1374 The same direction is taken by the decision on the case of Italian natural gas service stations, which the Commission deemed not to have an effect on trade between Member States. The decisive factor in its ruling was the fact that due to the specific geographic location of the assisted service stations, they were not in competition with natural gas service stations in other Member States. 1375 The Commission’s very polemical statement of reasons (in which these aspects were described in detail), however, makes absolutely no mention of the Philip Morris case law, under which it is sufficient for applicability of the interstate clause if the financial situation of the recipient is improved, with the result that its competitors from other Member States have less chance of entering its market.1376 State support for the purchase of small commercial vehicles, which is granted to an undertaking that is engaged in business other than transport services at a solely local or regional level, where the vehicles are typically used for very short journeys, can be assumed not to affect trade between Member States. 1377 In the airport sector, according to the Commission’s previous guidelines, the competitive situation of the airports had to be examined in each individual case, taking into account such factors as the catchment area and the amount of the fees for use of the airport infrastructure and services. The Commission had defined four different categories for determining the extent to which airports compete with each other (large Community airports = Category A; national airports = Category B; large regional airports = Category C; small regional airports = Category D). In the Commission’s 1368

Commission, XXIXth Report on Competition Policy, mn. 242 – Marina die Stabbia. Commission, N 582/99 – Villa Romana srl. 1370 Commission, N 818/99 – France, parafiscal tax on spectacles and concerts. Cf. alsoCommission, OJ 2007 L 47/4 – Prerov Municipal Hall. 1371 Commission, N 543/2001 – Ireland, Capital Allowances for Hospitals. 1372 Cf. ECJ Case C- 157/99 Smits v Stichting CZ Groep Zorgverzekeringen [2001] ECR I-05473, mn. 53. 1373 Cf. Article 2 and Recital 16 of the Commission Decision, OJ 2005 L 312, which clarifies that aid to hospitals that are active on a regional basis, can also lead to an effect on trade between Member States, as well as the succeeding provision in OJ 2012 L 7/3. 1374 Commission, NN 54/2009, mn. 127 et seqq. – Ho ˆ pitaux publics du re´seau Bruxelles. 1375 Commission, OJ 2006 L 32/82, mn. 59 et seqq. – Reduction of airborne pollution in the territory of the Piedmont Region. 1376 On the other hand, the intrastate provision was found to apply in the case of Dutch petrol stations located close to the German border, cf.Commission, XXIXth Report on Competition Policy, mn. 244. 1377 Commission, OJ 2001 L 212/34, mn. 29 – Aid scheme implemented by Spain for the purchase of commercial vehicles. 1369

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assessment, public grants to airports in Category A or B generally did contain within them the risk of distorting competition or affecting trade between the Member States. Thus, for airports in Category C and D, the competitive situation had to be evaluated in each individual case, taking into account the markets involved.1378 However, the Commission had not adhered to these standards in its practice, but considered it already sufficient for an effect on trade between Member States if the aid recipient was in competition (no matter how slight) with other airports, which in turn competed with undertakings from other Member States.1379 Moreover, the Commission fell back on the Philip Morris formula that it is sufficient if the financial situation of the recipient is improved, thus reducing the chances of its competitors from other Member States. 1380 513 State aid granted to local or regional credit institutions, such as savings banks, can affect trade between Member States.1381 The CJEU has stressed in its more recent decisions that the sector of financial services has been liberalised considerably on a Community level, which has greatly increased the competition between all institutions.1382 The fact that an aid recipient is only active in regions within a Member State does not refute the assumption of an effect on trade between the Member States. 1383 In the Commission’s view, State aid in the banking sector can, in fact, generally affect trade between Member States in many different ways.1384 For one thing, aid makes the national ‘domestic savings market’ more impermeable to penetration by banks from the other EU countries. This is particularly the case if an aid measure is likely to ensure the survival of credit institutions that are lacking in financial strength 1385. This also applies when credit institutions with a local area of activity are involved.1386 It is not necessary that the institution involved would become insolvent without the aid or otherwise find itself in financial difficulties. 1387 Moreover, since aid would make it easier for domestic banks to penetrate other national markets, they could use the funds they acquire for this very purpose.1388 The trade between Member States could also be affected if the aid recipient is active in a region that has very close economic ties with other Member States.1389 It makes no difference if the bank’s customers, to whom the benefits of the aid would ultimately be passed on, are exclusively nationals. In such cases as well, the aid would serve to make the domestic market more impermeable to the penetration of foreign banks.1390

1378 Community Guidelines on Financing of Airports and Start-Up Aid to Airlines Departing from Regional Airports, OJ 2005 C 312/1, mn. 11 et seqq., 38. 1379 Cf. for example Commission, N 638/2007, mn. 36 et seqq. – Airport Lotniczy; Commission, NN 21/2007 and NN 22/2007, mn. 37 et seq. – Rzeszow Jasionka Airport. 1380 Commission OJ 2008 L 346/1, mn. 221 et seq. – DHL and Leipzig Airport v Halle; Commission, NN 4/2009, mn. 22 et seq. – Dresden Airport; Commission, NN 25/2009, mn. 50 – Berlin Brandenburg International. 1381 Commission, E 10/2000 – Germany, Anstaltslast and Gewa ¨hrtra¨gerhaftung. 1382 ECJ Cases C-222/04 Ministero dell’Economia e delle Finanze et al. di Firenze anda [2006] ECR I289, mn. 145; C-148/04 Unicredito Italiano SpA v Agenzia delle Entrate [2005] ECR I-11137, mn. 60. 1383 Cf. for example Commission, OJ 2004 L 263/8, mn. 67 – Bank Burgenland. 1384 Summarising: Commission, OJ 1998 L 221/28(64) – Cre ´dit Lyonnais. 1385 Commission, OJ 1998 L 221/28(64) – Cre ´dit Lyonnais; Commission, OJ 1999 L 103/19(24) – Socie´te´ de Banque Occidentale; Commission Communication, OJ 1997 C 49/02(14) – Socie´te´ Marseillaise de Cre´dit. 1386 Commission, OJ 1999 L 116/36(48) – Banco di Napoli. 1387 Commission Communication, OJ 1998 C 144/6(9) – Cre ´dit Agricole. 1388 Cf. for example Commission Communication, OJ 1998 C 146/6(10) – Cre ´dit Mutuel; as well as Commission Communication, OJ 1998 C 144/6(8 et seq.) – Cre´dit Agricole. 1389 Commission Communication, OJ 1997 C 49/2(14) – Socie ´te´ Marseillaise de Cre´dit. 1390 Commission Communication, OJ 1998 C 146/6(9 et seq.) – Cre ´dit Mutuel.

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State aid granted to undertakings that render shipbuilding or ship conversion services 514 on a local or regional level can likewise affect trade between Member States. For if such aid is granted, the supply of those services by the undertakings may for that reason be maintained or increased with the result that undertakings established in other Member States would have less chance of providing their services in that sector in the market of that Member State.1391 In the Linde case, the Commission found against an effect on the trade between 515 Member States, making reference to the local character of the market (supply of gas through a stationary system), on which no other competitors were present. 1392 However, it is questionable whether this decision (in which the question of benefits is mixed up with the question of distortion of competition) can be generalised. In summary the practice of the Community bodies on undertakings with regional or 516 local areas of activity is inconsistent. Generally speaking, the Commission construes the interstate clause extremely broadly. In individual cases, however, – and often surprisingly – it allows for exceptions. The variable treatment of similar cases is difficult to explain; it is hard to find a common thread. At most, a pattern can be discerned in that the Commission apparently prefers to take up cases in which the market has been opened to competition due to liberalisation measures, for example with regard to postal services1393, aviation, public transport, financial services, etc. f) Obligation to state reasons. The yardstick for the (formal) statement of reasons is 517 correspondingly low as far as the question of the effect on trade between Member States is concerned. According to more recent rulings, the Commission must merely state in the decision the circumstances that lead to an effect on trade between Member States,1394 whereby it is sufficient if the activity of the undertaking (i. e. the product involved) and its market position are described and the decision contains a general statement to the effect that subsidies are likely to distort competition. 1395 The Commission does not need to carry out an detailed economic analysis of the actual situation on the relevant market, the market share of the undertakings in receipt of the aid, the position of the competitors or the exchange of services across borders. 1396 If the aid is granted in a liberalised sector in which the cross-border character is 518 evident, the Commission can limit itself to a brief statement of reasons. In such cases, the Commission is merely required to declare that the aid reduces the financial burdens of the recipient undertaking, that this strengthens the recipient undertaking in its competitive position in relation to its competitors and that the aid recipient is in competition with undertakings from other Member States.1397 On the other hand, if aid is granted to an undertaking that does business in a market that has not been liberalised, and accordingly is not subject to competition between undertakings from various Member States (e. g. shipping), the alleged effect on trade between Member States requires a separate statement of specific reasons. 1398

1391

ECJ Case C-71/04 Administracion del Estado v Xunta de Galicia [2005] ECR I-7419, mn. 39 et seqq. Commission, OJ 2003 L 250/24, mn. 32 et seqq. – Linde AG (Saxony-Anhalt). 1393 Cf. for example Commission, OJ 2009 L 64/4, mn. 102 et seqq. – Poste Italiane. 1394 ECJ Cases C-329/93, C-62/95 and C-63/95 Germany v Commission [1996] ECR I-5151, mn. 52; GC Case T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 64. 1395 GC Case T-171/02 Regione autonoma della Sardegna v Commission [2005] ECR II-2123, mn. 73 et seqq. 1396 GC Case T-55/99 CETM v Commission [2000] ECR II-3207, mn. 76 et seqq., 102. 1397 GC Case T-55/99 CETM v Commission [2000] ECR II-3207, mn. 76 et seqq., 100 et seqq. 1398 ECJ Cases C-15/98 and C-105/99 Sardegna Lines v Commission [2000] ECR I-8855, mn. 66 et seqq. 1392

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C. Legal exemptions (Article 107(2) TFEU) Bibliography: Bartosch, Verscha¨rft sich die Spruchpraxis zum Europa¨ischen Beihilfenrecht?, ZIP 2000, 2010; Koenig/Ku¨hling, Urteilsanmerkung EuG v. 15. 12. 1999, JZ 2000, 255; Kruse, Ist die “Teilungsklausel” als Rechtsgrundlage fu¨r Beihilfen zum Ausgleich teilungsbedingter Nachteile obsolet?, EuZW 1998, 229; Schu¨tte/Hix, The Application of the EC State Aid Rules to Privatizations: The East German Example, CMLR 1995, 215; Wo¨ssner, Die Deutschlandklausel im Beihilfenrecht, Diss. Tu¨bingen 2001.

I. Purpose Article 107(2) TFEU makes a legal exemption for cases where the compensation for hardships needs to take primacy over the protection of competition. The cases listed in Article 107(2) TFEU are conclusive and therefore not open to an extensive interpretation that would allow for the inclusion of further analogous cases. This falls in line with the jurisdiction of the European Court of Justice that legal exemptions are generally interpreted narrowly.1399 520 According to the wording of Article 107(2) TFEU the legal exemption ‘shall’ enter into force ex lege – as opposed to the cases listed under Article 107(3) TFEU that ‘may’ be exempt – without the need for a prior decision. It is, however, recognised that these cases also need verification by the Commission using the procedure set out in Article 107(3) TFEU,1400 but engaging in a far less extensive examination. When deciding on the exemption of Article 107(3)-cases the Commission has a very broad scope of discretion, it does not only verify whether the requirements of the law are met – as is the case with Article 107(2) TFEU – but also checks whether state aid is the suitable measure in the given case.1401 In contrast, if the requirements for a case of hardship in the meaning of Article 107(2) TFEU are met, the Commission has no scope of discretion and aid must be exempt from the prohibition.1402 521 Article 107(2) TFEU can only exempt cases of State aid that fulfill the requirements of Article 107(1) TFEU in the first place, this follows from fact that Article 107(2) is the legal exception from the rule stipulated in Article 107(1) TFEU. The funds given to an undertaking must therefore be State aid within the meaning of Article 107(1) TFEU and affect the trade between Member States and potentially distort competition. 1403 519

II. State aid with social character that is granted to individual consumers 522

Article 107(2) TFEU stipulates that any State aid which has ‘social character’ and is granted to individual consumers without discrimination related to the origin of the product concerned, shall be exempt from the prohibition of State aid. Since this is an exemption, Article 107(2) TFEU is to be interpreted narrowly.1404

1399 ECJ Case C-73/03 Spain v Commission [not yet published in the ECR], mn. 37; ECJ Cases C-346/03 and C-529/03 Associazione italiane del risparmio gestito v Commission [2006] ECR I-1875, mn. 79; GC T445/05 Associazione italiana del risparmio gestito and Fineco Asset Management v Commission [2009] ECR II 289, mn. 179. 1400 Groeben/Schwarze/Mederer Article 87 mn. 124. 1401 GC Case T-55/99 CETM v Commission [2000] ECR II-3207, mn. 76, 100. 1402 Calliess/Ruffert/Mederer Art 87 mn. 124. 1403 See Commentary on Article 107 mn. 101 et seq. 1404 Groeben/Schwarze/Mederer Article 87 mn. 123.

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1. Aid with social character Aid with social character is aid that is required by an individual to meet and satisfy 523 very basic human needs or which addresses issues of social interaction. Furthermore, the European Court of First Instance has affirmed that this aid may only be given to individual persons in need and may therefore not be directed at “investors of all categories’.1405 Aid that has fallen under this exemption in the past years has been: aid necessary for purchase of satellite receivers for the socially disadvantaged 1406, to pay for the bus and library fees of the visually impaired1407, and compensating bus companies that are legally required to reduce their fares for socially disadvantaged persons. 1408 Article 107(2)(a) was, however, also used to dampen the effects of the financial crisis on private individuals – as was the case with officially secured bridging loans given by the Hungarian government1409 and government guarantees for the postponement of mortgage payments for two years in the United Kingdom.1410 Article 3(7) of the Electricity and Article 3(4) of the Gas Directive1411 are also examples of social aid that allows “adequate safeguards to protect vulnerable consumers’ and to counteract “energy poverty’.

2. Consumer Within the meaning of this exemption, “consumer” only refers to end-consumers. 524 The fact that Article 107(2)(a) TFEU states that such aid is given to “individual consumers” implies that not all consumers qualify simply by being consumers, but that individual assessment needs to take place in every case. It is compulsory, that the aid benefits an end-consumer and not only an undertaking. An indirect benefit of the consumer is, however, also acceptable, since aid has to flow to an undertaking in order to fall under Article 107(1) TFEU.1412

3. Non-discrimination Non-discrimination means that aid may not be handed out on a differential basis 525 regarding the geographic origin of the products in question. Preference based on all other criteria is however permissible.1413

III. Aid to make good the damage caused by natural disasters or exceptional occurrences 1. General comments Article 107(2)(b) TFEU declares aid that aims to alleviate or undo the damage caused 526 by natural disasters and exceptional occurrences as compatible with the common market. The principle of a narrow interpretation of exemption applies in these cases as 1405 GC Case T-445/05 Associazione italiane del risparmio gestito v Commission [2009] ECR II 289, mn. 179. 1406 Commission Decision, 6 December 2006, N 546/2006. 1407 Commission Decision, 18 December2008, N 462/2008. 1408 Commission Decision, 13 December 2009, N 332/2008. 1409 Commission Decision, 13 July 2009, N 358/2009. 1410 Commission Decision, 13 August 2009, N 179/2009. 1411 Commission, O.J. 2009 L 211/55 and O.J. 2009 L 211/94. 1412 Commission Decision, 30 May 2007, N 911/2006. 1413 Commission, Annual Report on Competition Policy 1994, mn. 354.

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well.1414 Such occurrences need to be significantly different from normal and usual events1415 and the causal link between such occurrences and the damages endured need to be demonstrated sufficiently by the member states. 1416 The occurrence and the damages born out of it do not, however, have to coincide.1417 Damages and losses suffered due to natural disasters may be compensated to the full 100 %. The assessment of the losses can be based on refinancing and replacement costs.1418 Losses suffered due to the loss of business orders, customers, market shares, or profits cannot generally be seen as directly caused by the occurrences and can therefore not be compensated for by means of state aid.1419 In cases of particular hardship the Commission does, however, approve of aid to substitute for income losses caused by natural disasters. Since any kind of overcompensation is illegal, a calculation of the losses needs to take place in each case individually and insurance payments or other advantages need to be taken into account. 527 According jurisdiction of the European Court of Justice, the Commission is bound by the statements she makes in her official communications that relate directly or indirectly to State aid.1420 Two examples are Community framework for State aid in the forestry and agriculture sectors 2007–2013 1421 and the Communication on the consequences of the terror attacks on the United States for the air transport sector. 1422

2. Natural disasters 528

Natural disasters include earthquakes1423, avalanches, landslides, and floods1424. Losses incurred due to bad weather circumstances such as hail, frost, snow, heavy rains, or draught can only be reimbursed beyond a certain threshold of severity. 1425

3. Other exceptional occurrences 529

Other exceptional occurrences are wars, internal civil unrest, and strikes. 1426 Nuclear and industrial accidents can also be seen as such if the causal link between the accident and the losses or damages can be proven. The Commission has rejected damage caused by fires that were covered by fire insurance.1427 The Commission has also dealt with animal and plant disease cases with caution and closely observed whether they were 1414 ECJ Cases C-73/03 Spain v Commission [not yet published in the ECR], mn. 37; C-346/03 and C529/03 Atzeni and Others [2006] ECR I-1875, mn. 79; Commission, O.J. 2006 C 319/1 mn. 121. 1415 Commission Decision, 23 December 2008, N 643/2008 mn. 26. 1416 ECJ Cases C-346/03 and C-529/03 Atzeni and Others [2006] ECR I-1875, mn. 79; C-73/03 Spain v Commission [not yet published in the ECR], mn. 37. 1417 GC Case T-268/06 Olympiaki Aeroporia Ypiresies v Commission [2008] ECR II-1091, mn. 68. 1418 Commission Decision, 17 December 2005, N 435/2005 mn. 40. 1419 Commission Report on Competition Policy 2005, mn. 574. 1420 ECJ Case C-351/98 Spain v Commission, 2002 I-8031, mn. 53. 1421 Commission, Community Guidelines for state aid in the agriculture and forestry sector 2007 to 2013, O.J. 2006 C 319/1. 1422 Communication from the Commission on Insurance in the Air Transport sector following the terrorist attacks of 11 September 2001 in the United States. http://eurlex.europa.eu/Notice.domode=dbl&lang=en&ihmlang=en&lng1=en,de&lng2=de,en,fr,nl,&val=266868:cs&page=. 1423 Commission Report on Competition Policy 1987, mn. 164. 1424 Commission Decision, 11 December 2006, N 463a/2006; Commission Decision, 4 May 2007, N 914/2006; Commission Decision, 21 June 2007, N 913/2006; Commission Decision, 27 February 2009, N 401/2008; Commission Decision, 7 October 2009, N 424/2009. 1425 Commission Decision, 17 October 2003, N 398/2003; Commission Decision, 11 November 2003, N 436/2003. 1426 Commission, Community Guidelines for state aid in the agriculture and forestry sector 2007 to 2013, O.J. 2006 C 319/1, mn. 121. 1427 Commission, Community Guidelines for state aid in the agriculture and forestry sector 2007 to 2013, O.J. 2006 C 319/1, mn. 121.

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caused by a disregard for quality and security standards.1428 State aid should not be used to compensate for negligence or carelessness. Industry aid during the BSE 1429 and Dioxon1430 crises’ were, however, approved by the Commission because the causes did not lie within the industry.1431 In these cases, the Commission also felt that public health and consumer confidence were at risk and required state aid.1432 Likewise, the terror attacks of 11 September 2001 were also seen as an exception occurrence. 1433

IV. Aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany Article 107(2)(c) TFEU stipulates that all aid required in order to compensate for the 530 economic disadvantages – especially in regions in eastern Germany – caused by the division of Germany are compatible with the common market. According to its wording, Article 107(2)(c) TFEU would only apply to regions effected by the division of Germany in the status quo. Even though any attempts to change this wording have been unsuccessful, its reaffirmation in the Maastricht1434, Amsterdam1435, Nizza1436, and Lisbon1437 Treaties prove that this clause has not become redundant since the re-unification of Germany in 1989 but rather has changed its meaning.1438 The Lisbon Treaty does, however, allow for the possibility of repealing this provision in the medium to long term,1439 as its practical importance is becoming increasingly insignificant.

1. The division of Germany a) Views. The most contested part of this provision is the “division of Germany’. The 531 German federal government has argued that the phrasing described the existence of two co-existing political and economic systems. Hence State aid can be employed for any measures that serves the purpose of unifying of these systems 1440 and that therefore such aid could also be used programs created for the “build-up’ and strengthening of eastern German federal states (‘Aufbau Ost’).1441 The Commission opposed this wide interpretation of Article 107(2) (c) TFEU and used Article 107(3)(a) and (b) to permit aid during the first years of the reunification instead. Only two of several hundred state aid measures within the “Aufbau Ost’ program were permitted by the Commission using Article 107(2)(c) TFEU.1442 The Commission was of the opinion that Article 107(2) (c) TFEU had to be interpreted narrowly and that this provision is also subordinate to Article 107(3) 1428

Commission Decision, 23 December 2008, N 643/2008, mn. 29. Commission Decision, 15 March 1996, N 229/1996, N 290/1996, N 178/1996, N 289/1996; Commission 21 January 1998 N 795/1996. 1430 Commission, 20 July 1999 NN 87/1999, NN 88/1999, NN 89/1999, NN 90/1999, N 380/1999, N 386/1999, Commission 9 February 2000 N 770/99, 11 February 2000 NN 141/99; 24 May 2000 N 83/ 2000; 23 December 2008 N 643/2008; Commission 14 October 2009 NN 44/2009. 1431 Commission 23 December 2008 NN 643/2008 mn. 27. 1432 Commission 23 December 2008 NN 643/2008 mn. 30. 1433 GC Case T-268/06 Olympiaki Aeroporia Ypiresies AE v Commission [2008] ECR II-109, 1 mn. 49. 1434 O.J. 2002 C 325/33. 1435 O.J. 1997 C 340. 1436 O.J. 2001 C 80. 1437 O.J. 2008 C 115. 1438 Schu ¨ tte/Hix, CMLR 1995, 215, 227. 1439 See below mn. 541. 1440 ECJ Cases C-57/00 P and C-61/00 P Saxony v Commission [2003] I-9975, mn. 13. 1441 German Bundestag 27 January 1997, 13/6809. 1442 Commission, 14 April 1992 C-3/91, 1992 C 263/15, mn. 22 – Daimler-Benz/Potsdamer Platz; Commission 13 April 1994 N-719/93, O.J. 1994 C 178/24 – Tettau. 1429

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TFEU. The European Court of First Instance and the European Court of Justice have agreed with the interpretation of the Commission in the Cases Freistaat Sachsen v Kommission and Bundesrepublik Deutschland/Commission.1443 This narrow interpretation of the division of Germany only includes the political partitioning by means of the erection and preservation of the formerly occupied zones in Germany in 1948 instead of the entire historical process that led to the partitioning. Aid within the meaning of Article 107(2)(c) TFEU cannot be used promote ailing sectors of the East-German economy, but must be used to compensate for losses incurred due to the actual division of the country. 532

b) Wording and systematic interpretation. The interpretation of the Commission, the Courts and that of the Federal Republic of Germany are compatible with the wording of Article 107(2)(c) TFEU. ‘Division’ can be read to mean both the process of partition as well as state of being partitioned.1444 Grammatically the division of Germany can mean both the historic moment of partition as well the political state of division that is was in. Systematically Article 107(2)(c) TFEU originally stood within the context of other provisions that dealt with the partition of Germany such as Article 98 TFEU (ex-Article 78 TEC), the Protocol on German Internal Trade and Connected Problems1445 and the Declaration of German Nationality.1446 When the Treaty of Rome came into effect, the aim of these provisions was to give special attention to previously economically disadvantaged regions of Germany and to protect them from a further downslide caused by European integration. This goal speaks for a wider interpretation of the provision. It must, however, be kept in mind, that that narrow interpretation of exemptions generally ensures the effectiveness of a provision.1447 This also holds true in light of the decreased relevance of these exemptions the abandonment or discontinuation of some of their aims. Current structural deficits in these regions no longer justify a broad-scaled exemption from the state aid prohibition as they can no longer be portrayed behind the same political backdrop. A broad interpretation of Article 107(2)(c) TFEU would also come into conflict with Article 107(3)(a) and (c) TFEU, since this provision also allows for the advancement of economically underdeveloped regions. It would contradict the intentions of legislator if cases which Article 107(3)(a) and (c) TFEU was designed to deal with were dealt with under Article 107(2)(c) TFEU. For all these reason it is correct to say that Article 107(2)(c) TFEU must be interpreted narrowly.

533

c) History. aa) Relevance of the Lisbon Treaty. The changes made by the Lisbon Treaty have made have rendered a historical interpretation based on the Treaty of Rome fruitless. Article 107(2)(c) TFEU has not been changed or rescinded from the current treaty. The negotiations have however led to the addition of a second sentence stipulating its future annulment. This shows that the Member States are in fact in favour of a narrow interpretation. The ‘Declarations Annexed to the Final Act of the Intergovernmental Conference which adopted the Treaty of Lisbon from 2007’ states in its declaration to Article 107(2)(c) TFEU ‘that Article 107(2)(c) shall be interpreted in accordance with the existing case law of the Court of Justice of the European Union regarding the applicability of the provisions to aid granted to certain areas of the Federal Republic of Germany affected by the former division of Germany.’ Whilst this declaration is legally non-binding, it is an important document for the political understanding and interpretation of the treaty. It states, that the past interpretation of the European Court 1443

See below, mn. 534 et seq. ‘Division’ in French, ‘Teilung’ in German. 1445 http://europa.eu/abc/treaties/archives/en/entr35a.htm and Fn 50; Federal Law Gazette of Germany, BGBl. II, 753, 784. 1446 German Federal Law Gazette, BGBl. II, 753, 764. 1447 Larenz/Caranis, Methodenlehre 3rd ed., 1995 p. 176. 1444

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of Justice is in line with that of the legislators and/or Member States and that it shall continue to guide the interpretation after the inaction of the Treaty of Lisbon. Since this declaration was passed by all member state, it can also be assumed that the Federal Government of Germany has given up its previous position and is agrees with a narrow interpretation of Article 107(2)(c) TFEU. bb) The existing case law of the Court of Justice. According to the above mentioned 534 declaration on the Treaty of Lisbon in 2007, the member states agree that the interpretation of Article 107(2)(c) TFEU shall be guided by the existing case law of the Court of Justice. The Court of Justice delivered its opinion on the provision for the first time in its judgment Germany v Commission on 19 September 2000.1448 The Commission had declared a tax law that provided tax breaks to companies in certain regions of eastern Germany with over 250 employees incompatible with the common market. 1449 Whilst the Court of Justice clearly stated that Article 107(2)(c) TFEU had not lost its effect after the reunification of Germany1450, it also said that this provision had to be interpreted narrowly and could not be read more broadly than before the reunification.1451 According to a narrow interpretation, the “division of Germany’ refers to the dividing line that was drawn between the occupied zones in 1948.1452 Hence any diseconomies due to the division of Germany need to have a direct connection to this division of the occupied zones. The economic weakness of the previous ‘East-Germany’ do not bear a physical connection to the actual division, but rather follow from the failed planned market economy in the Former German Democratic Republic. 1453 The Court of Justice affirmed this narrow interpretation two years later in the its second 535 judgments Germany v Commission (28 January 2003), in a case that involved aid that had flown to steel works in Saxony. Again it ruled that the economic distress of the steel works had no connection to the former physical division of Germany.1454 In Free State of Saxony v. Commission the Court of Justice delivered a more extensive explanation of its legal opinion, taking the wording, the systematics and the history of Article 107(2)(c) TFEU into account and gave a thorough analysis of all the reason that could speak for a more extensive interpretation.1455 The Court also spoke about the geographic scope of this provisions when it rule that the Volkswagen works in Zwickau-Mosel and Chemnitz being over 100km away1456 from the former border decreased the possibility of a causal link to the former division. The Court did not discuss the argument of the Court of First Instance that the division of Germany led to the loss of sales markets1457, but it had already concluded that such a situation could justify an exemption in an early cases. 1458 The court just did not agree that Volkswagen had lost any such markets in this case. d) Spirit and Purpose of the Law. An interpretation based strongly on the goals or 536 “telos’ of Article 107(2)(c) TFEU1459 also leads one to a narrow interpretation of this 1448

ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857. Commission, 21 January 1998, O.J. 1998 L 212, 50. 1450 ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857 mn. 47 et seq. 1451 ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857 mn. 49, 51. 1452 ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857 mn. 52. 1453 ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857 mn. 54, 55. 1454 ECJ Case C-334/99 Germany v Commission [2003] ECR 2003, I-1139 mn. 124. 1455 ECJ Cases C- 59/00 P and 61/00 P d [2003] ECR I-9975 mn. 12 et seq. 1456 ECJ Cases C- 59/00 P and 61/00 P d [2003] ECR I-9975 mn. 44. 1457 GC Cases T-132/96 and 143/96 Olympiaki Aeroporia Ypiresies v Commission [1999] ECR II-3663, mn. 145 et seq. 1458 ECJ Case C-156/98 Germany v Commission [2001] ECR I-6857, mn. 52. 1459 ECJ Cases C-292/82 Merck [1983] ECR I-3781, 3792, mn. 12; C-337/82 St. Nikolaus Brennerei [1984] ECR I-1051, 1062 mn. 10. 1449

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provision. A broad interpretation would not be in line with the goals of Article 107(1) TFEU and would render Article 107(3) TFEU pointless in cases of economic distress – cases which this provision is actually set out to deal with. There is also no reason to believe that Article 107(2)(c) TFEU is a more “specialised’ provision (lex specialis) in comparison with Article 107(3) TFEU, especially since all former East-German states are eligible to subsidies under Article 107(3) TFEU.1460 The fact that the Commission has less discretion when applying Article 107(2)(c) TFEU, does not justify its application in these cases, as there is no reason why the Commission should not enjoy the discretion afforded to it by Article 107(3) TFEU. 537 In order to ensure the realisation of the common market the prohibition of state aid needs to be taken seriously and applied thoroughly. This implies a narrow interpretation of Article 107(2) lit. c and all other exemptions and the application of Article 107(3) TFEU to cases of economic distress, giving the Commission greater discretion when deciding about the necessity of aid in the individual cases.1461

2. Affected areas 538

Prior to the reunification of Germany, Article 107(2)(c) was applied to areas within 40 km of the border as well as West Berlin and the Saarland. After the reunification it was debated whether this provisions should apply to all former East-German states. There was however, agreement, over the fact that there was to be no immediate confinement of the areas previously affected by the division1462 and there where one undertaking could declare losses due to the division, the area surrounding this undertaking should be seen as affected by the division.

3. Disadvantages due to division 539

In order for aid to be granted, an undertaking needs to have suffered losses and been disadvantaged due to the (previous) division of Germany. A causal link between the borders that divided Germany and the economic losses incurred by the undertaking(s) must be proven. This is the case, if the undertaking would not have suffered any losses, had the partition never taken place.

4. Necessary compensation 540

Aid needs to be necessary to make up for the disadvantages and losses suffered by the undertakings. Hence this aid can only make up for selective losses and cannot be used to boost an economically weak region as a whole. The losses need to be calculated accurately and aid may not lead to overcompensation. The Commission also needs to establish that the aid is proportional and that no alternatives exist which would be less of an distortion of competition.

5. Repeal by the Council of the European Union 541

According to Article 107(2)(c) sentence 2 TFEU the Council – acting on a proposal by the Commission – may adopt a decision to repeal this provision five years after of the Treaty of Lisbon has entered into force. This simplified amendment procedure does 1460

Commission Decision, 8 November 2006, N459/2006. Koenig/Ku¨hling, Juristische Zeitung 2000, 255, 257. 1462 Kruse, EuZW 1998, 229, 231. 1461

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not breach national constitutional1463 or European law because it does not lead to the loss of sovereign power by any Member States.

D. Compatible and incompatible aid (Article 107(3) TFEU) I. Introduction Article 107(3) TFEU is – beside Article 107(1) TFEU concerning the notion of State aid 542 – the second key provision in the State aid law of the Union. Article 107(3) TFEU sets out the rules for the approval of State aid by way of a decision of the Commission, which enjoys a broad margin of appreciation. By contrast, Article 107(2) TFEU lists those State aid measures, which are considered to be compatible with the internal market directly pursuant to that provision of the Treaty. The bearing of Article 107(3) TFEU is not understandable without a profound knowledge of an extensive jurisprudence, which enriched the text of the Treaty by a number of additional substantial criteria.

1. Changes due to the Treaty of Lisbon The Treaty of Lisbon brings about two changes in the text of Article 107(3). On the one 543 hand, the term ‘common market’ has been replaced by ‘internal market’ and on the other, paragraph 3 lit. a) has been slightly modified by adding the following text: ‘and of the regions referred to in Article 349, in view of their structural, economic and social situation’. Article 349 TFEU empowers the Council to adopt specific measures – on a proposal of the Commission and after consulting the Parliament – aimed, in particular, at laying down the conditions of application of the Treaties to those regions, including common policies for Guadeloupe, French Guiana, Martinique, Re´union, Saint-Barthe´lemy, Saint-Martin, the Azores, Madeira and the Canary Islands. These measures shall counteract factors like remoteness, insularity, small size, difficult topography and climate, economic dependence on a few products, the permanence and combination of which severely restrain their development. Further to this, the Commission is now enabled directly by Article 108(4) TFEU to adopt block exemption regulations. It is also to be noted that Article 3(1)(g) EC has been deleted. According to that 544 provision, ‘the activities of the Community shall include, as provided in this Treaty and in accordance with the timetable set out therein … a system ensuring that competition in the internal market is not distorted’. This, however, cannot support far reaching conclusions, given that the essential provisions on State aid monitoring (Articles 107– 109 TFEU) remained unchanged. In addition, the Union continues to have exclusive competence on ‘the establishing of the competition rules necessary for the functioning of the internal market’ pursuant to Article 3(1)(c) TFEU.

2. Institutional aspects a) Commission, Parliament, Council. The monitoring of State aid, i. e. the surveil- 545 lance, whether Member States respect Articles 107–109 TFEU and the provisions adopted on the basis of these Articles, is essentially conferred on the Commission, a 1463 In the case of Germany: ‘Gesetz u ¨ ber die Ausweitung und Sta¨rkung der Rechte des Bundestages und des Bundesrates und Angelegenheiten der Europa¨ischen Union’, Germany Federal Law Gazette, BGBl. 2009, 3022.

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body independent from Member States, which is called upon to be the guardian of the common interests1464. The reason for this is that Article 107(3) TFEU only and exclusively allows the approval of State aid in the public interest. Pursuant to Article 108 TFEU the Commission shall keep under constant review all systems of aid existing in the Member States. According to the consistent case law of the ECJ, the finding that aid may be incompatible with the internal market is to be arrived at, subject to review by the Court, by means of an appropriate procedure which it is the Commission’s responsibility to set in motion. Therefore, Articles 107 and 108 TFEU confer on the Commission a principal and exclusive role in regard to establishing the eventual incompatibility of State aid.1465 The Commission adopts decisions as a college. It derives its powers directly from Articles 107 and 108 TFEU, even if it applies the so-called Procedural Regulation 1466, which – as a set of rules of secondary legislation – for obvious reasons cannot restrict the application of Treaty provisions1467. Its powers set out in the TFEU are also not restricted by Regulation No 994/19981468 either. By this Regulation the Council can empower the Commission to adopt so-called block exemption regulations, without the Council setting the criteria for compatibility of the aid with the internal market. The Treaty only confers marginal tasks on the Council. Firstly, it can only authorize aid pursuant to Article 107(3)(e) TFEU. The Council has so far only made use of this power for the authorization of operating aid to shipbuilding1469 and coal mining1470. Secondly, the Council may on application by a Member State and acting unanimously decide that aid which that State is granting or intends to grant shall be considered to be compatible with the internal market, in derogation from the provisions of Article 107 or from the regulations provided for in Article 109 TFEU, if such a decision is justified by exceptional circumstances. The power conferred upon the Council by the third subparagraph of Article 108(2) TFEU is clearly exceptional in character 1471. Where the Commission has already opened the procedure under the first subparagraph of Article 108(2) TFEU, the Member State concerned can ask that that procedure is stayed. 1464 See in that regard the so called Spaak Report, Comite ´ intergouvernemental cre´e´ par la Confe´rence de Messine, Rapport des Chefs de De´le´gation aux Ministres des Affaires Etrange`res, Bruxelles, 21 avril 1956. As to the institutional aspects see also: Di Bucci, Quelques aspects institutionnels du droit des aides d’Etat, (liber amicorum Santaolalla) 43. 1465 See ECJ Case C-354/90 Fe ´de´ration nationale du commerce exte´rieur des produits alimentaires and Syndicat national des ne´gociants et transformateurs de saumon [1991] ECR I-5505, mn. 9 and 14, see also ECJ Cases C-110/02 Commission v Council [2004], ERC I-6333, mn. 29, (Comments on that judgment in EuZW, 16/2004, 502) and C-234/99 Niels Nygård [2002] ECR I-3657, mn. 62. 1466 Council Regulation (EC) No 2015/1589 laying down detailed rules for the application of Article 108 TFEU, OJ 2015 L 248/9. 1467 ECJ Cases C-182/03 and C-217/03 Belgium v Commission [2006] ECR I-5479, mn. 72 and 73. See also Mehta, Tax Harmonisation and State Aid – A Warning for the future? EStAL 2/2007, 257. 1468 Council Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ 1998, L 142/1 and footnote 1365 above. 1469 See Council Regulation (EC) No 3094/95 on aid to shipbuilding, OJ 1995, L 332/1, which has been amended two times, see Council Regulation (EC) No 1013/97 on aid to certain shipyards under restructuring, OJ 1997, L 148/1, and Council Regulation (EC) No 1540/98 establishing new rules on aid to shipbuilding OJ 1998, L 202/1. These Regulations, which allowed so called operating aid, are no more in force. 1470 Council Regulation (EC) No 1407/2002 on State aid to the coal industry, OJ 2002, L 205/1. This Regulation expired on 31 December 2010 and has been replaced by Council Decision 2010/787/EU on State aid to facilitate the closure of uncompetitive coal mines, OJ 2010, L 336/24. This Decision will expire on 31 December 2027. 1471 ECJ Cases C-110/02 Commission v Council [2004] ECR I-6333, mn. 31, and C-399/03 Commission v Council [2006] ECR I-05629, mn. 27 und 28, (with comments in EuZW 16/2006, 497). See also ECJ Case C-111/10 Commission v Council [2013] ECR I-00000, mn. 39.

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Has the Commission declared the aid in question incompatible with the market and thereby closes the procedure referred to in the first subparagraph of Article 108(2) TFEU, the Council is no longer authorised to exercise the exceptional power. To hold that a Member State is able to grant to beneficiaries of unlawful aid, which has previously been declared incompatible with the market by a Commission decision, new aid in an amount equivalent to that of the unlawful aid, intended to neutralise the impact of the repayments which the beneficiaries are obliged to make pursuant to that decision, would clearly amount to thwarting the effectiveness of decisions taken by the Commission under Articles 107 EC and 108 TFEU1472. Thirdly, the Council, on a proposal from the Commission and after consulting the 550 European Parliament, may make any appropriate regulations for the application of Articles 107 and 108 and may in particular determine the conditions in which Article 108(3) shall apply and the categories of aid exempted from this procedure 1473. The role of the European Parliament is quite restricted: it is consulted before the 551 Council adopts Regulations pursuant to Article 109 TFEU. b) The role of Member States. Only the Member State concerned is party to the 552 administrative procedure before the Commission. That is a consequence of Article 107(3) TFEU, which only allows State aid to be approved in the public interest. Member States must notify aid measures before granting the aid. The Member State concerned is the only addressee of the Commission decision1474. Others – and before all beneficiaries – can in certain circumstances have a mainly economic interest in the case, but they are not parties to the procedure on the authorization of aid1475. Their position is therefore objectively different from the position of undertakings in procedures based on Articles 101 and 102 TFEU. Decisions of the Commission concerning State aid are addressed to Member States also 553 in cases where the State measures are investigated on the basis of a complaint alleging the incompatibility of aid and in which the Commission refuses to initiate the formal procedure under Article 108(2) TFEU because it considers either that the measures complained of do not constitute State aid within the meaning of Article 107(1) TFEU or that they are compatible with the internal market. Where the Commission adopts such a decision and proceeds, in accordance with its duty of good administration, to inform the complainants of its decision, it is the decision addressed to the Member State which must form the subject-matter of any action for annulment which the complainant may bring, and not the letter to that complainant informing him of the decision1476. Whereas with regard to Article 107(1) TFEU it is incumbent upon the Commission 554 to demonstrate the incompatibility of State aid by showing that it distorts or threatens to distort competition and affects trade between Member States. With regard to Article 107(3) TFEU the burden of proof is reversed: The onus of proving the existence

1472 ECJ Case C-110/02 Commission v Council [2004] ECR I-6333, mn. 43, see also the comments on that judgement in EuZW, 16/2004, 502. 1473 See Council Regulation (EU) No 2015/1589 laying down detailed rules for the application of Article 108 TFEU, OJ 2015 L 248/9, (the “Procedural Regulation”) and Council Regulation (EU) 2015/1588 on the application of Articles 107 and 108 of the TFEU to certain categories of horizontal State aid, OJ 2015 L 248/1, (the so called “Enabling Regulation”). 1474 See Luma, Die Stellung Dritter in der Beihilfenkontrolle, EuZW, 15/2004, 457. 1475 ECJ Cases C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 59; C-613/ 97 Ufex et al. v Commission [2000] ECR II-4055, mn. 86 and 87. See also M. Niejahr und T. Scharf, Third parties in State aid control: more than just a source of information? Liber amicorum Santaolalla, p. 347. 1476 ECJ Case C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 45.

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of the factual circumstances upon which the compatibility of aid under Article 107(3) TFEU depends is incumbent on the State making the application1477. c) The role of national courts. National courts do have an important role to play in procedures on State aid. As regards the supervision of Member States’ compliance with their obligations under Articles 107 and 108 TFEU, the national courts and the Commission fulfil complementary and separate roles1478. Whilst assessment of the compatibility of aid measures with the internal market falls within the exclusive competence of the Commission, subject to review by the Court, it is for the national courts to ensure that the rights of individuals are safeguarded where the obligation to give prior notification of State aids to the Commission pursuant to Article 108(3) TFEU is infringed1479. Individuals (i. e. parties concerned) cannot therefore simply, on the basis of article 107 TFEU alone, challenge the compatibility of an aid with Union law before national courts or ask them to decide as to any incompatibility which may be the main issue in actions before them or may arise as a subsidiary issue 1480. Even if national courts are not allowed to decide on the compatibility with Article 107 TFEU of State measures, an eventual approval by the Commission does not prevent national courts from bringing the question before the ECJ in the framework of a preliminary ruling case in which the ECJ is asked to rule on the validity of the decision. 556 National courts also play an important role in the enforcement of recovery decisions adopted by the Commission under Article 14(1) of the Procedural Regulation No 659/1999 under Article 16(1) of the Procedural Regulation No 2015/1589. The involvement of national courts in such cases usually arises from actions brought by beneficiaries to review the legality of the recovery decision issued by national authorities following a Commission order. 557 The General Block Exemption Regulation1481, which has direct effect in the Member States’ legal systems, could also give rise to disputes before national courts. In this context national courts may have to assess whether a certain aid measure meets a certain requirement of the Regulation or not. Other types of legal action may also arise as practice evolves. 558 Where the national court entertains doubts as to whether the measures at issue should be categorized as State aid, it may seek clarification from the Commission on that point1482. In its Communication ‘Notice on cooperation between national courts and the European Commission in the State aid field’1483 the Commission encouraged national courts to seek closer cooperate with the Commission where the application of Article 108(3) TFEU causes particular difficulties and explained, which kind of information to national courts could be provided. The ECJ underlines in that regard that relations between the Member States and the Union institutions are governed, according to 555

1477 See in that regard the Opinion of AG Darmon in ECJ Case 248/84 Germany v Commission [1987] 4013, 4032, point 8, which refers to an Opinion of AG Capotorti in ECJ Case 730/79 Philip Morris [1980] 2671, 2702. See also GC Cases T-171/02 Regione autonoma della Sardegna v Commission [2005] ECR II2123, mn. 129, and T-211/05 Italy v Commission [2009] ECR II-02777, mn. 174. 1478 ECJ Case C-39/94 SFEI et al. [1996] ECR I-3547, mn. 41, and ECJ Joined Cases C-261/01 and C-262/01 Van Calster et al. [2003] ECR I-12249, mn. 74; See in that regard J.-P. Keppenne and K. Groß, Quelques conside´rations sur le roˆle du juge nationale dans le controˆle des aides d’Etat, Liber amicorum Santaolalla, p. 391. 1479 ECJ Joined Cases C-261/01 and C-262/01 Van Calster et al. [2003] ECR I-12249, mn. 75, ECJ Case ¨ lleitung [2006] ECR I-9957, mn. 38, (Commented in EuZW 23/2006, p. 725.). C-368/04 Transalpine O 1480 ECJ Case 74/76 Iannelli & Volpi [1977] ECR 557, mn. 12. 1481 Commission Regulation (EU) No 651/2014, OJ 2014 L 187/1. 1482 ECJ Case C-39/94 SFEI [1996] ECR I-3547, mn. 50. 1483 OJ 1995 C 312/8. See also Commission notice on the enforcement of State aid law by national courts, OJ 2009 C 85/1.

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Article 4(3) TEU by a principle of sincere cooperation and that the Commission must respond as quickly as possible to requests from national courts 1484. Where, in accordance with Article 108(3) TFEU, the Commission has initiated the 559 formal examination procedure under Article 108(2) TFEU with regard to a measure which has not been notified and is being implemented by a Member State, a national court hearing an application for the cessation of the implementation of that measure and the recovery of payments already made is required to adopt all the necessary measures with a view to drawing the appropriate conclusions from an infringement of the obligation to suspend the implementation of that measure. To that end, the national court may decide to suspend the implementation of the measure in question and order the recovery of payments already made. It may also decide to order provisional measures in order to safeguard both the interests of the parties concerned and the effectiveness of the Commission’s decision to initiate the formal examination procedure1485. Where the national court entertains doubts as to whether the measure at issue 560 constitutes State aid within the meaning of Article 107(1) TFEU or as to the validity or interpretation of the decision to initiate the formal examination procedure, it may seek clarification from the Commission and, in accordance with the second and third paragraphs of Article 267 TFEU, it may or must refer a question to the ECJ for a preliminary ruling1486. With regard to the measures which may or must be taken to ensure this legal 561 protection, the Court has stated that, where such a breach is invoked by individuals, national courts must take all the consequential measures, in accordance with national procedures, as regards both the validity of measures giving effect to the aid and the recovery of financial support granted in disregard of Article 108(3) TFEU. National courts must, in particular, refrain from taking decisions which conflict with a decision of the Commission, even if it is provisional. Consequently, where the Commission has initiated the formal examination procedure with regard to a measure which is being implemented, national courts are required to adopt all the necessary measures with a view to drawing the appropriate conclusions from an infringement of the obligation to suspend the implementation of that measure1487. Such decisions of national courts differ basically from decisions taken by the Commission under Article 107(3) TFEU.

3. The legal nature of authorizations Article 107(1) TFEU sets out the principle of prohibition of any State, which distorts or 562 threatens to distort competition, in so far as it affects trade between Member States. Of course, State aid may be considered to be compatible with the internal market, if it contributes to the execution of important projects of common European interest and does not adversely affect Competition between undertakings and trading conditions between Member States to an extent contrary to the common interest. Thus, Article 107(2) and (3) TFEU allows exceptions from the general prohibition of State aid, namely in a general way in para (2) and in cases to be authorized in individual cases under para (3). It is the task of the Commission to examine whether the aid is compatible with the internal market. 1484 ECJ Case C-39/94 SFEI [1996] ECR I-3547, mn. 50, referring to ECJ Case C-2/88 Imm. J. J. Zwartveld [1990] ECR I-3365, mn. 17 seq. 1485 ECJ Cases C-284/12 Deutsche Lufthansa [2013] ECR I-00000, mn. 42 and 43, and C-27/13 Flughafen Lu¨beck GmbH [2014] ECR I-00000, mn. 25 and 26. 1486 ECJ Cases C-222/04 Cassa di Risparmio di Firenze and Others [2006] ECR I-289, mn. 72 to 74, and C-284/12 Deutsche Lufthansa [2013] ECR I-00000, mn. 44. 1487 ECJ Joined Cases C-393/04 and C-41/05 Air Liquide [2006] ECR I-5293, mn. 42, where the ECJ refers to ECJ Case C-174/02 Streekgewest [2005] ECR I-85, mn. 17. ECJ Case C-284/12, Deutsche Lufthansa AG [2013] ECR I-00000, mn. 41–42.

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The Commission approves State aid by a decision as foreseen in Article 288 TFEU. Pursuant to that provision a decision ‘shall be binding in its entirety. A decision which specifies those to whom it is addressed shall be binding only on them’. The approval as a decision is comparable to a ‘Verwaltungsakt’ according to § 35 of the German Law on Administrative Procedures, to a ‘Bescheid’ pursuant to §§ 56 seq. of the Austrian General Procedural Law or to an administrative decision pursuant to the UK Administrative Procedures Act. That applies equally to conditional decisions and to decisions of the Commission stating that an aid measure is incompatible with the internal market.

a) Margin of appreciation. While those forms of aid which are listed in Article 107(2) TFEU are ex lege compatible, when approving State aid pursuant to Article 107(3) TFEU the Commission enjoys a wide margin of discretion, the exercise of which involves complex economic and social assessments which must be made in a European Union context. The assessment of whether a State aid is compatible with the internal market raises problems which presuppose the examination and appraisal of economic facts and conditions which may be both complex and liable to change rapidly1488. 565 The exercise of this wide margin of discretion involves assessments of an economic and social nature liable to rapid change which must be made within a Union context, thus, judicial review of the manner in which that discretion is exercised is confined to establishing that the rules of procedure and the rules relating to the duty to give reasons have been complied with, and to verifying that the facts relied on are accurate and that there has been no error of law, manifest error in the assessment of the facts or misuse of powers1489. The Court, in reviewing whether that freedom was lawfully exercised, cannot substitute its own assessment for that of the competent authority 1490. 566 The wide margin of appreciation is justified by the fact that the Commission, when applying Article 107(3) TFEU, must balance adverse interests and align decisions with the common interest1491. 564

aa) Criteria. In the context of the broad discretion it enjoys in applying Article 107(3) TFEU, the Commission is justified in relying on the criteria it considers to be most appropriate in order to determine whether an aid can be considered compatible with the internal market, provided that those criteria are relevant having regard to Article 107 TFEU1492. The Court used to refer to Article 3(1)(g) of the Treaty establishing the European Community, according to which the activities of the Community shall include ‘a system ensuring that competition in the internal market is not distorted’. That provision does not exist in the new Treaty, but Article 3(1)(b) TFEU confers on the Union the exclusive competence for the establishing of the competition rules necessary for the functioning of the internal market’. 568 The Commission is under an obligation, when examining the impact of State aid, to weigh the beneficial effects of the aid against its adverse effects on trading conditions and the maintenance of undistorted competition1493. 567

1488

ECJ Case C-301/87 France v Commission [1990] ECR I-307, mn. 15(the ‘Boussac’ judgment). Consistent jurisprudence, see inter alia ECJ Case 730/79 Philip Morris [1980] ECR 2671, mn. 24, and recently ECJ Case C-333/07 Socie´te´ Regie Networks [2008] ECR I-10807, mn. 78, with reference to ECJ Joined Cases C-75/05 P and C-80/05 P Germany and Others v Kronofrance [2008] ECR I-6619, mn. 59 and the case-law cited there. 1490 ECJ Cases C-456/00 France v Commission [2002] ECR I-11949, mn. 41, and C-278/00 Greece v Commission [2004] ECR I-3997, mn. 97. 1491 Cf. J.-P. Keppenne, Guide des aides d’Etat en droit communautaire, 1999; mn. 504, and GC Case T239/94 EISA v. Commission [1997] ECR II-1839, mn. 86 and 93. 1492 GC Case T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 89. 1493 GC Joined Cases T-371/94 and T-394/94 British Airways e. a. v Commission [1998] ECR II-2405 mn. 283, see also the XIVth Report on Competition Policy 1984, p. 130, point 202. 1489

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The Court concludes from the relevant provisions of the Treaty that when the 569 Commission considers the compatibility of a State aid with the internal market it must take all the relevant factors into account, including, where relevant, the circumstances already considered in a prior decision and the obligations which that decision may have imposed on a Member State1494. It follows that when the Commission had not been informed, when it took the contested decision, of any new fact allowing it to assess whether the aid in question might have the benefit of the derogation laid down in Article 107(3)(c) TFEU, it was justified in basing its decision on the assessments it had already made in its previous decision and the failure to comply with the condition it had imposed thereby1495. However, for obvious reasons, such an examination must be made in accordance with the procedures laid down by the Treaty1496. The compatibility with the Treaty of the aid in question must be determined in the 570 context of the Union and not of a single Member State1497. Private interests – in particular of the beneficiary – cannot respectively should not be taken into account in view of the wording of Article 107(3) TFEU. It must also not be forgotten that the examination of compatibility is carried out not in the interest of the Member State granting the aid but in the general interest of the Union. Therefore, and necessarily, only Member States are parties to the procedure before the Commission, as underlined by both the Court of Justice and the General Court1498. bb) Assessment in the ‘Union Framework’. To pass judgement within the ‘Union 571 Framework’ means that the Commission has to exercise its discretion under the principle of proportionality in order to strike a balance between the objectives of undistorted competition and solidarity within the Union. The solidarity, depending on the case, may have different weight; in crisis situations described in Article 107(3)(a) TFEU, it is more important with regard to competition than in the cases of Article 107(3)(c) TFEU1499. In this framework, the Commission has to consider and estimate the sector specific effects of the planned regional aid, also with regard to those regions that may fall under Article 107(3)(a) TFEU, in order to prevent that the regional aid measure creates a sector specific problem that is more serious than the initial regional problem.1500 In particular, it is not for the Court to substitute its own economic assessment for 572 that of the author of the decision.1501 However, both European jurisdictions disrespect this principle from time to time.1502 cc) No room for discretion with regard to defining State aid. The Commission has 573 no discretion when deciding the question of whether or not State aid is granted, given 1494 ECJ Cases C-261/89 Italy v Commission [1991] ECR I-4437, mn. 20, and C-110/02 Commission v Council [2004] ECR I-6333, mn. 39. 1495 ECJ Cases C-261/89 Italy v Commission [1991] ECR I-4437, mn. 23, and C-110/02 Commission v Council [2004] ECR I-6333, mn. 39. 1496 ECJ Case C-294/90 British Aerospace et al. v Commission [1992] ECR I-493, mn. 14. 1497 ECJ Case 730/79 Philip Morris [1980] ECR I-2671, mn. 26, and GC Joined Cases, T-371/94 and T394/94 British Airways et. al. v Commission [1998] ECR II-2405, mn. 282. 1498 See mn. 588 and the Case-law quoted there. 1499 See the opinion of Advocate General Darmon in the ECJ Case 248/84 Germany v Commission [1987] ECR, 4013, 4025, 4031. 1500 GC Case T-380/94 AIUFASS et al. [1996] ECR II-2169, mn. 54 and 55. 1501 GC Case T-123/97 Salomon v Commission [1999] ECR II-2925, mn. 47, with reference to GC Cases T-371/94 and T-394/94 British Airways u. a. and British Midland Airways v Commission [1998] ECR II2405, mn. 79. 1502 An example can be found in GC Case T-27/02 Kronofrance v Commission [2004] ECR II-4177, mn. 87 to 98. See also the judgement on appeal, ECJ joined Cases C-75/05 P and C-80/05 P Germany a. o. v Kronofrance [2008] ECR 2008, I-6619, mn. 59 to 75.

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that the concept of State aid is defined in the Treaty Being a ‘legal concept’ it has to be interpreted on the basis of objective criteria. The Union judge has to comprehensively assess the question of whether a measure falls within the scope of Article 107(1) TFEU considering the specific circumstances of the case at hand and the technical or complex nature of the assessments made by the Commission.1503 To the extent the assessment of whether State aid is given requires using the so-called market economy investor test (‘private investor test’), the Commission has wide discretionary powers because this test requires the evaluation of complex economic relationships. 574

b) Principles for exercising discretionary judgement. aa) Fixed term. Generally, the Commission ensures that State aid schemes are fixed in term, so that a periodic adjustment with assessment by the Commission can take place. This is also true of the self-binding standards of the Commission.

575

bb) Transparency. State aid must serve a certain predetermined purpose and must be awarded in a transparent way. State aid awarded without a specific and legitimate purpose, such as operating aid, distorts competition without having positive effects. Therefore operating aid is considered incompatible with the internal market in principle. It used to be approved in special situations (coal, shipbuilding, etc.) by – or with specific authorization of – the Council.1504

cc) Targeted purpose. Based on above, that State aid which meets the formulated objectives of the Union, are generally easier to approve (subject to verification of details). This also applies for State aid pursuing cohesion, i. e. the development of the most disadvantaged areas. With regard to the Union’s policy of encouraging research and corresponding development, aid schemes targeted at research and development can normally be approved. 577 Horizontal aid schemes (such as for research and development, environment, etc.) are preferable to sectorial aid schemes because the former are less distortive to competition and at the same time better serve the common policy goals set out in Article 107(3). 578 Aid schemes (‘regime’) – even if they are targeted to specific sectors – are preferable to individual aid because they are more transparent and – at least in the relevant sector – are less distortive. 576

579

c) Self-regulation through ‘soft law’. Even though the Commission has wide discretion in the application of Article 107(3) TFEU, it may bind itself by measures of selfregulation such as communications, guidelines and frameworks, if these rules do not depart from the rules of the Treaty.1505 The Commission, in adopting rules of conduct and announcing by publishing them that it will henceforth apply those rules to the cases to which they relate, itself imposes a limit on the exercise of its discretion and cannot depart from those rules under pain of being found, where appropriate, to be in breach of general principles of law, such as the principles of equal treatment or the protection of legitimate expectations.1506 Thus, in the specific area of State aid, the Commission is bound by the frameworks, guidelines and communications that it adopts, in so far as they do not depart from the rules in the Treaty and are accepted by the Member 1503

ECJ Case C-83/98 P France v Ladbroke Racing a. o. [2000] ECR I-3271, mn. 25. See the commentary on Article 107(3)(e) TFEU. ECJ Cases C-313/90 CIRFS v Commission [1993] ECR I-1125, mn. 40 to 51; C-288/96 Germany v Commission [2000] ECR I-8237, mn. 62; C-310/99 Italy v Commission [2002] ECR I-2289, mn. 45 and 52; and GC Case T-319/11 ABN Amro Group NV v Commission [2014] ECR II-0000, mn. 28. 1506 ECJ Joined Cases C-75/05 P and C-80/05 P Germany and Others v Kronofrance [2008] ECR I-6619, mn. 60 and case-law cited. 1504 1505

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States.1507 It is for both European Courts to determine whether the Commission has observed the rules which it adopted.1508 The Commission has specified its aid policy in various guidelines and frameworks. 580 This is to guarantee transparency and a uniform and non-discriminatory administrative practice. In general, guidelines and frameworks are instruments aimed at clarifying the exercise of discretion under Article 107(3) TFEU and are insofar to be distinguished from “communications” that relate to the interpretation of the notion of State aid as defined in Article 107(1) TFEU. However, the terminology is not uniform. 1509 Their importance decreases because the Commission increasingly makes use of the possibility of block exemption regulations, which are binding in their entirety and directly applicable in all Member States pursuant to Article 288 TFEU. If a given aid measure, by nature of its objective, falls within the scope of current 581 guidelines and therefore has to be notified under these guidelines, only the assessment criteria (e. g. aid intensities, eligibility criteria) as formulated in those guidelines apply. 1510 State aid cases which are covered by a particular guideline but fail to meet all conditions 582 therein (e. g. because they surpass the permitted aid intensities or do not comply with all eligibility criteria) will be declared incompatible with the internal market, and the Commission will not reassess them on the basis of the notice cited in the preceding paragraph1511. d) Self-binding through block exemption regulations. The Council has authorized 583 the Commission in a so called enabling regulation1512 in 1998 to stipulate those types of aid that are exempt from the registration process by so-called block exemption regulations. Based on this authorization, the Commission adopted in 2001/2002 and 2006 the following block exemption regulations: – Commission Regulation (EC) No. 68/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to training aid;1513 – Commission Regulation (EC) No. 70/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises;1514 – Commission Regulation (EC) No. 2204/2002 of 12 December 2002 on the application of Articles 87 and 88 of the EC Treaty to State aid for employment; 1515 – Commission Regulation (EC) No. 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid granted by Member States.1516 1507 ECJ Joined Cases C-75/05 P and C-80/05 P Germany and Others v Kronofrance [2008] ECR I-6619, mn. 61 and case-law cited; GC Cases T-380/94 AIUFFASS and AKT v Commission [1996] ECR II-2169, mn. 57, and T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 89. 1508 GC Joined Cases T-267/08 and T-279/08 Re ´gion Nord-Pas-de-Calais and Communaute´ d’agglome´ration du Douaisis v Commission [2011] ECR II-1999, mn. 131, GC Cases T-27/02 Kronofrance v Commission [2004] ECR II-4177, mn. 79; T-35/99 Keller and Keller Meccanica v Commission [2002] ECR II-261, mn. 77. 1509 See Koenig/Ku ¨ hling/Ritter, mn. 203. 1510 Common principles for an economic assessment of the compatibility of State aid under Article 87(3) EC-Treaty, point 6, published at http://ec.europa.eu/competition/state_aid/reform/economic_assessment_en.pdf. 1511 See the document cited in the previous footnote, mn. 7. 1512 See for that Council Regulation (EC) No. 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ 1998 L 142/1. 1513 OJ 2001 L 10/20. Regulation last amended by Commission Regulation (EC) No. 1976/2006. 1514 OJ 2001 L 10/33. Regulation last amended by Commission Regulation (EC) No. 1976/2006 (OJ 2006 L 368/85.), extending the scope of application of the regulation to research and development State aid. 1515 OJ 2002 L 337/3. Commission Regulation last amended by Regulation (EC) No. 1976/2006; see Zuleger, Die neue Gruppenfreistellungsverordnung fu¨r Bescha¨ftigungsbeihilfen, EuZW 9/2003 270. 1516 OJ 2006 L 302/29.

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These regulations were replaced by the general block exemption regulation (Commission Regulation (EC) No. 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the EC Treaty1517) and consequently by Commission Regulation (EU) No 651/2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty.1518 In order to avoid administrative burden in case of small quantities of aid which are considered not to have distortive affects in the internal market, the Commission adopted Regulation (EC) No. 69/2001 of 12 January 2001 on the application of Articles 87 and 88 of the Treaty on the ‘de minimis’ aid.1519 This Regulation was replaced by Commission Regulation (EC) No. 1998/2006 of 15 December 2001 on the application of Articles 87 and 88 of the Treaty on the ‘de minimis’ aid1520, which was than replaced again by Commission Regulation (EC) No 1407/2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid.1521 The Commission has also adopted a number of regulations in the field of agriculture, fisheries and transport.1522 These regulations have direct effect in the Member States. The national authorities, including the courts are bound by them, since they do not require any special implementation at national level. Through block exemption regulations, certain categories of aid are declared compatible with the internal market, provided the conditions set out therein are met. Such aid is no longer subject to notification and need not be approved individually for each case by the Commission. The usual pre-inspection by the Commission is omitted or is replaced by an ex-post control by national courts (provided that the national law provides the procedural condition, such as a claim of legitimacy against competitors 1523). Insofar, block exemption regulations cause decentralization of State aid control.1524 For block exemption regulations to show the intended effects, they have to stipulate the purpose of the aid, the categories of beneficiaries, the aid intensity (or maximum State aid amounts), the conditions for cumulating State aid and the conditions of monitoring rules.1525 The block exemption regulations have – as do the guidelines and the framework – a binding effect on the Commission: It cannot grant approvals in a particular case derogating from the block exemption regulation. If this is necessary due to special circumstances, the respective block exemption regulation must also be changed or adjusted with the ‘deviant’ decision. 1517 OJ 2008 L 214/3. For new publishing see Deiberova/Nyssens, The new General Block Exemption Regulation (GBER): What changed? EStAL 1/2009, 27. 1518 OJ 2014 L 187/1. 1519 OJ 2001 L 10/30. 1520 OJ 2006 L 379/5. See Berghofer, The New De Minimis Regulation: Enlarging the Sword of Damocles? EStAL 1/2007, 11. 1521 OJ 2013 L 352/1. 1522 See for that the commentary in the chapters on fundamentals for Article 107 mn. 1. 1523 Unlike in Austria, it seems that in Germany the competitors had no standing to claim for injunctive relief against the beneficiary, see Martina Maier und Matthias Johannes Nordmann, Keine Erhebung von Umsatzsteuer bei sta¨dtischem Krematorium, EuZW 4/2004, 125, and Bartosch, Die Durchsetzung der Beihilferechtswidrigkeit staatlicher Maßnahmen vor nationalen Gerichten, EuZW, 13/2005, 396. That only changed in 2011: see Bundesgerichtshof of 10 February 2011, I ZR 136/09. One could therefore say that the third phrase of Article 108(3) TFEU in Germany only entered in force in February 2011. 1524 Sinnaeve, Die ersten Gruppenfreistellungen: Dezentralisierung der Beihilfenkontrolle, EuZW 3/ 2001, 69. 1525 See Article 1 mn. 2 and 3 of the Authorizing Council Regulation (EC) No. 994/98.

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4. How can the Commission decide? a) Based on the content of the decision. aa) Phase-One-Decision. The Court distinguishes between the preliminary examination under Article 108(3) TFEU on the one hand, which only serves to allow the Commission a prima facie opinion as to whether the aid in question is entirely or partially compatible with the Treaty, and the examination under Article 108(2) TFEU. It is only in connection with the latter examination, which is designed to enable the Commission to be fully informed of all the facts of the case, that the Treaty imposes an obligation on the Commission to give the parties concerned notice to submit their comments.1526 This case law is at least ambiguous and may also be misleading. In the vast majority of cases, the Commission makes a so-called phase-one decision; the Court regards this as given in the preliminary stage. If one disregards the option that pursuant to Article 4(2) Procedural Regulation, the Commission may note that no State aid is granted, such a phase-one decision can only be based on clear proof of the compatibility of the measure with the internal market, which – in the light of the general prohibition of State aid in Article 107(1) TFEU – cannot be established on the basis of a prima facie opinion or a simple preliminary assessment. Such a decision is subject to control by the two fora of European Courts. Therefore, it must follow a proper investigation that corresponds with the rule of law. For this reason alone, it cannot depend on a ‘prima facie’ or ‘first’ opinion. In practice, such a decision will be issued if the Commission in the course of investigation engages in a dialogue with the notifying Member State and is satisfied that the measure is compatible with the internal market. In essence, this will be the case if the benefits of State aid compared to the adverse consequences, such as restriction of competition and effect on trade, outweigh or if the aid meets the horizontal or sectoral regulations (communications, guidelines or frameworks). As far as a block exemption regulation in the relevant field is present, a decision of the Commission is not necessary. Based on above, it follows that a phase-one decision either stipulates that the notified measure does not meet all criteria of Article 107(1) TFEU, meaning a non-existence of state aid1527 and consequently, there is no notification requirement, or the Commission finds that the notified measure, insofar as it is within scope of Article 107(1) TFEU, does not raise doubts as to its compatibility with the internal market. 1528 In the second case, the Commission decides that the measure is compatible with the internal market (this kind of decision is called ‘decision not to raise objections’).

591

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bb) Decision about initiating a formal investigation procedure. Negative or condi- 595 tional decisions may be issued only after completion of a formal investigation procedure.1529 If after the first provisional test the Commission finds that the notified measure raises doubts as to its compatibility with the internal market, it shall decide to initiate proceedings under Article 108(2) TFEU (this form of decision is called the ‘decision to initiate the formal investigation procedure’)1530. It should be recalled that the decision to open proceedings pursuant to Article 6 of 596 the Procedural Regulation No. 2015/1589 must give the interested parties the opportu1526 ECJ Case C-225/91 Matra [1993] ECR I-3203, mn. 16, with reference to ECJ Case C-198/91 Cook [1993] ECR I-2487. 1527 Article 4(2) of Procedural Regulation (EC) No 2015/1589. 1528 Article 4(3) Procedural Regulation No 2015/1589. 1529 See below at c). 1530 Article 4(4) Procedural Regulation No 2015/1589.

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nity effectively to participate in the formal investigation procedure, during which they will have the opportunity to put forward their arguments1531. The procedure under Article 108(2) TFEU merely obliges the Commission to take steps to ensure that all persons who may be concerned are notified and given an opportunity of putting forward their arguments, but it does not require individual notice.1532. 597 The procedure under Article 108(2) TFEU is essential whenever the Commission has encountered serious trouble in assessing whether an aid is compatible with the internal market. The Commission therefore may only limit itself to the preliminary assessment phase – which must be comprehensive pursuant to the authors’ opinion – of Article 108(3) TFEU for the adoption of a positive decision regarding aid, when the Commission is convinced that the notified measure is compatible with the Treaty. 598 If, however, the initial or preliminary examination does not enable the Commission to overcome all the difficulties involved in determining whether the aid measure is compatible with the internal market, it is necessary to obtain all the relevant information and for that purpose to initiate the procedure provided for in Article 108(2) TFEU1533. The notion of serious difficulties is objective. Whether the Commission encounters them is to be assessed on the basis of the facts of the notified measures. In that regard, the Commission does not enjoy a wide margin of appreciation, thus, the control of legality by European courts is not limited to manifest errors of appreciation. cc) Phase two decisions. A decision that finds the notified measure incompatible with the internal market (‘negative decision’1534) can only be adopted after conducting a formal investigation, just like a decision that binds the approval with conditions or requirements (this kind of decision is called ‘conditional decision’)1535. 600 Certainly, such a phase-two-decision can end with the approval of the aid if the concerns regarding the compatibility of the notified measure with the internal market are eliminated in the course of the formal investigation procedure so that the Commission may find that the aid is ultimately compatible with the internal market (‘positive decision’)1536. Similarly, in the course of the formal investigation, the Commission can find that not all criteria of State aid within the meaning of Article 107(1) TFEU are met and that consequently the measure does not constitute State aid1537. 599

dd) Suspension order or provisional recovery of the State aid. After giving the Member State concerned the opportunity to submit its observations, the Commission may issue a decision requiring the Member State to suspend any unlawful aid until the Commission has adopted a decision on the compatibility of the aid with the internal market (this decision is called a ‘suspension order’)1538. 602 After giving the Member State concerned the opportunity to submit its observations, the Commission may issue a decision requiring the Member State to temporarily 601

1531 GC Cases T-195/01 and T-207/01 Government of Gibraltar v Commission [2002] ECR II-2309, mn. 138, and T-81/07 – T-83/07 Jan Rudolf Maas v Commission [2009] ECR II-0000, mn. 117. 1532 ECJ Case 323/82 Intermills v Commission [1984] ECR 3809, mn. 17 and GC Cases T-81/07 – T-83/ 07 Jan Rudolf Maas v Commission [2009] ECR II-0000, mn. 117. 1533 See in particular ECJ Cases 84/82 Germany v Commission [1984] ECR 1451, mn. 13; C-198/91 Cook v Commission [1993] ECR I-2487, mn. 29; C-225/91 Matra v Commission [1993] ECR I-3203, mn. 33; and C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 39. “In regard to the nature of serious difficulties and the margin of appreciation of the Commission see GC Case T-89/ 09 Pollmeier Massivholz v Commission [2015] ECR II-00000, mn. 49 (judgment under appeal).” 1534 Article 9(5) Procedural Regulation No 2015/1589. 1535 Article 9(4) Procedural Regulation No 2015/1589. 1536 Article 9(3) Procedural Regulation No 2015/1589. 1537 Article 9(2) Procedural Regulation No 2015/1589. 1538 Article 13(1) Procedural Regulation No 2015/1589.

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recover any unlawful aid until the Commission has adopted a decision on the compatibility of the aid with the internal market (this decision is called a ‘recovery order’) if the following criteria are met: – according to established practice with regard to the State aid character of the measure there is no doubt, – taking action is urgent and – a substantial and irreparable damage to a competitor is a real concern. 1539 Such a recovery order is not to be confused with appropriate measures ordered by national courts under Article 108(3) sentence 3 TFEU1540. ee) Request for information. With the opening of formal investigation procedure, 603 the Commission can obtain the necessary information required by formal decision and order the suspension of aid. Only if the Member State fails to provide the Commission with the information requested, the Commission is empowered to terminate the procedure and to decide on the basis of the information available to it, on the question whether or not the measure is compatible with the internal market. 1541 With the entry into force of Regulation No 734/2013, which amended Procedural Regulation No 659/ 1999, the Commission obtained new investigative powers. In particular, it is now entitled to “request any other Member State, an undertaking or an association of undertakings to provide all market information necessary to enable the Commission to complete its assessment of the measure at stake”. Even if these powers are very limited and the provisions on the use of the new powers quite restrictive, it is questionable, whether the Commission can decide using Article 15(1) second sentence of Procedural Regulation No 2015/1589 or must use the new powers before issuing such a decision. It could be argued that the notion of information available is much larger after the introduction of the new investigative powers. b) Depending on the object. aa) New and existing State aid. The decision of the 604 Commission may relate to existing or new state aid. This distinction is relevant in terms of deadlines to be met by the Commission and also with regard to the legal consequences of the decision. Thus, the so-called Lorenz-timelimit 1542 of two months within which the Commission has to adopt a phase-one-decision only applies to notified new state aid. The period is to be calculated from that time in which the Commission has at its disposal all the information necessary to conduct a detailed examination. 1543 Existing State aid is in essence one that has been introduced prior to the effective date 605 of the Treaty for the respective Member State and remained applicable after and aid which is approved by the Commission or deemed to be approved pursuant to Article 4(6) Procedural Regulation.1544 New State aid is State aid that cannot be regarded as existing state aid. This distinction is important for procedural reasons. In particular, the Commission cannot order the recovery of existing State aid that was granted before its decision. bb) Individual State aid and aid schemes. The Commission’s decision may further 606 relate to aid schemes, in which the beneficiaries are described in a general and abstract 1539

Article 11 mn. 2 Procedural Regulation. ECJ Case Case C-1/09 CELF [2010] ECR I-02090, mn. 37. 1541 Articles 12 and 13 of Procedural Regulation No 2015/1589; see also ECJ Cases C-324/90 and C342/90 Germany and Pleuger Worthington v Commission [1992] ECR I-1173, mn. 26, and ECJ Case C520/07 P Commission v MTU Friedrichshafen [2009] ECR I-08555, mn. 36. 1542 ECJ Case 120/73 Lorenz [1973] ECR 1471, mn. 4; see also Article 4 mn. 5 Procedural Regulation. 1543 ECJ Case C-99/98 Austria v Commission [2001] ECR I-1101, mn. 54. 1544 For further details see the exhaustive and far-reaching definition of Article 1 (b) of the Procedural Regulation No 2015/1589. 1540

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way, or to individual aid, which is not granted under a scheme or which has to be notified individually under an aid scheme.1545 This distinction was important in terms of a now – unfortunately – discontinued jurisprudence on the admissibility of competitor actions under Article 263(4) TFEU, according to which individual complaints against decisions on aid regimes used to be inadmissible: A decision on an aid scheme (such as via sectoral tax relief) is a decision of general scope and is a measure of general effect. Such a provision applies to objectively determined situations and produces legal effects with respect to categories of persons envisaged in a general and abstract way. Although such a decision is addressed to the Member State, it appears to be with regard to the potential beneficiaries a measure of general application covering situations which are determined objectively, and entails legal effects for a class of persons envisaged in a general and abstract manner.1546 Therefore, individualization in the sense of the Plaumann-jurisprudence1547 does not occur. 607 In the case of an aid scheme, the Commission may confine itself to examining the general characteristics without being required to examine each particular case in which it applies1548 in order to determine whether a scheme contains elements of State aid. 1549 608 In contrast to this case law of the ECJ, the General Court considers that the Commission is not prevented from testing the application in a particular case of a notified aid scheme in addition to the abstract general analysis of the scheme itself. The Commission can consider that some specific applications of the aid scheme notified constitute aid while others do not, or can declare certain applications only to be incompatible with the internal market.1550 Although the above text is worded as ‘can’, the General Court constructed a legal obligation, given that the negative Commission decision was annulled precisely because it had not given special consideration to the unique situation of the applicant. cc) Notified and unlawful State aid. The Commission decision may relate to notified or non-notified (unlawful or unlawfully granted) State aid. This distinction is important in light of the deadlines to be met: In the case of non-notified (unlawful) State aid the Commission is not bound by time limits. Further to this, the distinction is important in the light of the obligation of national Courts set out in Article 108 (3) third sentence. 610 The fact that State aid has been granted without notification to the Commission and is thus unlawful does not relieve the Commission from the obligation to adopt a decision on the compatibility of the aid with the internal market.1551 609

611

c) Not every letter of a Union institution is a decision. According to settled case law, the mere fact that a letter is sent by a Union institution in response to a request made by the addressee of that letter is not enough for it to be treated as a decision for the purposes of Article 230 EC, thereby entitling its recipient to bring an action for its annulment.1552.According to settled case-law, only measures with binding legal effects are capable of affecting the interests of the applicant by bringing about a distinct change 1545

See Article 1 lit. d) and e) Procedural Regulation No 2015/1589. GC Case T-398/94 Kahn Scheppvaart v Commission [1996] ECR II-477, mn. 39. 1547 ECJ Case 25/62 Plaumann v Commission [1963] ECR 213. 1548 ECJ Cases C-15/98 and C-105/99 Italy and Sardegna Lines v Commission [2000] ECR I-8855, mn. 51, and C-278/00 Greece v Commission [2004] ECR I-3997, mn. 24. 1549 ECJ Case C-66/02 Italy v Commission [2005] ECR I-10901, mn. 91. 1550 GC Case T-9/98 Mitteldeutsche Erdo ¨ l-Raffinerie v Commission [2001] ECR II-3367, mn. 116. 1551 ECJ Case 301/87 France v Commission [1990] ECR I-307. 1552 GC Cases T-152/06 NDSHT Nya Destination Stockholm Hotell & Teaterpaket AB v Commission [2009] ECR II-00000, mn. 35; T-277/94 AITEC v Commission [1996] ECR II-351, mn. 50; T-154/94 CSF and CSME v Commission [1996] ECR II-1377, mn. 51; T-130/02 Kronoply v Commission, [2003] ECR II4857, mn. 42. 1546

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in his legal position and are – for that reason – capable of being the subject-matter of an action for annulment under Article 263 TFEU.1553 For determining whether an act or a decision produces such effects, its substance 612 must be examined.1554 Generally, the form of the subject of an action or a decision has no effect on assessing whether a decision can be contested under Article 263 TFWU. 1555 The addressee of a State aid decision examining the compatibility of an aid measure 613 with Article 107 TFEU, concluded pursuant to Article 4 of the Procedural Regulation is always the Member State concerned. A communication addressed to a complainant, may outline the terms of such a decision, even if that decision this has not been sent to the Member State concerned.1556 d) The Commission must end each procedure with a decision. It is not an (actionable) 614 decision when the Commission informs the participants in accordance with Article 24 of the Procedural Regulation (No. 2015/1589) that there are insufficient grounds to represent a view on the case. In such a case, the Commission must give the interested parties the opportunity to submit additional comments within a reasonable period of time.1557 Has the Commission obtained all these comments or has a reasonable period for taking 615 a decision expired; the Commission has to terminate the preliminary examination under Article 15(1) of the Procedural Regulation No. 2015/1589 with the adoption of a decision under Article 4(2), (3) or (4) of that Regulation, i. e. a decision determining that no State aid is granted, no objections are raised or that a formal investigation procedure must be initiated. Therefore, the Commission has to either open the next level of investigation or settle the matter through the adoption of a definitive decision in due time1558. According to Article 24(3) of the Procedural Regulation No 2015/1589, “at its 616 request, any interested party shall obtain a copy of any decision pursuant to Articles 4 and 7, Article 10(3) and Article 11”.

5. Period of time a) Statutory period. aa) Phase one decisions. As mentioned above, the Commission 617 has to adopt phase-one decisions within two months as from the moment it has at its disposal all the information necessary to conduct a detailed examination. 1559 The purpose of that provision, which seeks to prevent the implementation of aid contrary to the Treaty, requires that the prohibition laid down in that respect by the last sentence of Article 108(3) TFEU should be effective during the whole of the preliminary stage. That is why, in order to take account of the interest of Member States in being informed of the position quickly in spheres where the necessity to intervene may be of an urgent nature, the Commission must act diligently.1560 The Commission has to pass a decision on whether it will open a formal examination 618 within the first two months. This period of time starts on the day of complete 1553 ECJ Case 60/81 IBM v Commission [1981] ECR 2639, mn. 9; GC Cases T-351/02 Deutsche Bahn v Commission [2006] ECR II-1047, mn. 35; T-130/02 Kronoply v Commission [2003] ECR II-4857, mn. 43. 1554 GC Case T-130/02 Kronoply v Commission [2003] ECR II-4857mn. 44, with reference to the Order in Case C-50/90 Sunzest v Commission [1991] ECR I-2917, mn. 12. 1555 ECJ Case 60/81 IBM v Commission [1981] ECR 2639, mn. 9, ECJ Case 22/70 Commission v Council [1971] ECR 263, mn. 42 and GC Case T-353/00 Le Pen v Parliament [2003] ECR II-1729, mn. 77. 1556 GC Case T-182/98 UPS Europe v Commission [1999] ECR II-2857, mn. 38. 1557 ECJ Case C-521/06 P Athinaiki Techniki AE v Commission [2008] ECR I-5829, mn. 39. 1558 See within the procedure in competition issues: ECJ Case C-282/95 P Gue ´rin automobiles v Commission [1997] ECR I-1503, mn. 36, and for the area of State aid control: ECJ Case C-521/06 P Athinaiki Techniki AE v Commission [2008] ECR I-5829, mn. 40. 1559 ECJ Case C-120/73 Lorenz [1973] ECR 1471; mn. 4. 1560 ECJ Case C-120/73 Lorenz [1973] ECR 1471; mn. 4.

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notification or once the Commission has all the information necessary to conduct a detailed examination. For the purposes of the preliminary examination phase, the notification can be considered complete, when the Commission receives all of the information which enables it to form an opinion on the compatibility of the aid notified.1561 If the Commission does not come to a decision within this time frame and fails to initiate the contentious procedure within a reasonable period of time, the Member State may, after giving prior notice to the Commission, put the aid in question into effect, whereupon it will come under the system for existing aid.1562 619 The time frame can be extended on the basis of consent between the Member State and the Commission. 620 If the Commission fails to start a formal examination within this time frame of two months, the Member State may implement the measures in question after giving the Commission prior notice thereof, unless the Commission takes a decision pursuant to this Article within a period of 15 working days following receipt of the notice. 621

bb) Phase two decision. According to Article 9(6) of the Procedural Regulation No 2015/1589, the Commission shall as far as possible endeavour to adopt a decision within a period of 18 months from the opening of the procedure. This time limit may be extended by common agreement between the Commission and the Member State concerned. In the light of the non-binding nature of the time-limit in Article 7(6), the possibility of the extension does not seem to be necessary.

cc) Unlawful aid. Since unlawful aid is usually granted before or without notification, the Member States cannot have an interest in obtaining legal certainty in due time. Hence, there are no time frames for the assessment of unlawful aid. 623 According to the case-law of the Court of Justice, the requirement of legal certainty does however prevent the Commission from indefinitely delaying the exercise of its powers 1563. 622

b) Other timely aspects. aa) Information available at the time of decision. The Commission has to base its decision on the information available at the time of the decision. According to the case law of the ECJ, the legality of a decision concerning State aid is to be assessed in the light of the information available to the Commission when the decision was adopted.1564 As Advocate General Darmon has stated1565, the judicial review is limited to the legality of the decision and cannot be connected to a resumption of the examination of State aid procedure based on criteria that were not raised before the conclusion of the decision process. 625 Thus, in certain cases where the request for information by the Commission had not been answered, the ECJ has not permitted factual recitations by Member States that had not already been raised in the administrative proceedings before the Commission. 1566 626 Therefore in proceedings to annul a decision of the Commission, the legality of the contested measure must be assessed on the basis of the elements of fact and of law existing at the time when the measure was adopted.1567 624

1561

ECJ Case C-99/98 Austria v Commission [2001] ECR I-1101, mn. 56. ECJ Case C-99/98 Austria v Commission [2001] ECR I-1101, mn. 32. 1563 ECJ Cases C-74/00 and C-75/00 Falck SpA and Acciaierie di Bolzano SpA v Commission [2002] ECR I-7869, mn. 140. 1564 ECJ Cases C-241/94 France v Commission [1996] ECR I-4551, mn. 33; 234/84 Belgium v Commission [1986] ECR 2263, mn. 16; 84/82 Germany v Commission [1984] ECR 1451. 1565 ECJ Case 248/84 Germany v Commission [1987] ECR 4013, mn. 8 and 9. 1566 ECJ Case C-241/94 France v Commission [1996] ECR I-4551, mn. 36 et seq. 1567 ECJ Cases 15/76 and 16/76 France v Commission [1979] ECR 321, mn. 7, and C-277/00 Germany v Commission [2004] ECR I-3925, mn. 39. 1562

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Where the Commission gave the Member States sufficient opportunity – such as 627 through the opening of formal proceedings – to submit their comments, it cannot be criticised for having failed to take account of any elements of fact which could have been submitted to it during the administrative procedure but which were not, as the Commission is under no obligation to consider, of its own motion and on the basis of prediction, what elements might have been submitted to it.1568 bb) The Commission applies the provisions which are in force at the time of the decision. According to the case-law of the ECJ, amending legislation applies to the effects in the future of situations which have arisen under the law as it stood before amendment1569 The ECJ has also ruled that the protection of legitimate expectation cannot be extended to the point of generally preventing new rules from applying to the future effects of situations which arose under the earlier rules. 1570 The ECJ also applies this jurisprudence to State aid, its rationale is the following: according to Article 108(3) TFEU planed State aid have to be examined in advance 1571. Pursuant to Article 4(1) of the Procedural Regulation the Commission has to examine the notification immediately after receipt. This rule only places the Commission under a particular duty of diligence and is not a provision for the temporal application of the criteria to assess the compatibility of the notified aid scheme with the internal market. Such a rule can also not be derived from Article 4(2) of the Procedural Regulation, which stipulates a two-month deadline for the preliminary examination. The question, whether a subsidy constitutes State aid within the meaning of the Treaty, must be applied to an objective situation, which falls to be appraised on the date on which the Commission takes its decision.1572 Consequently the Court’s judgement of the Commission’s decision is also based on the assessment of the facts and the rules at that time of the decision. In addition, the rules, principles and criteria of assessment of the compatibility of State aid in force at the date on which the Commission takes its decision may, as a rule, be regarded as better suited to the to the context of competition. 1573 Consequently, the notification by a Member State of aid or a proposed aid scheme does not give rise to a definitively-established legal situation which requires the Commission to rule on their compatibility with the internal market by applying the rules in force at the date on which that notification took place. On the contrary, it is for the Commission to apply the rules in force at the time when it gives its decision, the only rules on the basis of which the lawfulness of the decision it takes in that regard falls to be assessed.1574

628

629

630

631

632

c) Applicable law for the assessment of unlawful State aid. A number of instruments 633 that have been adopted by the Commission in previous years contained provisions, according to which unlawful aid – meaning aid in breach of Article 108(3) TFEU1575 – 1568 GC Case T-17/03 Schmitz-Gotha Fahrzeugwerke v Commission [2006] ECR II-1139, mn. 54, with further references. 1569 ECJ Case 68/69 Brock [1970] ECR 171, mn. 7; ECJ Case 270/84 Licata v WSA [1986] ECR 2305, mn. 31. 1570 ECJ Cases 278/84 Germany v Commission [1987] ECR 1, mn. 36; and 203/86 Spain v Council [1988] ECR 4563, mn. 19. 1571 ECJ Case 120/73 Lorenz [1973] ECR 1471, mn. 2. 1572 ECJ Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR I-5479, mn. 137; and C-341/06 P and C-342/06 P Chronopost und La Poste v UFEX [2008] ECR I-0000, mn. 95. 1573 ECJ Case C-334/07 P Commission v Freistaat Sachsen [2008] ECR I-0000, mn. 51–52. 1574 ECJ Case C-334/07 P Commission v Freistaat Sachsen [2008] ECR I-0000, mn. 53. 1575 OJ 2002 C 70/8.

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will be assessed on the basis of the provisions that were in place at the time it was provided. This applied to guidelines on State aid for environmental protection and the multi-sector framework on regional aid for large investment projects – bot repealed already years ago. 634 In order to create transparency and legal certainty, the Commission, has informed the Member States and third parties in a notice1576 that the Commission will apply this rule broadly. This notice lays out how the Commission uses its discretion in examining the compatibility of State aid and the internal market. The Commission announced therefore that it will assess the compatibility of unlawful State aid on the basis of the criteria applicable at the time the aid was granted. This notice does, however, not apply to special provisions on the aid for rescuing and restructuring undertakings, in particular banks, affected by the financial crisis. This notice is also without prejudice to the interpretation of the regulations of the Council and the Commission in the field of State aid, given that the Commission cannot limit or alter the temporal effects or limit the scope of a provision created by a different legislative organ.

6. Content and effect of the decision 635

a) No cure for the unlawfulness of the aid. A decision of the Commission that nonnotified aid is compatible with the internal market only has the legal effect that this aid is considered compatible. It does not cure the breach of the prohibition set out in Article 108(3) 3rd sentence TFEU. Measures to implement this aid are therefore illegal, as they cannot evade the direct effect of the cited provision. Any contrary interpretation would have the effect of according a favourable outcome to the non-observance by the Member State concerned would deprive that provision of its effectiveness. 1577

b) The unlawfulness of the aid does not exempt the Commission from its obligation to examine its compatibility with the internal market. In the Boussac1578 case brought before the ECJ, the Commission took the view that a failure to notify State aid constitutes a breach of compulsory provisions and leads therefore, in and of itself, to the illegality of the aid. Furthermore, according to the Commission, this illegality means that no further examination of the (material) legality of the aid is required. 637 The ECJ rejected this view, as it would allow the prohibition of aid purely on the basis of a procedural irregularity1579. The Commission must, therefore, adhere to the following procedural steps when evaluating non-notified aid: – Where aid was granted without the notification of the Commission, it may, after hearing it, instruct the Member State concerned to discontinue the payment of the aid immediately until the Commission has completed its examination and to provide the Commission with all necessary documents within a set time frame. – The Commission is afforded the same powers as above, where the Member State notified the aid but implemented it before the end of the proceedings stipulated in Article 108(2) and (3) TFEU and therefore in violation of these provisions. – The Commission is obliged to examine the compatibility of the aid with the internal market in accordance with the procedure set out in Article 108(2) and (3) TFEU and the Procedural Regulation No 2015/1589. 636

1576

OJ 2002 C 119/22. ECJ Cases C-354/90 Fe´de´ration nationale du commerce exte´rieur des produits alimentaires et al. ¨ lleitung [2006] ECR I-9957, mn. 41; C-261/01 and C[1991] ECR I-5505, mn. 16; C-368/04 Transalpine O 262/01 Van Calster [2003] ECR I-12249, mn. 63. 1578 ECJ Case 301/87 France v Commission [1990] ECR I-307, the opinion of the Commission see mn. 9. 1579 ECJ Case 301/87 France v Commission [1990] ECR I-307, mn. 11. See also mn. 19–22. 1577

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– Where the Member State does not provide the Commission with the requested documents, the Commission can follow through with the proceedings and base its decision purely on the information provided to it. This decision may order the Member State to reclaim the aid already paid to the undertakings. Recent case law of the ECJ has kept with this jurisdiction1580. 638 c) The method of financing. The ECJ has repeatedly ruled that the method of 639 financing alone can make an entire State aid scheme incompatible with the internal market. Therefore, the aid cannot be considered separately from its method of financing. The method of financing forms an integral part of the measure, if it forms an integral part of the measure.1581 For that reason, the notification of the aid must include the method of financing. Without this information, it is possible that the Commission declares an aid measure compatible, when, if the Commission had been aware of its method of financing, it could not have been so declared.1582 d) Distortion of competition and effects on trade. aa) General requirements. Any grant of aid granted to an undertaking exercising its activities in the internal market may be liable to cause distortion of the competition and affect trade between Member States 1583 The Commission must make mention of the circumstances in which the aid was granted. The Commission may not be so general as to simply assert the distortion of competition but does also not have to analyse the market shares, competition on the market as well as trade flows between the Member States 1584. It is sufficient to examine whether that aid is liable to affect such trade and distort competition. In the case of aid granted illegally, the Commission is not required to demonstrate the actual effect which that aid has had on the competition and on trade between Member States.1585 Furthermore, it is not necessary that the beneficiary undertaking should itself participate in the intra-Union trade. Where a Member State grants aid to an undertaking, internal activity may be maintained or increased as a result, so that the opportunities for undertakings established in other Member States to penetrate the market in that Member State are reduced as a result. The aid can also put the undertaking in the position to compete in other Member States but not on the basis of equal strength 1586. The Commission is also not required to prove that there will be a ‘permanent’ distortion of competition or whether the anti-competitive effects of the aid are significant. 1580 ECJ Cases C-142/87 Belgium v Commission [1990] ECR I-959, mn. 15- 20; C-354/90 Fe ´de´ration nationale du commerce exte´rieur des produits alimentaires and Syndicat national des ne´gociants et transformateurs de saumon v France [1991] ECR I-5505, mn. 13; C-39/94 Syndicat français de l’Express international (SFEI) et al. v La Poste et al [1996] ECR I-3547, mn. 43. 1581 ECJ Cases C-261/01 and C-262/01 Van Calster [2003] ECR I-12249, mn. 49, and C-345/02 Pearle et al [2004] ECR I-7139, mn. 29; see, Geburtig, Die Abgabenerhebung im Visier des Europa¨ischen Beihilferechts – eine kritische Anmerkung zur van Calster-Rechtsprechung des ECJ, EuZW 23/2005, 716, Jaeger, Grenzen der staatlichen Zurechenbarkeit parafiskalischer Abgabenerhebung durch o¨ ffentliche Einrichtungen, EuZW 18/2004, 558; Jaeger, Nachtra¨gliche Beihilfengenehmigung und der Rechtsschutz von Konkurrenten vor nationalen Gerichten, EuZW 3/2004, 78. 1582 ECJ Cases C-261/01 and C-262/01 Van Calster [2003] ECR I-12249, mn. 50; GC Cases T-371/94 and T-394/94 British Airways et al. and British Midland Airways v Commission [1998] ECR II-2405, mn. 79. 1583 ECJ Case 730/79 Philip Morris v Commission [1980] ECR 2671, mn. 11 and 12, GC Case T-214/95 Vlaams Gewest v Commission [1998] ECR II-717, mn. 48 to 50, and GC Cases T-92/00 and T-103/00 ´ lava – Diputacio´n Foral de A ´ lava [2002] ECR II-1385, mn. 72. Territorio Histo´rico de A 1584 ECJ Cases C-148/04 Unicredito Italiano [2005] ECR I-11137, mn. 54 and further cases mentioned there. 1585 GC Cases T-55/99 CETM v Commission [2000] ECR II-3207, mn. 100–103, and T-198/01 Technische Glaswerke Ilmenau v Commission [2004] ECR I-2717, mn. 215. 1586 ECJ Case C-66/02 Italy v Commission [2005] ECR I-10901, mn. 117.

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According to the case-law, it is not necessary that such, distortion is significant or substantial.1587 645 Under special circumstances the Commission may, however, have to examine whether aid can affect the trade between Member States and distort competition. This is the case where the aid at issue is intended to finance, by means of loans at reduced rates, expenses for market penetration programmes in non-member States concerning the establishment of permanent structures1588. 646

bb) Specifics regarding tax exemptions. In terms of the requirement that there be an effect on trade, it follows from the jurisdiction of the Court, that granting aid in the form of a tax exemption can affect the trade between Member States if the beneficiaries pursue an economic activity or are in competition with undertakings or other commercial agents in other Member States1589.

647

cc) Regarding small benefits. It cannot generally be said that a State subsidy granted to an undertaking which provides only local or regional transport services and does not provide services outside its State of origin will have no effect on trade between Member States.1590 Article 107 aims to prevent free trade from being compromised by means of any terms and concessions that favour certain undertakings and distort competition. This provision does not differentiate between certain measures on the basis of their objectives but on the basis of their effects. It is, therefore, not sufficient for a measure to be a tax or to have social aims, in order to be exempted from the application of Article 107 TFEU1591. The ECJ has also ruled that the trade between Member States must generally be considered affected when aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intraUnion trade.1592

dd) Minor subsidies. There is no threshold below which it may generally be said that the trade between Member States is not affected. The relatively small amount of aid or the relatively small size of the undertaking, which receives it, do not – as such – exclude the possibility that intra-Union trade might be affected 1593. This could lead one to conclude, that there is no such thing as a ‘de-minimis’ aid to which the State aid rules do not apply. 649 The ECJ’s judgment in the case Heiser1594 contradicts this conclusion slightly as it alludes to the idea that the ECJ would be willing to accept a ‘de-minimis rule’. The argument made in mn. 34 of the judgment according to which the Court did not have sufficient information to conclude that the subsidy was below the threshold of Euro100 000 for the period of three years would be not understandable, if the Court considered that ‘de-minimis’ aid has to be treated under Article 107 TFEU. The ECJ only concluded, that since the national authority did not limit the amount officially, it could not be proven that this small subsidy fell under a ‘De-minimis rule’. 648

1587 GC Cases T-211/05 Italy v Commission [2009] ECR II-0000, mn. 157, and T-92/00 and T-103/00 ´ lava v Commission [2002] ECR II-1385, mn. 78. Diputacio´n Foral de A 1588 ECJ Case C-494/06 P Commission v WamSpA [2009] ECR I-00000, mn. 56/57. 1589 Compare ECJ Case C-172/03 Heiser [2005] ECR I-1627, mn. 35, and ECJ Case C-88/03 Portugal v Commission [2006] ECR I-07175, mn. 91. 1590 ECJ Case C-280/00 Altmark [2003] ECR I-7747, mn. 77 and 78. 1591 ECJ Case 173/73 Italy v Commission [1974] ECR 709, mn. 13. 1592 ECJ Case C-222/04 Cassa di Risparmio di Firenze et al. [2006] ECR I-289, mn. 141 and mentioned cases. 1593 ECJ Cases C-142/87 Belgium v Commission [1990] ECR I-959, mn. 43, C-278/92 – C-280/92 Spain v Commission [1994] ECR I-4103, mn. 42, and C-280/00 Altmark [2003] ECR I-7747, mn. 81. 1594 ECJ Case C-172/03 Heiser [2005] ECR I-1627, mn. 34.

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In summary we can conclude, that neither a very small subsidy nor a subsidy that 650 only benefits a small undertaking can be said ‘per se’ to not affect the trade between Member States1595. e) Incentives and necessity. The Commission can only consider State aid to be 651 compatible with Article 107(3) TFEU if the aid contributes to achieving competitive goals that could not be achieved under normal market conditions. Furthermore, Member States may not subsidies an undertaking beyond the point necessary for the attainment of the objectives specified in Article 107(3) TFEU 1596. It is not acceptable for aid to include arrangements, in particular as regards its 652 amount, whose restrictive effects exceed what is necessary to enable the aid to attain the objectives permitted by the Treaty.1597 State aid is necessary if the beneficiary would not be able to make the rational or 653 required investment without it. If an application for aid is made after the investment has been made, it can generally be said that the subsidy was not required to make said investment. The term investment also has a quantitative component: there is no incentive to invest, if the subsidy is so low that the investment will not be profitable in the medium to long term.

7. No violation of other provisions of the TFEU by the Commission’s decision a) No violation of other provisions. According to the jurisprudence of the ECJ, it is clear 654 from the general scheme of the Treaty that the procedure conducted by the Commission must never produce a result which is contrary to the specific provisions of the Treaty. 1598 State aid, certain conditions of which contravene other provisions of the Treaty, cannot therefore be declared by the Commission to be compatible with the internal market1599. Consequently, State aid must not be discriminatory within the meaning of Article 18 TFEU, infringe the free movement of workers (Article 45 TFEU), the right of establishment (Article 49 TFEU) or the freedom to provide services (Article 56 TFEU) 1600. b) The modalities of State aid. The ECJ has also ruled that any modalities of aid that 655 are inextricably linked to this aid cannot be judged in isolation1601. The obligation on the part of the Commission to ensure that Articles 107 and 108 TFEU are applied consistently with other provisions of the Treaty is all the more necessary where those other provisions also pursue the objective of undistorted competition in the internal market 1602. c) Tax provisions. aa) Direct taxes. Although direct taxes falls within the competence 656 of the Member States, the latter must none the less exercise that competence consistently with European Union law1603. Consequently, if a Member State grants an under1595 See also ECJ Cases 730/79 Philip Morris Holland v Commission [1980] ECR 2671, mn. 11, E C-75/ 97 Belgium v Commission [1999] ECR I-3671, mn. 47, C-278/92 through C-280/92 Spain v Commission [1994] ECR fI-4103, mn. 42, and C-393/04 and C-41/05 Air Liquide [2006] ECR I-5293, mn. 36, as well as C-172/03 Heiser [2005] ECR I-1627, mn. 32. 1596 ECJ Case 730/79 Philip Morris Holland v Commission [1980] ECR 2671, mn. 17; see also Nicolaides, Is State Aid Necessary when Investment is unnecessary? EStAL 2/2008, 230. 1597 ECJ Case 74/76 Iannelli &Volpi [1977] ECR 557, mn. 15, and GC Case T-162/06 Kronoply v Commission [2009] ECR II-0000, mn. 66. 1598 ECJ Cases 73/79 Commission v Italy [1980] ECR 1533, mn. 11, and C-225/91 Matra v Commission [1993] ECR I-3203, mn. 41. 1599 ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 78–79. 1600 See in that sense ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 79. 1601 ECJ Case 74/76 Iannelli & Volpi [1977] ECR 557. 1602 ECJ Case C-225/91 Matra v Commission [1993] ECR I-3203, mn. 42. 1603 ECJ Cases C-107/94 Asscher [1996] ECR I-3089, mn. 36; and C-264/96 ICI [1998] ECR I-4695, mn. 19.

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taking a tax exemption but denies alike undertakings from other Member States the same treatment, this can generally be considered a discrimination that is not coherent with the principles of EU law as there is no objective difference between the situations of the two companies1604. For the same reason, aid schemes that are funded by means of taxes that are also levied on goods imported from other Member States cannot be approved, as they are an infringement of Article 28 and 30 TFEU and the provisions on the gradual elimination of tariffs and duties1605. The same applies to aid schemes connected to discriminatory taxes and therefore infringe Article 110 TFEU 1606. bb) Indirect taxes. With regards to indirect taxes, it must be noted that tax exemptions, tax reductions, tax differentiation and refunds, foreseen in various Directives on excise duties may constitute State aid and must, therefore, be notified to the Commission in accordance with Article 108(3) TFEU. Any information received by the Commission on the basis of these Directives does not exempt the Member States from their notification duties in accordance with Article 108(3) TFEU 1607. Even where these tax exemptions, tax reductions and tax refunds are approved – on the basis of specific procedures set out in the respective Directive – by the Council on a proposal of the Commission, this cannot replace the notification requirement and authorization by the Commission pursuant to Articles 107(3) TFEU (the principle of ‘double guichet’, which means that two different authorizations are required cumulatively). “For the issue of existence of State aid it is not relevant, whether the exemptions, reductions or refunds are compulsory or left to the appreciation of the Member State in individual cases.” 658 The ECJ has, however, also clarified that those liable to pay a tax cannot rely on the argument that the exemption enjoyed by other businesses constitutes State aid in order to avoid payment of that tax.1608 It follows that, even if the exemption at stake constitutes aid within the meaning of Article 107 EC, the fact that the aid may be unlawful does not affect the legality of the tax itself.1609 657

d) Quantitative restraints on trade. A system or a scheme of aid granted by a Member State or by means of State resources may, simply because it benefits certain national undertakings or products, hinder, at least indirectly, the importation of similar or competing products coming from other Member States. That is not in itself sufficient to put that measure as such on the same footing as a measure having an effect equivalent to a quantitative restriction within the meaning of Article 34 TFEU 1610. 660 State aid schemes can, however, be incompatible with the internal market if their aim is to keep imports out of a Member State and protect rather than fund or subsidize local producers1611. As the Court has consistently held1612, Article 107 TFEU may in no case be used to frustrate the rules of the Treaty on the free movement of goods. It is clear from the relevant case-law that those rules and the Treaty provisions relating to State 659

1604 ECJ Case C-107/94 Asscher [1996] ECR I-3089, mn. 42; and ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 80–85. 1605 ECJ Case 77/72 Capolongo v Maya [1973] ECR 611, 622–624, mn. 7–14. 1606 ECJ Cases 73/79 Commission v Italy [1980] ECR 1533, mn. 12–23; 17/81 Pabst & Richarz v HZA Oldenburg [1982] ECR 1331, mn. 21. 1607 See for example Article 26 of Directive Nr. 2003/96/EC, OJ 2003 L 283/51; see in that regard ECJ Case C-272/12 P Commission v Ireland et al. [2013] ECR I-00000, mn. 49, 50 and 53. 1608 ECJ Case C-390/98 Banks [2001] ECR I-6117, mn. 80. 1609 ECJ Joined Cases C-393/04 and C-41/05 Air Liquide [2006] ECR I-5293, mn. 43; ECJ Joined Cases C-430/99 and C-431/99 Sea-Land Service and Nedlloyd Lijnen [2002] ECR I-5235, mn. 47; and C-368/04 ¨ lleitung in O ¨ sterreich [2006] ECR I-9957, mn. 51. Transalpine O 1610 ECJ Case 74/76 Iannelli &Volpi [1977] ECR 557, mn. 9/10. 1611 ECJ Case 249/81 Commission v Ireland [1982] ECR 4005, mn. 18. 1612 See, in particular, ECJ Case 103/84 Commission v Italy [1986] ECR 1759, mn. 19.

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aid have a common purpose, namely to ensure the free movement of goods between Member States under normal conditions of competition. The fact that a national measure might be regarded as aid within the meaning of Article 107 is therefore not a sufficient reason to exempt it from the prohibition contained in Article 34 TFEU 1613. The prohibition of discrimination of goods from other Member States is also set out in Article 107(2)(a) TFEU. e) State monopolies. Measures conducted by a state monopoly that also constitute 661 State aid within the meaning of Article 107 TFEU also need to meet the requirements of Article 37 TFEU. Actions by such monopolies have to meet the requirements of Article 37 TFEU regardless of whether they constitute State aid or not 1614. f) Merger Control. A case that has been notified to the Commission can simulta- 662 neously fall under the provisions on State aid, merger control and Article 101 TFEU. Because each of these provisions has different objectives, the examination can bear different results, particularly regarding the compatibility of the measure 1615. The Commission is also not required to assess the legality of the supposed aid, namely the aid inherent in the merger, in a formal preliminary decision, but it cannot, in its analysis of the competitive situation refrain from assessing whether, and if so to what extent, the financial and thus the commercial strength of the merged entity was strengthened by the financial support provided by the supposed aid.1616. g) The limits of considering other provisions. Not any breach or infringement of 663 European Union law, which is liable to proceedings for a declaration that the member State has failed to fulfil its obligations under Article 258 TFEU can constitute a serious difficulty as regards the Commission’s assessment of the compatibility of the disputed aid with the internal market and result in a negative decision pursuant to Article 108 TFEU1617. Aid can only be considered incompatible due to the breach of other provisions if the restriction of competition goes beyond the restriction that is inherent to state funding by means of state aid1618.

8. The obligation to state reasons Since any State aid decision is a decision within the meaning of Article 288(4) TFEU, 664 the Commission is under the obligation to state reasons within the meaning of Article 296 TFEU. The reasons of a decision are of crucial importance because the operative part of an act may be indissociably linked to the statement of reasons for it, so that, when it has to be interpreted, account must be taken of the reasons which led to its adoption. The following principles apply to the duty to state reasons: a) Scope of the obligation to state reasons. It is settled case-law that the statement of 665 reasons required by Article 296 TFEU must be appropriate to the measure at issue and must disclose in a clear and unequivocal fashion the reasoning followed by the institution which adopted the measure in such a way as to enable the persons concerned to ascertain the reasons for it and to enable the competent Community court to exercise its power of review.1619 The requirements to be satisfied by the statement of reasons 1613

ECJ Case C-21/88 Du Pont de Nemours [1990] ECR I-00889 mn. 19–20. ECJ Case 91/78 Hansen v HZA Flensburg [1979] ECR 935, mn. 9. 1615 ECJ Case C-225/91 Matra v Commission [1993] ECR I-3203, mn. 40–47. 1616 GC Case T-156/98 RJB Mining v Commission [2001] ECR II-337, mn. 125. 1617 GC Case T-158/99 Thermalhotel Stoiser v Commission [2004] ECR II-1, mn. 159. 1618 See ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 78–79. 1619 ECJ Cases C-341/06 P and C-342/06 P Chronopost and La Poste [2008] ECR I-4777, mn. 89. 1614

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667

668

669

670

671

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depend on the circumstances of each case, in particular, the content of the measure in question, the nature of the reasons given and the interest which the addressees of the measure, or other parties to whom it is of direct and individual concern, may have in obtaining explanations.1620 “It is not necessary for the reasoning to go into all the relevant facts and points of law, since the question whether the statement of reasons meets the requirements of Article [296 TFEU] must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question.”1621 “In particular, the Commission is not obliged to adopt a position on all the arguments relied on by the parties concerned. It is sufficient if it sets out the facts and the legal considerations having decisive importance in the context of the decision.” 1622 Furthermore, a revocation of a previous decision does not alter the scope of the Commission’s duty to state reasons. The concept of State aid must be applied to an objective situation, which falls to be appraised on the date on which the Commission takes its decision.1623 The reasons why the Commission made a different assessment of the situation in question in a previous decision cannot therefore have any effect on the assessment of the legality of the contested decision. 1624 “Applied to the classification of a measure as aid, that principle requires a statement of the reasons for which the Commission considers that the measure concerned falls within the scope of Article [107(1) TFEU]. In that connection, even in cases where it is clear from the circumstances under which it was granted that the aid is liable to affect trade between Member States or to distort or threaten to distort competition, the Commission must at least set out those circumstances in the statement of reasons for its decision.” 1625 It follows from the case law concerning the requirement that a measure affects trade between Member States and distorts or threatens to distort competition in order to be qualified as State aid it is not necessary, to establish that the aid has a real effect on trade between Member States and that competition is actually being distorted, but only to examine whether that aid is liable to affect such trade and distort competition. 1626 This holds true for both existing and new aid.1627 b) Satisfaction of the requirement to state reasons. It has been repeatedly stated in the case-law that it is not appropriate for the Commission to express a view in the statement of reasons of a decision on measures that are outside the scope of the operative part of that decision.1628 However, “regardless of the grounds on which the contested decision is based, only the operative part thereof is capable of producing legal effects and, as a consequence, of adversely affecting the interests of those concerned. By contrast, the assessments made in the grounds of a decision are not in themselves capable of forming the subject-matter of an application for annulment. They can be 1620

ECJ Case C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 63. See e. g. ECJ Cases C-341/06 P and C-342/06 P Chronopost and La Poste [2008] ECR I-4777, mn. 88; ECJ Case C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 63, and the case-law cited; ECJ Case C-501/00 Spain v Commission [2004] ECR I-6717, mn. 73. 1622 GC Cases T-211/05 Italy v Commission [2009] ECR II-2777, mn. 68, and T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, mn. 279 to 281. 1623 ECJ Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission [2006] ECR 2006, I-5479, mn. 137, and C-89/08 P Commission v Ireland et al. [2009] ECR I-11245, mn. 73. 1624 ECJ Cases C-341/06 P and C-342/06 P Chronopost and La Poste [2008] ECR I-4777, mn. 95. 1625 ECJ Case C-88/03 Portugal v Commission [2006] ECR I-7115, mn. 89, and the case law cited there. 1626 ECJ Cases C-393/04 and C-41/05 Air Liquide [2006] ECR I-5293, mn. 34, and C-222/04 Cassa di Risparmio di Firenze [2006] ECR I-289, mn. 140, and the two cases mentioned there. 1627 ECJ Case C-372/97 Italy v Commission [2004] ECR I-3679, mn. 44. 1628 GC Cases T-81/07, T-82/07 and T-83/07 KG Holding and Others v Commission [2009] ECR II-2411 mn. 46. 1621

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subject to judicial review by the [Union’s] judicature only to the extent that, as grounds of a measure adversely affecting the interests of those concerned, they constitute the essential basis for the operative part of that measure”. 1629 Finally, it should be mentioned that, where some grounds of a decision on their own 672 provide a sufficient legal basis for the decision, any errors in other grounds of the decision have, in any event, no effect on its enacting terms. Moreover, where the enacting terms of a Commission decision are based on several pillars of reasoning, each of which would in itself be sufficient to justify those terms, that decision should, in principle, be annulled only if each of those pillars is vitiated by an illegality. In such a case, an error or other illegality which affects only one of the pillars of reasoning cannot be sufficient to justify annulment of the decision at issue because that error could not have had a decisive effect on the enacting terms adopted by the Commission Furthermore, if the operative part of the decision is based on several pillars of reasoning, each of which would in itself be sufficient to justify the operative part on its own, that decision should, in principle, be annulled only if each of those pillars is vitiated by an illegality.1630 c) Special cases. aa) Complaints. As regards a Commission decision finding that no 673 State aid as alleged by a complainant exists, it must be noted that the Commission must at least provide the complainant with an adequate explanation of the reasons for which the facts and points of law put forward in the complaint have failed to demonstrate the existence of State aid.1631 “The Commission is not required, however, to define its position on matters which 674 are manifestly irrelevant or insignificant or plainly of secondary importance”. 1632 bb) Complexity of aid assessments. “The fact that a decision is one of the first 675 dealing with a complex issue does not by itself justify a statement of reasons necessarily going into the detail of the calculation of those costs if […] the Commission took the view that the complainants’ grounds in that regard were misconceived in terms of the principles on which they were based.”1633 Assuming that an approach by the Commission was itself incorrect, that fact could be 676 relevant to the substance of the contested decision but not to its validity in procedural terms.1634 cc) Aid schemes. It should be reiterated that in the case of an aid programme, the 677 Commission may confine itself to examining the characteristics of the programme in question in order to determine, in the grounds of its decision, whether, by reason of the terms of the programme, it gives an appreciable advantage to recipients in relation to their competitors and is likely to benefit in particular undertakings engaged in trade between Member States.1635 However, this case-law is in conflict with the General Court’s case-law, according to which even in the case of aid schemes the Commission may be required to consider the individual application of that scheme to certain undertakings and must – under certain circumstances – assess it differently and individually. 1636 1629 Ibid.; see also GC Cases T-251/00 Lagarde `re and Canal+ v Commission [2002] ECR II-4825, mn. 68, and T-387/04 EnBW v Commission [2007] ECR II-1195, mn. 127. 1630 GC Case T-162/06 Kronoply v Commission [2009] ECR II-0000, mn. 62, and the further case law cited there. 1631 ECJ Cases C-341/06 P and C-342/06 P Chronopost and La Poste [2008] ECR I-4777, mn. 89. 1632 Ibid.; Case C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 64. 1633 ECJ Cases C-341/06 P and C-342/06 P Chronopost and La Poste [2008] ECR I-4777, mn. 94. 1634 Ibid. 1635 ECJ Case C-310/99 Italy v Commission [2002] ECR I-2289, mn. 89. 1636 GC Case T-9/98 Mitteldeutsche Erdo ¨ l-Raffinerie GmbH v Commission [2001] ECR II-3367, mn. 116.

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9. Recovery of aid 678

679

680

681

682

683 684 685

a) Objective of recovery orders. According to established ECJ case law, recovery of unlawful aid is the logical consequence of the finding that it is incompatible with the internal market. The purpose of the recovery is to restore the previous situation 1637. The Member States obligation to reimburse aid incompatible with the internal market has the purpose of restoring the previously existing situation, which is achieved only when the aid in question, together with default interest, has been repaid by the recipient. That objective is attained once the aid in question, increased where appropriate by default interest, has been repaid by the recipient, to the public body responsible for granting the State holdings. By repaying the aid, the recipient forfeits the advantage which it had enjoyed over its competitors on the market, and the situation prior to payment of the aid is restored.1638 This consequence cannot depend on the form in which aid was granted.1639 The objective is to restore the situation that existed before the aid was granted. The ability to issue a recovery order is an important complimentary instrument of State aid control1640 and is therefore explicitly provided for in Article 13(2) (provisional recovery) and Article 16 (recovery after a final negative decision) of the Procedural Regulation No 2015/1589. A negative decision regarding unlawful aid, i. e. aid granted before its approval, usually orders the Member State to reclaim the aid with interest and compound interest from the recipient. The recovery of unlawful aid takes place according to the relevant legal provisions of the Member State, as there are no European provisions concerning the recovery procedure. The national provisions must, however, be applied in such a way that the recovery is not rendered practically impossible and the interests of the Union are taken fully into consideration.1641 The application of national procedures may not impede the restoration of effective competition by preventing the immediate and effective execution of the Commission’s decision. To achieve this result, Member States are required to take all necessary measures ensuring the effectiveness of the Commission’s decision. 1642 The recovery order issued by the Commission must be distinguished from a recovery order under Article 108(3) TFEU issued by a national court.1643 The recovery order is not punitive in nature; it rather serves to eliminate the advantage enjoyed by the recipient as a result of the unlawful aid. 1644 The recovery of unlawful aid incompatible with the internal market is very difficult if the benefiting undertaking ceases to exist (becomes insolvent) and there is reason to suspect that the benefit has been conferred to a third party. In this case the recovery cannot be limited to a claim against the direct recipient. The Commission distinguishes 1637 ECJ Cases C-142/87 Tubemeuse [1990] ECR I-959, mn. 66;C-305/89 Alfa Romeo [1991] ECR I1603, mn. 41; C-404/00 Commission v Spain [2003] ECR I-6659, mn. 41, C-672/13 OTP Bank Nyrt [2015] I-00000, mn. 70. 1638 See e. g. ECJ Cases C-350/93 Commission v Italy [1995] ECR I-699, mn. 21 and 22; C-110/02 Commission v Council [2004] ECR I-6333, mn. 42. 1639 ECJ Cases C-404/97 Commission v Portugal [2000] ECR I-4897, mn. 38 and 46; C-183/91 Commission v Greece [1993] ECR I-3131, mn. 16; C-110/02 Commission v Council [2004] ECR I-6333, mn. 41. 1640 ECJ Case 70/72 Commission v Germany [1973] ECR 813, mn. 13. 1641 ECJ Case 94/87 Commission v Germany [1989] ECR 175, mn. 12. 1642 ECJ Case C-232/05 Commission v France [2006] ECR I-10071, mn. 50 (see also the decision analysis in EuZW 2/2007, 56). 1643 See e. g. Arhold, Ru ¨ ckforderung einer gemeinschaftsrechtswidrigen Beihilfe – Urteilsbesprechung zum Beschluss des OVG Berlin-Brandenburg v. 7 November 2005, 8 p. 93/05 (decision analysis). 1644 ECJ, C-74/00 and C-75/00 Falck and Acciaierie di Bolzano ECR 2002, I-7869, mn. 181.

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between two cases. If the capital goods that were acquired with State aid were sold at market value, it can be assumed that the buyer received no benefit (asset deal). If, however, the undertaking is acquired by new shareholders or owners, it can be assumed that the undertaking continues to exist and to benefit from the aid despite the change in ownership (share deal). A different view would allow a recovery order to be thwarted by changing the ownership of the undertaking.1645 Recovery does not need to be made if the benefiting undertaking has been dissolved due 686 to insolvency, because competition is no longer distorted when the undertaking disappears from the market. It is not clear whether a national court can make use of other remedies instead of 687 ordering recovery, e. g. interpreting the provisions allowing the aid reductively in a way that eliminates its selectivity and therefore its status as State aid (inverse remedies concept). Similarly a court could simply not apply the provisions that cause selectivity. The question is relevant, for instance, if a charge is reimbursed and the reimbursement constitutes unlawful State aid because it is in breach of the notification requirement. Certainly, it would not be compatible with Union interests if a national court ordered that the repayment be made to further undertakings, if the result is simply a larger circle of aid recipients and therefore the aid’s effect is magnified rather than eliminated. 1646 b) Cases without recovery. aa) Impossibility. The failure to implement a Commission 688 decision on unlawful aid by a Member State can only be justified by absolute impossibility1647. However, if a Member State encounters unforeseen difficulties or consequences when executing a Commission decision it must submit these problems for consideration by the Commission and suggest appropriate alterations of the decision. In such a case, the Commission and the Member State must, in accordance with the duty of sincere cooperation (Article 4(3) TEU), work together in good faith with a view to overcoming the difficulties whilst fully observing the Treaty provisions, and in particular the provisions on aid.1648 In case that a Member State claims that executing the decision correctly is impossible 689 due to its lack of clarity, it must be taken into account that the operative part of a decision must, when necessary, be interpreted in the light of the reasons which led to its adoption.1649 If a Member State has difficulty interpreting a Commission decision, it may ask the Commission for clarification1650. It is a principle of settled case law that possible internal difficulties (like the ones 690 based on lack of competence in a federal State) cannot justify the failure of a Member 1645 The question has been the subject of an extensive academic discussion. See in particular: Ritter, EGBeihilfenru¨ckforderung von Dritten, 2004; Bielesz, Ru¨ckforderung staatlicher Beihilfen nach Unternehmensverka¨ufen, 2007; Borchardt, Die Ru¨ckforderung zu Unrecht gewa¨hrter staatlicher Beihilfen beim Verkauf von Vermo¨genswertendes Beihilfenempfa¨ngers durch den Insolvenzverwalter, ZIP 2001, p. 1301; Ehricke, Die Ru¨ckforderung gemeinschaftsrechtswidriger Beihilfen in der Insolvenz des Beihilfeempfa¨ngers, ZIP 2000, p. 1656; id., Ru¨ckforderung gemeinschaftsrechtswidriger Beihilfen in der Insolvenz des Beihilfeempfa¨ngers, ZIP 2001, p. 489; Koenig, Bestimmung des Passivlegitimierten Adressaten nach der Vera¨ußerung eines begu¨nstigten ‘Unternehmens’, EuZW 2001, p. 37; Rapp/Bauer, Die Ru¨ckforderung gemeinschaftsrechtswidrig gewa¨hrter Beihilfen im Insolvenzverfahren, KTS 2001, p. 1; Solte´sz, Augen auf beim “Asset Deal”! – Beihilfenrechtliche Haftung des Erwerbes von Betriebsvermo¨ gen, BB 2001, p. 1049. 1646 In this sense: ECJ Cases C-368/04 Transalpine O ¨ lleitung in Austria [2006] ECR I-9957, mn. 51, and C-393/04 and C-41/05 Air Liquide Industries Belgium [2006] ECR I-5293, mn. 45. 1647 ECJ Cases C-348/93 Commission v Italy [1995] ECR I-673, mn. 16; C-404/97 Commission v Portugal [2000] ECR I-4897, mn. 39, (decision analysis in EuZW 1/2001, 22, also see the decision analysis of C-378/98, EuZW 18/2001, 565). 1648 ECJ Cases 94/87 Commission v Germany [1989] ECR 175, mn. 9; C-404/97 Commission v Portugal [2000] ECR I-04897, mn. 40. 1649 ECJ Cases C-355/95 P TWD v Commission [1997] ECR I-2549, mn. 21; C-404/97 Commission v Portugal [2000] ECR I-4897, mn. 41. 1650 ECJ Case C-404/97 Commission v Portugal [2000] ECR I-04897, mn. 43.

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Art. 107 TFEU

State to fulfil its obligations, even if the difficulties are insurmountable. 1651 In the case of indirect aid, when benefits are not transferred directly to the recipient, but rather, for instance, to investors or consumers, the determination of the exact amount of aid received may be difficult, but the recovery can still not be considered impossible. 1652 691 Financial difficulties suffered by the aid recipient as a result of the recovery do not make the execution of the recovery order absolutely impossible1653 and cannot justify the non-implementation of a decision. bb) Recovery would breach a general principle of Union law. According to Article 16(1) of Regulation No 2015/1589, the Commission does not require recovery of aid if this would be contrary to a general principle of Union law. Examples of relevant general principles are the principles of the protection of legitimate expectations, legal certainty and equal treatment.1654 693 In accordance with the case-law of the Court of Justice, although a tax levied in breach of EU law must normally be reimbursed where a request to that effect is made before the national courts, that is not the case where it is established by the national authorities that the charge has been borne in its entirety by someone other than the taxable person and that reimbursement of the charge would constitute unjust enrichment of the latter1655. 692

694

c) The recovery amount does not need to be specified in the decision. There is no provision in Union law that requires the Commission to specify the exact amount to be reclaimed when ordering recovery of aid found to be incompatible with the internal market. It is sufficient for the Commission’s decision to include information enabling the Member State that granted the aid, to work out himself without overmuch difficulty, that amount.1656

695

d) Deggendorf principle. According to the Deggendorf principle the Commission may require the Member State to suspend the payment of aid compatible with the Common Market to the recipient until it has repaid unlawfully received aid to the Member State.1657 The cumulative effect of the two measures would cause an unjustified distortion of competition/impair trade between Member States.

696

e) Interest and compound interest. According to Article 14(2) of Regulation No 659/ 1999, recovery decisions shall include interest payable from the date on which the unlawful aid was received. Unless otherwise provided for in a specific decision the interest rate to be used for recovering State aid in breach of Article 108 TFEU is an annual percentage rate fixed for each calendar year. It is calculated on the basis of the average of the 5 years inter-bank swap rates for September, October and November of 1651 In this sense: ECJ Cases C-52/95 Commission v France [1995] ECR I-4443, mn. 38; C-265/95 Commission v France [1997] ECR I-6959, mn. 55; C-280/95 Commission v Italy [1998] ECR I-259, mn. 16; C-404/97 Commission v Portugal [2000] ECR I-4897, mn. 52. 1652 Heidenhain‘s (Mittelbare Beihilfen, EuZW 20/2007, 623) criticism of recovery practice and of the courts’ view on the matter is not justified. When applying Article 107 TFEU, it is irrelevant whether a benefit is gained directly or indirectly by the beneficiary. The effect – and only this is significant – is the same. 1653 ECJ Case 63/87 Commission v Greece [1988] ECR 2875, mn. 14. 1654 GC Cases T-273/06 and T-297/06 ISD Polska sp. z o.o. and Industrial Union of Donbass Corp. v Commission [2009] ECR II-0000, mn. 146–149. 1655 ECJ Case C-147/01 Weber’s Wine World and Others [2003] ECR I-533 mn. 94 and the case-law cited, GC Case T-500/12 Ryanair Ltd. [2015] ECR II-00000, mn. 87. 1656 ECJ Cases C-480/98 Spain v Commission [2000] ECR I-8717, mn. 25; C-441/06 Commission v France [2007] ECR I-8887, mn. 29. 1657 ECJ Case C-355/95 P Textilwerke Deggendorf GmbH (TWD) v Commission [1997] ECR I-2549, mn. 26 and 27.

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II

the previous year, plus 75 basis points. In duly justified cases the Commission can increase the rate by more than 75 basis points in respect of one or more Member States. The interest rate is to be applied on a compound basis until the date of recovery of the aid. The interest accruing in the previous year shall be subject to interest in each subsequent year.1658

II. Cases in which aid can be approved 1. Introduction The large majority of State aid decisions are made under the exceptions listed in 697 Article 107(3) (a)–(c) TFEU, the application of which lies in the Commission’s discretion. More than half of these decisions fall under the scope of lit. c of the provision. It is sound to unravel the Commission’s case-law according to the respective aid objectives and potential beneficiaries as this roughly corresponds to the order in which they are laid down in the Treaty. Firstly, general assessment principles applicable to Article 107(3) (a)–(c) TFEU will be laid down, and after that the respective scopes of application of (a)–(c) as well as (d) (aid to promote culture) and (e) (aid approved by the Council) will be illustrated. At this point it is worth reiterating, that the provisions in Article 107(3) TFEU are 698 exceptions to the general principle that State aid shall be incompatible with the Internal market (Article 107(1) TFEU), therefore, Article 107(3)(c) TFEU must be interpreted restrictively.1659 According to the case-law of the ECJ, in interpreting a provision of Union law it is necessary to consider not only its wording but also the context in which it occurs and the object of the rules of which it is part.1660

2. General assessment principles The following principles guide the Commission in its decision practice and the 699 implementation of State aid policy: State aid has to serve a purpose of common interest, has to have a clear incentive 700 effect (Article 6 GBER), be appropriate and proportionate, and have to be granted in full transparency (Article 5 GBER).1661 Aid granted without a specific objective – such as operating aid – heavily distorts competition without any positive effects and is therefore, as a matter of principle, incompatible with the internal market; for particular industries the Council may, however, issue Regulations according to Article 107(3)(e) TFEU, as for example in the case of subsidised coal mining. Considering the above, aids aiming at express Union objectives are generally more 701 readily declared compatible with the internal market. This is true, for instance, of aid promoting economic and social cohesion, i. e. assistance that aims to contribute to the development of particularly disadvantaged areas, or promoting projects of common interest. With a view to the European Union’s goal to foster research, development, and innovation, respective aids in these areas are welcome.

1658 See Articles 9–11 of Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 TEC. 1659 GC Case T-109/01 Fleuren Compost [2004] ECR II-127, mn. 75. 1660 ECJ Cases 292/82 Merck [1983] ECR 3781, mn. 12; 337/82 St. Nikolaus Brennerei [1984] ECR 1051, mn. 10. 1661 See in that regard Recital 5 GBER, OJ 2014 L 187/1.

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II 702

703 704 705

706

707

708

709

710 711

702–711

Art. 107 TFEU

Only aid necessary for the attainment of one of the objectives specified can be approved – otherwise distortions of competition would be accepted which do not account for any positive effects.1662 Vice versa, aid cannot be declared compatible with the internal market that cannot be brought in line with the Union’s objectives and interests as it for example keeps alive undertakings in a sector that already struggles with overcapacity1663 or contravenes the functioning of an internal market organisation for agricultural products.1664 In this context the following clarifications appear to be useful: Horizontal aid is such to serve a particular objective such as the promotion of research and development or environmental protection across all economic sectors. Regional aid is concerned with measures supporting economic development in a specific region and is primarily intended to incentivise investments in underdeveloped regions.1665 Sectorial aid aims to support certain sectors of the economy (see e. g. the Commission Communication on the application of State aid rules to public service broadcasting of 2 July 20091666, the Framework on State aid to shipbuilding1667 and the Commission Communication relating to the methodology for analysing State aid linked to stranded costs1668). Horizontal aid (such as research and development and environmental protection aid, which is granted to every sector performing a certain activity) is preferable to sectorial aid schemes because its impact on competition significantly lower. At the same time, it better serves common objectives. On this basis, horizontal aid amounted to EUR 46.3 billion in 2008 and constituted 88 % of all aid granted in the manufacturing and service sectors. This share was 80 % in 2014, 74 % in 2004 and a mere 50 % in the mid-nineties. The Member States also prioritised three areas in 2008: regional aid (26 %); aid under the environmental aid guidelines (24 %); and research, development, and innovation aid (16 %).1669 Aid schemes are preferable to individual aid even if they are aimed at particular sectors because they are more transparent and less detrimental to competition at least in the sector concerned. Supporting a sector or area in one Member State must not simply transfer problems to other Member States.1670 Moreover, the aid has to contribute to the development of the sector and must not preserve non-competitive structures. 1671 The Commission ensures that aid schemes are only of temporary duration, so that they can be adjusted periodically. The Court has also held on numerous occasions that the objective pursued by State measures is not sufficient to exclude those measures outright from classification as ‘aid’ 1662

ECJ Case 730/79 Philip Morris [1980] ECR 2671, mn. 16–17. See e. g. the Commission Decision 87/585/EEC of 15 July 1987 on aid granted by the French Government to a producer of textiles, clothing and paper products – Boussac Saint Fre`res, OJ 1987 L 352/42. 1664 Commission Decision 86/561/EEC of 25 June 1986 on an aid to fish producers’ organizations granted by the German Government, OJ 1986 L 327/44. 1665 See the Guidelines on National Regional Aid for 2007–2013, OJ 2006 C 54/13. 1666 OJ 2009, C 257/01. 1667 OJ 2011, C 364/9. 1668 Under http://ec.europa.eu/competition/state_aid/legislation/stranded_costs_en.pdf. The Communication deals with compensation for lost investments by undertakings that formerly held monopolies in the electricity sector. 1669 State aid Scoreboard – http://ec.europa.eu/competition/state_aid/scoreboard/horizontal_objectives_en.html. 1670 ECJ Case 730/79 Philip Morris [1980] ECR 2692, mn. 26. 1671 ECJ Case 301/87 France v Commission [1990] ECR I-307, mn. 52–57. 1663

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for the purposes of Article 107(1) TFEU.1672 This provision does not distinguish between the causes or the objectives of State aid, but defines them in relation to their effects. 1673 “Moreover, the case-law shows that the legality of a Commission decision declaring 712 that new aid does not fulfil the conditions under which the exemption in Article [107(3)(c) TFEU] applies must be assessed solely in the context of that provision, and not in the light of the Commission’s earlier decision-making practice, assuming that is established”.1674 The Commission’s approval practice under Article 107(2) and (3) TFEU is best 713 described according to the subject areas which in the following are subdivided by aid objectives and aid beneficiaries. In most areas State aid control has been codified by soft law frameworks or guidelines. The adoption of the new General Block Exemption Regulation in June 2014 continues this process.

3. Specific provisions for exemption a) Article 107(3)(a) TFEU: Regional aid in less developed regions. For regional aids 714 Article 107(3)(a) and (c) TFEU allow two exceptions from the principle of undistorted competition in the interest of solidarity, which is — as the preamble shows — a basic objective of the Treaties. In exercising its discretion, the Commission has to ensure that the aims of free competition and Union solidarity are reconciled, whilst complying with the principle of proportionality.1675 The importance of the latter depends upon the particular case; it is more likely to outweigh considerations of competition in the situations of crisis described in subparagraph (a) than in the cases provided for in subparagraph (c).1676 In this context, the Commission is under a duty to evaluate the sectoral effects of the planned regional aid, even where regions likely to fall within paragraph 3(a) are concerned, in order to avoid a situation in which, as a result of an aid measure, a sectoral problem is created at Community level which is more serious than the initial regional problem.1677 “However, so as not to deprive paragraph 3(a) of its utility, the Commission has a 715 broader discretion in balancing those objectives in the case of an aid project intended to promote the development of a region coming under paragraph 3(a) than it has in the case of identical aid to a region covered by paragraph 3(c).”1678 Article 107(3)(a) TFEU allows regional assistance, however, the use of the words 716 “abnormally” and “serious” in the exemption contained in Article 107(3)(a) shows that it concerns only areas where the economic situation is extremely unfavourable in relation to the Community as a whole.1679 Regions applicable for aid under Article 107(3)(a) TFEU are privileged by the Commission’s decision practice in comparison to regions falling under Article 107(3)(c) TFEU. In Article 174 TFEU the Union has set itself the goal of ‘reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions’. The wording in Article 107 1672

ECJ Case C-487/06 P British Aggregates Association v Commission [2008] ECR I-10505, mn. 84. ECJ Case C-487/06 P British Aggregates Association v Commission [2008] ECR I-10505, mn.s. 84 and 85, see further the decisions cited here. 1674 GC Case T-211/05 Italy v Commission [2009] ECR 2009 II-2777, mn. 170. In this sense: ECJ Cases C-57/00 P and C-61/00 P Freistaat Sachsen et al. v Commission [2003] ECR I-9975, mn.s. 52 and 53; GC Case T-171/02 Regione autonoma della Sardegna v Commission [2005] ECR II-2123, mn. 177. 1675 GC Case T-126/96 BFM v Commission [1998] ECR II-3437, mn. 101. 1676 Conclusions of the Advocate General Darmon in the ECJ Case 248/84 Germany v Commission [1987] ECR 4013, 4025, 4031. 1677 GC Case T-126/96 BFM v Commission [1998] ECR II-3437, mn. 101. 1678 GC Case T-380/94 AIUFFASS et al [1996] ECR II-02169, mn. 55. 1679 Commission, Guidelines on national regional aid for 2007–2013, mn. 15. 1673

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717–721

Art. 107 TFEU

TFEU cannot, however, lead to the conclusion that the Commission should take no account of the Community interest when applying Article 107(3)(a), and that it must confine itself to verifying the regional specificity of the measures involved, without assessing their impact on the relevant market or markets in the Community as a whole.1680 In the interest of ensuring the maximum possible coherence between the designation of regions eligible for the derogation under Article 107(3)(a) TFEU under the regional aid guidelines, and the regions eligible for the convergence objective under the structural fund regulations, the Commission has traditionally used the same GDP per capita data to designate the Article 107(3)(a) regions as that used to designate the convergence regions under the structural fund regulations.1681 717

b) Article 107(3)(b) TFEU. The provision deals with two different types of aid:

aa) Aid to promote important projects of common European interest. The Commission has based its policy with regard to this type of aid on the view that a project may not be described as being of common European interest for the purposes of Article 107(3)(b) TFEU unless it forms part of transnational European programme supported jointly by a number of Member States, or arises from concerted action by a number of Member States to combat a common threat such as environmental pollution.1682 The Commission applies the provision to projects that aim at energy saving 1683 and environmental protection (in this case even to investment projects of individual undertakings)1684 if they are a project of common European interest. 719 The project must contribute in a concrete, exemplary and identifiable manner to the Union interest in the field of environmental protection, such as by being of great importance for the environmental strategy of the EU. The advantage of the project must not be limited to the Member State or the Member States implementing it, but must extend to the Union as a whole. The project must contribute significantly to achieving the EU’s goals.1685 720 The new Commission Communication laying down criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest gives cross sector guidance on the application of Art. 107(3)(b) TFEU.1686 It entails specific criteria for research & development & innovation projects, projects comprising industrial deployment, as well as environmental, energy and transport projects.1687 721 The mere fact that the project is carried out by undertakings in different countries, or that a research infrastructure is subsequently used by undertakings established in different Member States, is not sufficient. 1688 718

1680

ECJ Case C-169/95 Spain v Commission [1997] ECR I-135, mn. 17. Point 16 of the Guidelines on National Regional Aid for 2007–2013, OJ 2006 C 054/13. 1682 ECJ Cases 62/87 and 72/87 Exe ´cutif re´gional wallon v Commission [1988] ECR 1573, mn. 22. 1683 Commission Decision of 15 December 1981 on the preferential tariff charged to glasshouse growers for natural gas in the Netherlands, OJ 1982 L 37/29. 1684 See the Community guidelines on State aid for environmental protection, OJ 2001 C 37/3, mn. 73. 1685 For eligibility criteria see further Commission Communication on Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, OJ 2014 C 188/4, Chapter 3. Eligibility Criteria. 1686 However, the Communication leaves the possibility of declaring an important project of common European interest compatible with the internal market on the grounds of Art. 107(3)(c) TFEU unaffected, see OJ 2014 C 188/4, mn. 8. 1687 OJ 2014 C 188/4, mn.s. 21–23. 1688 See Commission Communication on Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, OJ 2014 C 188/4, fn. 19. 1681

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bb) Aid to remedy a serious disturbance in the economy of a Member State. A ‘serious disturbance in the economy of a Member State’ requires more than a regional economic crisis; the disturbance has to be exceptional. In the last few years preceding the current global financial crisis, the provision has almost never been applied. 1689 However, it has been applied to aids in several Member States during the financial crisis that followed the sudden increase in oil prices in 1973–741690 and again in 1987 and 1991 to the benefit of Greece.1691 Due to the onset and deepening of the global economic crisis in 2008, the Commission felt compelled to react quickly and create instruments allowing the Member States necessary room to manoeuvre. The Commission issued the following communications for the banking and finance sector1692: – Commission Communication on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’)1693; – Commission Communication on the application, from 1 January 2012, of State aid rules to support measures in favour of banks in the context of the financial crisis1694; – Commission Communication on the application, from 1 January 2011, of State aid rules to support measures in favour of banks in the context of the financial crisis1695; – Commission Communication ‘The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis’1696; – Commission Communication ‘The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition’1697; – Communication from the Commission ‘on the treatment of impaired assets in the Community banking sector’1698; however, the communication was soon replaced by the Notice from the Commission on a simplified procedure for treatment of certain types of State aid1699; – Commission Communication on ‘The return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules’1700. 1689

See e. g. ECJ Case 730/79 Philip Morris [1980] ECR 2692, mn. 25. See Commission, Report on Competition Policy 1975, mn. 133. 1691 See the Commission Decision 88/167/EEC of 7 October 1987 concerning Law 1386/1983 by which the Greek Government granted aid to the Greek industry, OJ 1988 L 76/18. 1692 A review of the national measures taken as a result of the discussed instruments is available under http://ec.europa.eu/competition/state_aid/legislation/review_of_schemes_en.pdf. Also see Weber/Gru¨newald, Finanzkrise und Wirtschaftspolitik: Herausforderungen fu¨r das Europa¨ische Wettbewerbsrecht, EuZ 3/2009, 58; Luja, State aid and the Financial Crisis: Overview of the Crisis Framework, EStAL 2/2009, 145; Werner/Maier, Procedure in Crisis – Overview and Assessment of the Commission’s State aid Procedure during the Current Crisis, EStAL 2/2009, 177; Rose M. D’Sa, “Instant’ State aid Law in a Financial Crisis – A U-Turn?, EStAL 2/2009, 139; Ritzenhoff, Das Beihilfe- und Vergaberecht in der Krise, 2012. 1693 OJ 2013 C 2016/1. 1694 OJ 2011 C 356/7. 1695 OJ 2010 C 329/7. 1696 OJ 2008 C 270/8. 1697 OJ 2009 C 10/2. 1698 OJ 2009 C 72/1. 1699 OJ 2009 C 136/3. 1700 OJ 2009 C 195/9. 1690

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722

723

724

725

II

726–728

Art. 107 TFEU

726

The Commission Communication ‘Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis’ was relevant to the “real economy”.1701 It expired on 31. December 2011.

727

c) Article 107(3)(c) TFEU. This particular exemption is the one most frequently applied. As it aims at facilitating the development of certain economic activities or of certain economic areas, the exemption in lit. c) is used with regard to – regional aid1702, – horizontal aid, such as State aid granted in the area of research, development and innovation1703, the promotion of capital risk investments in SMEs1704, environmental aid1705, State aid for employment1706, State aid for training1707, State aid for the rescuing and restructuring of undertakings in difficulty1708, and – sectoral regimes, such as State aid to shipbuilding1709, State aid to former State monopoly enterprises in the electricity industry for their stranded investments 1710, State aid to close uncompetitive coal mines1711, State aid in the steel industry1712, State aid for the development of new technology especially in the area of broadband services1713, as well as State aid in the motor vehicle and synthetic fibre industry 1714.

728

aa) Regional aid. State aid supporting the development of economically weak regions makes up more than half of the aid granted by Member States – that is, under regular conditions.1715 In 2013, the Commission adopted new guidelines on regional State aid for the period between 2014 and 2020 (Regional Aid Guidelines, RAG).1716 They cover regional aid in all economic sectors except the fisheries and aquaculture, agriculture and the transport sector because those are subject to special rules. 1717 Furthermore, the RAG 1701 OJ 2011 C 6/5; This Communication replaced an earlier version issued with the same title (OJ 2009 C 83/1). 1702 See Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1. 1703 See, for example, Framework for State aid for research and development and innovation, OJ 2014 C 198/1. 1704 Guidelines on State aid to promote risk finance investments, OJ 2014 C 19/4. 1705 Guidelines on State aid for environmental protection and energy 2014–2020, OJ 2014 C 200/1; Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-2012, OJ 2012 C 158/4. 1706 Commission Communication— Criteria for the analysis of the compatibility of State aid for the employment of disadvantaged and disabled workers subject to individual, OJ 2009 C 188/6. 1707 Commission Communication— Criteria for the analysis of the compatibility of State aid for training subject to individual notification, OJ 2009 C 188/1. 1708 Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ 2014 C 249/1. 1709 Framework on State aid to shipbuilding, OJ 2011 C 346/9. The application of this Framework has been extended until 30 June 2014, i. e. it has already expired. 1710 Commission Communication of 26 July 2001 on conditions of the methodology for analysing State aid linked to stranded costs, http://ec.europa.eu/competition/state_aid/legislation/stranded_costs_en.pdf. 1711 Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ 2010 L 336/24. 1712 See point 2 of the Commission Communication ‘Rescue and restructuring aid and closure aid for the steel sector’, OJ 2002 C 70/21, which was applicable until 31 December 2009. 1713 EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, OJ 2013 C 25/1. The 2009 Guidelines still apply for unlawful aid granted while they were in force. 1714 Commission Communication on the modification of the Multisectoral Framework on regional aid for large investment projects (2002) with regard to the establishment of a list of sectors facing structural problems and on a proposal of appropriate measures pursuant to Article 88 mn. 1 TEC, concerning the motor vehicle sector and the synthetic fibres, OJ 2003 C 263/03 – this has expired. 1715 See the 9th Report on State aids, COM 2001, 403 final, p. 59. 1716 OJ 2013 C 209/1. 1717 Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1, mn. 10.

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II

do not apply to aid granted to airports or in the energy sector. 1718 The RAG do apply to the processing and marketing of agricultural products into non-agricultural products, however, the Agricultural de minimis Regulation1719, the Agricultural Block Exemption Regulation1720 and the according guidelines1721 set out the current framework for granting aid in the agricultural sector. Regional aid control follows a multi-stage procedure. First, an overall population ceiling is determined for all Member States of the Union setting out the overall scope of assisted areas within the EU. Given that the award of regional State aid derogates from the general prohibition of State aid laid down in Article 107(1) of the Treaty, the Commission considers “that the combined population of ‘a’ and ‘c’ areas in the Union must be lower than that of the non-designated areas. The total coverage of those designated areas should therefore be less than 50 % of the Union’s population”.1722 With regard to the economic crisis the Commission has adjusted that ceiling to 46,53 % of the EU-27 population. 1723 After that, Member States can designate their respective ‘a’-areas (those areas eligible for aid under Article 107(3)(a) TFEU) – these are according to the guidelines NUTS 1724 2 regions whose GDP per capita in purchasing power standards (PPS) is below or equal to 75 % of the EU-27 average. After deducting these ‘a’-areas from the overall population ceiling the remaining regions are available for designation of ‘c’-areas (falling under the scope of Article 107(3)(c) TFEU). For this EUROSTAT-data on Member States’ regional GNP are used. As a first step the Commission determines this ceiling according to the threshold value method which requires the regional GDP per capita and/or the regional rate of unemployment to fall below the average value of the respective Member State. According to that, the respective ceiling for every Member State is calculated in a second step (minimum/maximum values, limitation of losses and compensation for dropped out ‘c’ areas. This method can lead to an expansion of the entire assisted area so that the ceilings of other Member States that do not benefit have to be adjusted accordingly. It is on this basis that each Member State notifies its regional aid maps it has drawn up according to objective and verifiable criteria and that contain the designated areas and the respective aid intensities. In order to avoid so called subsidy auctions that may entice Member States to enter intense competition of granting State aid the RAG set out special rules with low aid intensities. Furthermore, specific rules apply to several other economic activities, thereby acknowledging their particular characteristics. These rules may partly or in total deviate from the RAG. In accordance with its longstanding practice the Commission considers regional aid to the steel industry as defined in Annex IV of the RAG as incompatible with the

1718

Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1, mn. 11. Commission Regulation (EU) No. 1408/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector, OJ 2013 L 352/9. 1720 Commission Regulation (EU) No. 702/2014 of 25 June 2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union, OJ 2014 L 193/1. 1721 European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020, OJ 2014 C 204/1. 1722 Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1, mn. 146. 1723 Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1, mn. 148. 1724 Commission Regulation (EU) No. 31/2011 of 17 January 2011 amending annexes to Regulation (EC) No 1059/2003 of the European Parliament and of the Council on the establishment of a common classification of territorial units for statistics (NUTS), OJ 2011 L 13/3. 1719

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729

730

731

732

733

II

734–736

Art. 107 TFEU

internal market.1725 The synthetic fibre industry, which is defined in the same Annex, is also not eligible for regional investment aid due to its special characteristics. 1726 bb) Horizontal aid. (1) Export aid. State aid for exports into other Member States is prohibited.1727 Furthermore, it is expressly prohibited under the de minimis Regulation1728. Export aid constitutes an immediate harm to competition between providers of goods and services on a market. Recognising their detrimental effect, the Commission has in its role as the guardian of fair competition within the TFEU consistently condemned any form of export aid in intra-Community trade1729. Even though State aid granted by Member States for exports to third countries might have the potential to distort competition within the Community itself1730, the Commission has not systematically taken action against such measures. 735 This has several reasons: First of all, the provisions of the Treaty on foreign trade, i. e. Articles 112 and 113 TFEU (ex Articles 133 and 134 TEC), were in part applicable to this area and, furthermore, Article 132 TEC did in fact provide for a harmonisation of export aid. Secondly, it was not only intra-Community competition which was impaired by State aid for exports outside of the Community but also the competitiveness of the Community’s exporters in relation to the Community’s trade partners who were able to grant similar aid. Ultimately, progress was made in monitoring State aid based on the trade provisions of the Treaty as well as in the OECD and the WTO1731. 736 The Commission has repeatedly interfered, e. g. in cases of preferential rediscount rate for exports1732, export credits acquired at preferential rates within intra-Community trade1733 subsidised advertisement campaigns in other Member States1734, cost increase guarantees, an exchange rate guarantee for French exporters tendering for the construction of a power station in Greece1735, tax refunds for exports1736, general tax refunds1737, exclusively for those undertakings increasing their exports1738. 734

1725

See point 9 of the Guidelines on regional State aid for 2014–2020, OJ 2013 C 209/1. Ibid. 1727 ECJ Cases C-6/69 and 11/69 Commission v France [1969] ECR 523, mn. 20. 1728 See Article 1(1) lit. d) of Regulation No. 1407/2013, OJ 2013 L 352/1. 1729 In its 7th Report on Competition Policy (1977), the Commission stated in point. 242 that export aids cannot be based on exemptions. Aid intensity, the form as well as the underlying reasons and objectives will be disregarded. 1730 See ECJ Case C-142/87 Belgium v Commission [1990] ECR I-959, mn. 32 and 35; see also ECJ Case C-44/93 Assurances de Cre´dit v OND and Belgium [1994] ECR I-3829, mn. 30. 1731 Communication of the Commission to the Member States pursuant to Article 93(1) TEC applying Articles 92 and 93 of the Treaty to short-term export- credit insurance, OJ 1997, C 281/4, point 1.2. Regarding the differences in State aid concepts between the Treaty and the WTO see Slocock, EC and WTO Subsidy Control Systems – some Reflections, EStAL 2/2007, 249. 1732 ECJ Case C-6/69 and 11/69 Commission v France [1969] ECR 523, mn. 21/23. 1733 16th Report on Competition [1986], point 257. 1734 Decision of the Commission of 8 September 1976 concerning the assistance granted by the Italian government […] for advertising campaigns to expand the sale of exports b certain Italian industries, OJ 1976, L 270/39. 1735 Commission Decision 84/416/EEC of 27 June 1984 concerning the French Government’s intention to accord special exchange risk cover to French exporters in respect of a tender for the construction of a power station in Greece, OJ 1984 L 230/25. 1736 Commission Decision 89/659/EEC of 3 May 1989 relating to Ministerial Decision No E 3789/128 of the Greek Government establishing a special single tax on undertakings, OJ 1989 L 394/1; see also ECJ Case C-183/91 Commission v Greece [1993] ECR I-3131. 1737 Commission Decision 92/129/EEC of 24 April 1991 on aid granted by the Italian Government to the forestry, pulp, paper and board industry and financed by means of levies on paper, board and cellulose, OJ 1992 L 47/19. 1738 Commission Decision 79/519/EEC of 18 May 1979 concerning the ‘special financing scheme for investments to increase exporting firms’ production capacity’ in France, OJ 1991 L 138/30. 1726

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737–743

II

By contrast, the Commission has for a long time taken no action against State aid in 737 the area of export credit insurance within the Union. This was, however, caught up on in 1997 by the Commission’s communication on the application of the State aid provisions regarding short-term export credit insurance 1739.1740 Nowadays, State aid for management consulting as well as for participating at fairs in 738 order to increase the potential for exports, particularly that of SMEs, is regarded more favourably1741. Although Article 87 TEC (now Article 107 TFEU) in conjunction with ex Article 132 739 TEC was applicable to State aid granted for extra-Community exports the Commission itself has only sparingly taken any action against such extra-Community export aid. 1742 (2) Investment aid. In order to enhance the efficiency of investment aid, the 740 Commission now only allows such aid to be granted within the framework of regional and SME aid and for special purposes such as environmental protection (see further sections below). General investment promotion schemes were either converted or abolished entirely during the 1980s1743. (3) R&D&I aid. In order to increase the competitiveness of undertakings in the 741 Union State aid for research, development and innovation is usually assessed and granted rather generously. In doing so, the Commission bases its assessment practice on the closeness1744 of the aid to the market. According to the current provisions1745 any form of fundamental research (‘experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct practical application or use in view’) which is remote from the market can be promoted with up to 100 %. As a general rule, industrial research (‘planned research or critical investigation 742 aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services’)1746 can be promoted with up to 70 %.1747 The permissible aid intensity for experimental development amounts to 25 %. (This 743 means ‘acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This may also include, for example, activities aiming at the conceptual definition, planning and documentation of new products, processes or services. Experimental development may comprise prototyping, demonstrating, piloting, testing and validation of new or improved products, processes or 1739 OJ 1997, C 281/4. That Communication has been replaced by 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, OJ 2012, L 392/1, the annexes of which are subject to several amendments – se recently: Communication from the Commission – amending 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 shortterm export-credit insurance, OJ 2015, C 28/1. 1740 See also ECJ Case C-63/89 Assurances du Cre ´dit and Cobac v Council and Commission [1991] ECR I-1799, mn. 24. 1741 See 25th Report on Competition [1995], point 208. 1742 ECJ Case C-142/87 Belgium v Commission [1990] ECR I-959, mn. 32 et seq. 1743 21st Report on Competition [1991], point 240–241; 22 nd Report on Competition [1992], point. 455– 463. 1744 See Framework for State aid for research and development and innovation, OJ 2014 C 198/1, mn. 74, 89 and 112. 1745 See the Framework for State aid for research and development and innovation, mn. 89 and Annex II. 1746 Framework for State aid for research and development and innovation, mn. 15 lit. q. 1747 Framework for State aid for research and development and innovation, OJ 2014 C 198/1, Annex II.

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II

744–750

Art. 107 TFEU

services in environments representative of real life operating conditions where the primary objective is to make further technical improvements on products, processes or services that are not substantially set. This may include the development of a commercially usable prototype or pilot which is necessarily the final commercial product and which is too expensive to produce for it to be used only for demonstration and validation purposes. Experimental development does not include routine or periodic changes made to existing products, production lines, manufacturing processes, services and other operations in progress, even if those changes may represent improvements’)1748. 744 For further commentary on research & development & innovation aid see Part IV 25 et seqq. below. (4) Environmental aid. In 2013, the Commission fundamentally updated its policies on environmental aid1749. Promoting renewable energies, saving energy and waste management have now taken priority. The new guidelines, thus, cover environmental aid as well as aid to the energy sector. With regard to the ‘polluter pays’ principle set out in Article 191(2) TFEU they allow for investment aid, operating aid and other categories of aid. To keep up with latest developments in the energy sector, the new guidelines now explicitly include provisions on reductions in or exemptions from environmental taxes and reductions in funding support for electricity from renewable sources. Beside aid to energy infrastructure they also allow for aid to generation adequacy measures. 746 Individual aid granted to consumers enticing them to buy environmentally friendly products may fall under the exemption in Art. 107(2)(a) TFEU and be ex lege compatible with the internal market. Selective promotion measures may affect competition by facilitating the purchase of ‘certain’ producers’ products. The Commission’s power to investigate and assess such cases on the basis of Article 107(3) TFEU is in no way prejudiced. 747 For further commentary on environmental and energy aid see Part IV Articles 36 et seq. and Part VIII paras. 295 et seq. below. 745

(5) Training aid. The Commission regards training measures as an integral instrument of an effective employment strategy. This inherently positive stance is upheld by Article 31 GBER which integrated the prior block exemption Regulation 1750 on training aid. The GBER does not distinguish between specific and general measures anymore. 749 The aid intensity shall not exceed 50 % of the eligible costs, but may be higher for training for disabled or disadvantaged workers and if granted to small or medium-sized enterprises (SMEs). Eligible costs may be the trainers’ and trainees’ personnel costs, costs for advisory services and operating costs for taking part in the training project [Art. 31(4) GBER]. Any aid not covered by the GBER is governed by the Communication from the Commission – Criteria for the analysis of the compatibility of State aid for training subject to individual notification.1751 748

750

(6) Employment aid. Employment aid is used for creating new jobs, employing disadvantaged or disabled workers or covering additional costs of employment. Arti1748 Community Framework for State aid for research and development and innovation, OJ 2014 C 198/1, mn. 15 lit. j. 1749 Guidelines on State aid for environmental protection and energy 2014–2020, OJ 2014, C 200/1. See further Szyszczak, Time for Renewables to Join the Market: the New Guidelines on State Aid for Environmental Protection and Energy, Journal of European Competition Law & Practice, 2014, 616. 1750 OJ 2001 L 10/20, amended by Regulation 1976/2006, OJ 2006 L 368/85. See also Communication from the Commission – Criteria for the analysis of the compatibility of State aid for training subject to individual notification, OJ 2009 C 188/1 (albeit with regard to Articles 38 and 39 GBER 2008). 1751 OJ 2009 C 188/01, albeit regarding the GBER 2008.

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751–756

II

cles 32 and 33 of the General Block Exemption Regulation1752 allow for wage subsidies to recruit disadvantaged workers (with an aid intensity up to 50 %) and employ workers with disabilities (with an aid intensity up to 75 %). Article 34 exempts aid that compensates the additional costs of employing workers with disabilities with an aid intensity of up to 100 %, whereas Article 35 allows costs for assistance provided to disabled workers to be compensated with an intensity of up to 50 %. It has to be pointed out that advantages to employers do not constitute State aid, as only 751 benefits granted to undertakings fall within the definition of State aid in Article 107(1) TFEU. Aid granted for the employment of disadvantaged or disabled workers and for covering the additional costs such employment causes is covered by the Commission’s communication on ‘Criteria for the analysis of the compatibility of State aid for the employment of disadvantaged and disabled workers subject to individual notification’1753. (7) SME. In 1992, the Commission issued for the first time guidelines for assessing State aid granted to small and medium-sized enterprises (SMEs) that were redrafted in 1996 1754 and replaced by the 2001 Block Exemption Regulation1755. Finally, the provisions were merged into the General Block Exemption Regulations of 2008 and now of 2014. The definition of a SME can be found in the Annex to the Commission’s recommendation concerning the definition of micro, small and medium-sized enterprises. 1756 Failures in the risk capital markets —mainly due to imperfect or asymmetric information— make it difficult for SMEs to raise capital and justify aids to undertakings even if they are not located in areas eligible for regional aid. Article 28 GBER allows for innovation aid to be granted to SMEs in order to support the obtainment, validation or defence of patents or other intangible assets; costs of secondment and recruitment of highly qualified personnel and the obtainment of advisory and support services. Costs of process and organisational innovation of SMEs are also eligible1757. Up to a certain maximum amount risk capital may be allocated to SMEs without any restrictions as to the eligible costs. This is to counter disadvantages grounding in the fact that investors’ costs for evaluating the SMEs collaterals and business strategy are considerably higher than their prospective venture capital and profits1758. The Commission decided not apply these Guidelines to aid to export-related activities towards third countries or Member States, namely aid directly linked to the quantities exported, the establishment and operation of a distribution network or to other current costs linked to the export activity, as well as aid contingent upon the use of domestic over imported goods1759.

752

753

754

755

(8) State aid for the rescuing and restructuring of undertakings in difficulty. A 756 State interfering in the market so as to prevent an undertaking that has fallen into grave financial difficulties from exiting the market altogether can very seriously distort competition. This kind of aid is often granted in economic sectors faced with structural problems or over-capacity. Attempts to save these undertakings through State aid merely ‘relocate’ these problems and any associated capacity and employment cutbacks 1752

Regulation No.651/2014, OJ 2014 L 187/1. OJ 2009, C 188/6, albeit regarding the GBER 2008. 1754 OJ 1996 C 213/4. 1755 Regulation No. 70/2001, OJ 10/33. 1756 OJ 2003 L 124/36. 1757 For more details, see Article 29 of the General Block Exemption Regulation. 1758 Communication from the Commission – Guidelines on State aid to promote risk finance investment, OJ 2014, C 19/4, mn. 3 seq. 1759 Communication from the Commission – Guidelines on State aid to promote risk finance investment, OJ 2014, C 19/4, mn. 28. 1753

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II

757

758 759

760 761

762 763

764

757–764

Art. 107 TFEU

from those undertakings unable to survive on the market onto other – healthy – undertakings, potentially also in other, possibly less developed Member States. Following the guidelines for State aid for the rescuing and restructuring of undertakings in difficulty in 20041760 the Commission has issued new guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty in 2014. 1761 It is the Commission’s assumption that an undertaking is in difficulty within the meaning of these guidelines if it is no longer able to absorb its losses through either its own financial means or other means which have been made available to it by its owners or by its creditors—losses that will most certainly lead to the undertaking’s economic demise, be it on a short- or mid-term basis, if the state itself does not intervene. 1762 For details on undertakings in difficulty see Part V. below. Rescue aid is as such only a temporary, reversible support measure. Such a measure is intended to keep an undertaking afloat until a plan for restructuring or liquidation has been developed. Rescue aid is based on the general principle of enabling some kind of temporary support for those undertakings faced with substantial deterioration of its financial situation through e. g. acute liquidity or technical insolvency problems. This type of temporary support shall allow the concerned undertaking time to analyse the circumstances that gave rise to the difficulties and to develop an appropriate plan to remedy said difficulties. For details on rescuing aid see sections Part V. below. On the other hand, restructuring is based on a feasible, coherent and far-reaching plan to restore an undertaking’s long-term viability. It usually involves one or more of the following elements: the reorganisation and rationalisation of the undertaking’s activities on a more efficient basis, which usually entails withdrawing from loss-making activities, the restructuring of those existing activities that can be made competitive again or, in some cases, the diversification of certain activities towards new and viable ones. Any operational restructuring must usually involve financial restructuring (capital injections, debt reduction). For details on restructuring aid see Part V. below. Member States are only allowed to grant rescue aid so as to ensure the provisional continuation of the undertaking’s activity and only for a period lasting no longer than 6 months. Such a grant can only be awarded in form of a bridging loan under regular market conditions or a loan guarantee. In the meantime, the undertaking must attempt to restructure its finances and develop a restructuring plan. Should a complete restructuring process be necessary any plan submitted for such a process must secure the restoration of competitiveness within a reasonable period of time. In the case of State-run companies consenting to privatisation will normally be regarded as a positive element in the administrative procedure aiming at the approval of restructuring aid. State aid for restructuring must always be limited to the necessary minimum. Furthermore, in return for the advantage of receiving State aid, the beneficiary is expected to bring larger sacrifices than those brought by unsupported competitors, such as the reduction of their overall capacity or withdrawal from certain markets or sectors. These principles are by now an integral part of the Commission’s authorisation practice. They are also acknowledged by the ECJ’s settled case law. 1763 1760 OJ 2004 C 244/2. See Ehricke, Die neuen Leitlinien der EG-Kommission u ¨ ber Sofort- und Umstrukturierungsbeihilfen, EuZW 3/2005, 71. 1761 OJ 2014 C 249/1. 1762 See mn. 20 of the Guidelines. 1763 See, for example, Commission Decision 87/585/EEC of 15 July 1987 on aid granted by the French Government to a producer of textiles, clothing and paper products – Boussac Saint Fre`res, OJ 1987 L 352/

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D. Compatible and incompatible aid (Art. 107(3) TFEU)

765–769

II

Rescue aid is considered a one-off operation primarily designed to keep a company in 765 business for a limited period of time during which its future can be assessed. Similarly, restructuring aid is considered to be a one-off measure in order to prevent undertakings that are only able to survive with repeated State support from abusing the support measures. Is an undertaking benefiting from more than one rescue and/or restructuring aid, one can assume that the difficulties that undertaking faces occur on a regular basis and that repeated interference by the State will distort competition without having a positive effect, which is contrary to the Union’s interests. Thus, repeated State intervention of this kind is prohibited1764. cc) Sector specific aid. To particular economic sectors special provisions apply due to their idiosyncrasy. Since the ECSC Treaty expired, Articles 107–109 TFEU are also applicable to undertakings within those sectors. The Council passed a Regulation for the coal mining industry1765 which essentially retained the old provisions. For the time being closure aid is foreseen for the coal mining sector1766. In addition, this sector can also benefit from other types of aid pursuant to the GBER, except regional aid 1767. By contrast, State aid, including regional aid to the steel industry is no longer compatible with the internal market. Previously, several sensitive industrial sectors have been subject to specific, stricter rules on State aid, like the Code on aid to the synthetic fibres and Community framework on State aid to the motor vehicle industry. Rules in sensitive industrial sectors have been included within the Multisectoral framework on regional aid for large investment projects through its latest revision1768. Sectors where serious structural problems prevail have been specified in the communication modifying the framework1769. Special provisions applied to the shipbuilding sector1770, which expired in 2014. There are no longer any special provisions applicable to the shipbuilding, motor vehicle and the textile and clothing industry; these sectors are now governed by the guidelines on regional aid 2014–2020. Apart from the State aid guidelines for environmental protection and energy, further sector-specific provisions apply to public-service broadcasting, 1771 for airports and airlines,1772 for the film industry1773 and for maritime transport.1774 42; confirmed by ECJ Case C-301/87 France v Commission [1990] ECR I-307; Commission Decision 89/ 43/EEC of 26 July 1988 on aids granted by the Italian Government to ENI-Lanerossi, OJ 1989 L 16/52; confirmed by ECJ Case C-303/88 Italy v Commission [1991] ECR I-1433. 1764 This is the so called “one-time-last-time principle”. 1765 Regulation (EC) No. 1407/2002 of the Council on State aid in the steel industry, OJ 2002 L 205/1. 1766 Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ 2010, L 336/24. This decision expires on 31 December 2027. 1767 See Recital (12) of the GBER, OJ 2014, L 187/1. 1768 Communication of the Commission to Member States — Multisectoral framework on regional aid for large investment projects — Code on aid to the synthetic fibres industry — Community framework for State aid to the motor vehicle industry, OJ 2001, C 368/10. 1769 Commission communication on the modification of the Multisectoral Framework on regional aid for large investment projects (2002) with regard to the establishment of a list of sectors facing structural problems and on a proposal of appropriate measures pursuant to Article 88 mn. 1 of the EC Treaty, concerning the motor vehicle sector and the synthetic fibres sector, OJ 2003, C 263/3. 1770 Framework guidelines on State aids in shipbuilding (OJ 2003 C 317/06), prolonged by the Communication OJ 2008, C 173/3. 1771 Commission Communication on the application of State aid rules to public service broadcasting, OJ 2009, C 257/1. 1772 Guidelines on State aid to airports and airlines, OJ 2014 C 99/3. 1773 Commission Communication on State aid for films and other audiovisual works, OJ 2013 C332/1. 1774 Community guidelines on State aid to maritime transport, OJ 2004 C 13/3; see also Commission Communication providing guidance on State aid complementary to Community funding for the

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766

767

768

769

II

770–775

Art. 107 TFEU

770

Article 93 TFEU provides special rules on State aid in the transport sector: Aids are regarded as compatible ‘with the Treaties’ if they meet the needs of coordination of transport or if they represent reimbursement for the discharge of certain obligations inherent in the concept of a public service.

771

d) Article 107(3)(d) TFEU. Article 107(3)(d) covers aids to promote culture and heritage conservation. Before this derogation from the prohibition of State aid in Article 107(1) was introduced by the Treaty of Maastricht, State aid with cultural goals had to be authorised under Article 107(3)(c). Thus, it had to be considered as aid to facilitate the development of certain economic areas. The Commission refused to authorise aid promoting culture if the relevant aid scheme discriminated against undertakings from other Member States.1775 Article 107(3)(d) does not define the notion of culture. It seems to draw its concept of culture from Article 167 TFEU, which, however, neither provides a definition. The ‘promotion of culture’ includes the promotion of publishers, theatres and cinemas, the film industry and other cultural institutions.1776 It does, however, not extend to promotion of the press, although most Member States operate support schemes for this purpose. With regard to daily newspapers the Commission so far assumes that there is hardly any trade between the Member States, amongst others due to linguistic barriers. Thus, the Commission does not qualify support for daily newspapers as State aid falling under Article 107(1) TFEU. It is, however, questionable whether this approach is still viable since some newspapers are now traded across borders. A framework for the development of public broadcasting services is provided by the Communication on the application of State aid rules to public service broadcasting of 2 July 2009.1777 It was adopted by the Commission on the basis of Article 86(2) EC (now Article 106(2) TFEU) because the recipient undertakings were regarded as public service undertakings. It is settled case-law that Member States are allowed to define broadcasting services of general interest in broad and qualitative terms and that their freedom to use advertising revenue to finance such services of general economic interest cannot be disputed.1778 Licence fees to finance public broadcast service providers are regarded as State aid. This is due to the fact that their amount is determined by public authorities; that the obligation to pay the licence fee does not arise from a contractual relationship between the service provider and the person liable to pay, but simply from the ownership of a television or radio receiver; that where necessary, the licence fee is collected in accordance with the rules on income taxes; and, lastly, that it is the public authority who determines the service provider’s share of the income from licence fees. 1779 In 2013, the Communication on State aid for films and other audiovisual works was adopted by the Commission1780 and replaced the Communication on certain legal aspects relating to cinematographic and other audiovisual works from 2001, which

772

773

774

775

launching of the motorways of the sea, OJ 2008 C 317/10 and Commission Communication providing guidance on State aid to ship management companies, OJ 2009 C 132/6. 1775 Commission Decision 89/441/EEC of 21 December 1988 on aid granted by the Greek Government to the film industry for the production of Greek films, OJ 1989 L 208/38. 1776 For details see below, Part VIII. O. 1777 OJ 2009, C 257/1. Regarding State aid law: See Do ¨ rr/Cloß, Die Vereinbarkeit der Gebu¨hrenfinan¨ stereichischen Rundfunks mit dem EG-Beihilferecht, ZUM 2/1996, 105; Antweiler/Dreesen, zierung des O Wettbewerbsrechtliche Beurteilung der Rundfunkgebu¨hrenfinanzierung – Neue Entwicklungen und Mn.llelen zum Beihilferecht, EuZW 4/2007, 107. 1778 GC Case T-309/04 et al. TV 2 v Danmark A/S et al. [2008] ECR II-0000, mn. 113. 1779 GC Case T-309/04 et al. TV 2 v Danmark A/S et al. [2008] ECR II-0000, mn. 158. 1780 OJ 2013 C 332/1.

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expired in 2012.1781 The new Communication introduced amendments to the criteria of the 2001 Communication. In particular, it covers State aid for a wider scope of activities, introduces a higher maximum aid intensity level for cross-border productions and caters for the protection of and access to film heritage. e) Article 107(3)(e) TFEU. Article 107(3)(e) is a catch-all provision covering all cases that are not addressed by other provisions, and it is rarely used. The provision serves primarily as a legal basis for the creation of special regulations, which were otherwise not covered. Operational aid, however, distorts the conditions of competition according to case law, since it release an undertaking from costs which it would normally have had to bear in its day-to-day management or normal activities without setting incentives for investments or other desired activity. State aid granted without specific conditions and solely according to the quantities used, are regarded as operational aids. They affect trading conditions to an extent contrary to the common interest.1782 This means operational aid distorts competition without any beneficial effects. Furthermore, it may prevent necessary market consolidation, in particular by frustrating the market exit of receiving undertakings. This can lead to markets suffering from overcapacities. As a general rule, operational aid therefore cannot be authorised under Article 107(3)(a) to (d) TFEU1783. Irrespective of this general rule, there can be situations where operational aids are required to ensure the existence of a particular industry. One example is the shipbuilding sector that had to face difficulties due to the existence of large and efficient Korean competitors, which were also benefitting from State aid granted in different but not transparent form. Taking into account its relevance for national defence, it was necessary to protect the European shipbuilding sector, or at least mitigate the burden. The principles set out in the latest Framework on State aid to shipbuilding 1784 were applied from 1 January 2012 to 31 December 2013 with an extended application to 30 June 2014.1785 According to this framework, operational aids could not be granted to the shipbuilding industry any more. Since the Framework expired regional aids for shipbuilding are covered by the Commission’s Guidelines on regional State aid for 2014–2020 alone.1786 Furthermore, operational aids for services of general economic interest are frequently granted under Article 106(2) TFEU.1787 1781

OJ 2009 C 31/1. ECJ Case C-86/89 Italy v Commission [1990] ECR I-3891, mn. 18. 1783 ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 30, referring to ECJ Cases C301/87 France v Commission [1990] ECR I-307, and C-86/89 Italy v Commission [1990] ECR I-3891. 1784 OJ 2011 C 364/9. 1785 OJ 2013 C 357/1. 1786 OJ 2013 C 209/1. 1787 It is not easy to decide whether payments by the state are to be regarded as State aids: See ECJ Cases C-280/00 Altmark [2003] ECR I-7747, and C-53/00 Ferring [2001] ECR I-9067, and the commentary on Article 106(2) TFEU, as well as Bartosch, Die Kommissionspraxis nach dem Urteil des ECJ in der Rechtssache Altmark – Worin liegt das Neue? EuZW 10/2004, 295, and Werner/Ko¨ ster, ECJ: Ausgleich gemeinwirtschaftlicher Verpflichtungen im o¨ffentlichen Personenverkehr keine Beihilfe – Altmark Trans (Urteilsbesprechung) EuZW 16/2003, 496. 1782

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PART III SERVICES OF GENERAL ECONOMIC INTEREST (SGEI)

Bibliography: Alchian, Uncertainty, Evolution and Economic Theory, The Journal of Political Economy 58(1950), 211–221; Averch/Johnson, Behaviour of the firm under regulatory constraint, AER 52(1962), 1052–1069; Bartosch, Die Commissionspraxis nach dem Judgment des ECJ in der Rechtssache Altmark – Worin liegt das Neue?, EuZW 2004, 295–301; id., Sozialer Wohnungsbau und europa¨ische Beihilfenkontrolle, EuZW 2007, 559–564; id., Dienstleistungsfreiheit versus Monopolrechte – Die Fragwu¨rdigkeit des Remailing-Judgments des ECJ vom 10. 2. 2000, NJW 2000, 2251–2253; id., Der ECJ zieht der EGBeihilfenkontrolle engere Schranken – das Judgment in der Rechtssache Ferring/ACOSS, NVwZ 2002, 174–175, Behrens, Der Wettbewerb im Vertrag von Lissabon, EuZW 2008, 193; Britz, Finanzielle Direkthilfen fu¨r Dienstleistungen von allgemeinem wirtschaftlichen Interesse, ZHR 169(2005), 370–403; Busche, Privatautonomie und Kontrahierungszwang, 1999; Czerny, Die beihilfenrechtliche Bejudgmentung der staatlichen Finanzierung im allgemeinen wirtschaftlichen Interesse, 2009; Do¨ rr, Infrastrukturfo¨rderung (nur) nach Ausschreibung?, NZBau 2005, 617–623; Endler, Privatisierungen und Vergaberecht, NZBau 2002, 125–136; Erhardt, Beihilfen fu¨r o¨ffentliche Dienstleistungen, 2003; Fox, Antitrust, Competitiveness, and the World Arena: Efficiencies and Failing Firms in Perspective, ALJ 64(1996), 725–733; Franz, Gewinnerzielung durch kommunale Daseinsvorsorge, 2005; Frielinghaus, Die kommunale Insolvenz als Sanierungsansatz fu¨r die o¨ffentlichen Finanzen, 2007; Grave, Article 86 II EG: Weder Verbot noch Gebot zur Quersubventionierung von Dienstleistungen im allgemeinen wirtschaftlichen Interesse, EuZW 2001, 709–711; Gundel, Staatliche Ausgleichszahlungen fu¨r Dienstleistungen von allgemeinen wirtschaftlichen Interesse: Zum Verha¨ltnis zwischen Article 86 II EGV und dem EG-Beihilfenrecht, RIW 2002, 222–230; Hart, The Market Mechanism as an Incentive Scheme, Bell Journal of Economics 14(1983), 366–382; Hofmann/Wessels, Der Vertrag von Lissabon – eine tragfa¨hige und abschließende Antwort auf konstitutionelle Grundfragen?, integration 2008, 3–20; Jennert, Finanzierung und Wettbewerb in der Daseinsvorsorge nach Altmark Trans, NVwZ 2004, 425–431; id., Das Judgment ‘Parking ¨ bernahme des Betriebsrisikos als rechtssicheres Abgrenzungsmerkmal fu¨r die DienstleistungsBrixen’: U konzession?, NZBau 2005, 623–626; id., Zum Verha¨ltnis von europa¨ischem Beihilfenrecht und mitgliedstaatlicher Daseinsvorsorge, 2005; id./Pauka, EU-Beihilfenrechtliche Risiken in der kommunalen Praxis – Einfu¨hrung und Darstellung typischer Sachverhalte im kommunalen Alltag mit Bezug zum Europa¨ischen Beihilferecht (part 1), KommJur 2009, 321–329; id./Ra¨ uchle, Beendigungspflicht fu¨r vergaberechtswidrige Vertra¨ge, NZBau 2007, 555–558; Jovanovic, Selection and the Evolution of Industry, Econometrica 50(1982), 649–670; Keßler/Dahlke, Der soziale Wohnungsbau in Deutschland und die europa¨ische Beihilfekontrolle, EuZW 2008, 68–69; id., Der soziale Wohnungsbau in Deutschland im Lichte des europa¨ischen Beihilferechts, EuZW, 2007, 103–106; Kibele, Europarechtliche Anforderungen an die Defizitfinanzierung der o¨ffentlichen Krankenha¨user, KH 2007, 1094–1102; Knauff, Anm. zu ECJ, C-458/ 03, EuZW 2005, 731–732; Koenig, Die neuen EG-beihilfenrechtlichen Kompensationsmaßsta¨be in der Daseinsvorsorge – das Altmark Trans-Judgment in der Praxis, BB 2003, 2185–2188; id./Haratsch, Staatliche und kommunale Bu¨rgschaften auf dem Pru¨fstand des EG-Beihilfenrechts – Neue Tendenzen, ZHR 169(2005), 77–93; id./Ku¨hling, “Totgesagte Vorschriften leben la¨nger’ – Bedeutung und Auslegung der Ausnahmeklausel des Art 86 Abs 2 EG, ZHR 166(2002), 656–684; id., Die Krankenhausfinanzierung im Kreuzfeuer der EG-Beihilfenkontrolle, EuZW 2008, 359–363; id., Ist die Krankenhausfinanzierung ein pathologischer Fall fu¨r EG-beihilfenrechtliche Transparenz- oder sogar fu¨r Entflechtungsmaßnahmen?, EuZW 2009, 844–848; id./Vorbeck, Europa¨ische Beihilfenkontrolle in der Daseinsvorsorge Ein kritischer Zwischenruf zum Monti-Paket, ZEuS 2008, 207–218; Ku¨hling, Sektorspezifische Regulierung in den Netzwirtschaften, 2004; id./Wachinger, Das Altmark Trans-Judgment des ECJ – Weichenstellung fu¨r ¨ PNV?, NVwZ 2003, 1202–1205; Kwoka/Warrenoder Bremse gegen mehr Wettbewerb im deutschen O Boulton, Efficiencies, failing firms, and alternatives to merger: a policy synthesis, Antitrust Bulletin 31(1986), 431, 434–450; Lecheler/Gundel, Die Rolle von Art 90 Abs 2 und 3 EGV in einem liberalisierten Energiemarkt – Zur Bedeutung der ECJ-Entscheidungen vom 23–10–1997 fu¨r die Zukunft, RdE 1998, 92–102; Leibenath, Anm. zu C-83/01 P ua. (Chronopost), EuZW 2003, 509–510; Lipka, Beihilfenrechtliche Anforderungen an Vergabeverfahren: zur Einordnung staatlicher auftra¨ge als Beihilfen und zu den Rechtsschutzmo¨glichkeiten der Konkurrenten, 2005; Liston, Price-Cap Versus Rate-of-Return Regulation, Journal of Regulatory Economics 5(1993), 25–48; Masing, Die US-amerikanische Tradition der Regulated

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Industries und die Herausbildung eines europa¨ischen Regulierungsverwaltungsrechts, Ao¨R 128(2003), 558–607; Meinzenbach, Die Anreizregulierung als Instrument zur Regulierung von Netznutzungsentgelten im neuen EnWG, 2008, Motta, Competition Policy, 2004; Mu¨ller-Graff, Der Vertrag von Lissabon auf der Systemspur des europa¨ischen Prima¨rrechts, integration 2008, 123–144; Nettesheim, Europa¨ische Beihilfenaufsicht und mitgliedstaatliche Daseinsfu¨rsorge, EWS 2002, 253–263; Nickell, Competition and Corporate Performance, Journal of Political Economy 104(1996), 724–746; Olley/Pakes, The Dynamics Of Productivity In The Telecommunications. Equipment Industry, Econometrica 64(1996), 1263–1297; Peter/Tittel/Mu¨ller-Gerndt/Peisl, Innovationsfa¨higkeit und Innovationspotenziale bei Energieversorgern, et 4/2006, 8–10; Po¨cker, Der ECJ, das Beihilferecht und die Prozeduralisierung, EuZW 2007, 167–171; Rabe, Zur Metamorphose des Europa¨ischen Verfassungsvertrags, NJW 2007, 3153–3157; Rittner, Der – unverfa¨lschte – Wettbewerb: Grundlage und Ziel der EG, WuW 2007, 967; Ro¨ ller/Stennek/Verboven, Efficiency gains from mergers, European Economy, Reports ans Studies, No. 5, 2001; Ross, State aids and national courts: Definitions and other problems. A Case of premature emancipation?, CMLR 37(2000), 401–423; Rudolph, Unternehmensfinanzierung und Kapitalmarkt, 2006; Sa¨ cker, Das Regulierungsrecht im Spannungsfeld von o¨ffentlichem und privatem Recht, Ao¨R 130(2005), 180–224; id., Die wettbewerbsorientierte Anreizregulierung von Netzwirtschaften, N&R 2009, 78–85; id./Meinzenbach, Der Effizienzkostenmaßstab des § 21 Abs 2 im System der energierechtlichen Netzentgeltregulierung, RdE 2009, 1–14; Sappington, Price Regulation, in: Cave/Majumdar/Vogelsang (Ed.), Handbook of Telecommunication Economics (Vol. 1) – Structure, Regulation and Competition, 2002, S. 225; Scharfstein, Product Market Competition and Managerial Slack, RAND Journal of Economics 19(1988), 147–155; Schebstadt, Der Kostenausgleich fu¨r Daseinsvorsorgeverpflichtungen in der europa¨ischen Beihilfeaufsicht, DVBl. 2004, 737–746; Schmidbauer, Allokation, technischer Fortschritt und Wettbewerbspolitik, 1974; Schuppert, Der moderne Staat als Gewa¨hrleistungsstaat, in: Schro¨ter (editor), Empirische Policy- und Verwaltungs¨ konomie, 2006; Schwintowski/Klaue, Anwendbarforschung, 2001; Schwalbe/Zimmer, Kartellrecht und O keit des Kartellrechts auf Energieliefervertra¨ge – die deutsche und die europa¨ische Sicht, BB 2000, 1901– 1905; Terhechte, Der Vertrag von Lissabon: Grundlegende Verfassungsurkunde der europa¨ischen Re¨ nderungsvertrag?, EuR 2008, 143–189; U. Schneider, Liberalisierung chtsgemeinschaft oder technischer A der Stromwirtschaft durch regulatorische Marktorganisation, 1999; Uerpmann, Kooperatives Verwaltungshandeln im Gemeinschaftsrecht: Die Gemeinschaftsrahmen fu¨r staatliche Beihilfen, EuZW 1998, 331– 335; Weber, Vom Verfassungsvertrag zum Vertrag von Lissabon, EuZW 2008, 7–14; Weiß, Europarecht ¨ ffentliche Unternehmen und EGV, EuR 2003, 165–190; und Privatisierung, Ao¨R 128(2003), 91–133; id., O Wende, Die einheitliche Auslegung von Beihilfen- und Vergaberecht als Teilgebiete des europa¨ischen Wettbewerbsrechts, 2011; Wolf, Effizienzen und europa¨ische Zusammenschlusskontrolle, 2009.

Content A. SGEI and the principle of an open market economy with free competition in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Implications of the Treaty of Lisbon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The SGEI package of the European Commission . . . . . . . . . . . . . . . . . . . . . . B. Application of Article 107 TFEU to compensation granted for the provision of SGEI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Concept of undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Economic activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Non-economic activities of a purely social nature and those related to State prerogatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Service Monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Specific sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Relativity of the concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Payments to an entity engaged in economic and noneconomic activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Advantage (Altmark-Trans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 1st Altmark criterion: Entrustment with the fulfilment of a clearly defined public service obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) SGEI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Obligation to carry out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Entrustment Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Definition in the Entrustment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 2nd Altmark-criterion: Ex ante objectivity and transparency . . . . . . .

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Services of General Economic Interest (SGEI) 3. 3rd Altmark criterion: Necessity (avoidance of overcompensation) 37 4. 4th Altmark-criterion: Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 a) Amount of compensation where the SGEI is assigned under an appropriate tendering procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 b) Amount of compensation where the SGEI is not assigned under a tendering procedure (efficiency benchmark) . . . . . . . . . . . . 44 III. Trade affecting distortion of competition (de-minimis) . . . . . . . . . . . . . . . . 49 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2. De-minimis-Regulation (EU) No 360/2012 (Text) . . . . . . . . . . . . . . . . . . . 3. De-minimis-Regulation (EU) No 360/2012 (annotations). . . . . . . . . . . 51 a) Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 b) Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 c) Monitoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 C. Exemptions pursuant Article 106(2) TFEU and the SGEI Framework . . . 59 I. Purpose of Article 106(2) TFEU within State aid law . . . . . . . . . . . . . . . . . . 59 II. Scope of applicability – Article 106(2) TFEU beyond the Altmark criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 III. Application of Article 106(2) TFEU with regards to the SGEI Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 2. Role and scope of the SGEI framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3. Services of General Economic Interest (SGEI) . . . . . . . . . . . . . . . . . . . . . . . . 77 4. Act of entrustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 5. The necessity for aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 b) Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 c) Cost control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 aa) Reduced cost-plus approach (Efficiency Principle) . . . . . . . . . . 91 bb) Cost components. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 cc) Reasonable profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 dd) Functional connection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 ee) Prohibition of overcompensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 ff) No obligation to tender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6. No effects on the development of trade contrary to the Union’s interest (Article 106(2) sentence 2 TFEU) . . . . . . . . . . . . . . . . . . 124 a) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 b) Scope and duration of entrustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 c) Violation of primary and secondary legislation on procurement principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 d) State monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 e) Infrastructure facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 7. Further requirements of the SGEI framework . . . . . . . . . . . . . . . . . . . . . . . . 137 IV. Principles of procedure (burden of proof and intensity of examination) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 D. SGEI Block Exemption Decision 2012/21/EU (SGEI Decision) . . . . . . . . . . . 143 Article 1 Subject matter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Article 2 Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Article 3 Compatibility and exemption from notification . . . . . . . . . . . . . 152 Article 4 Entrustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Article 5 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 1. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 2. Calculation of costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 3. Revenues to be balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 4. Reasonable profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 5. Accounting unbundling (Article 5(9)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 6. Efficiency incentives (Article 5(6)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Article 6 Control of overcompensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Article 7 Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

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Services of General Economic Interest (SGEI) Article 8 Availability of information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Article 9 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 Article 10 Transitional provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

A. SGEI and the principle of an open market economy with free competition in the European Union I. Introduction In an open market economy with free competition, mainly private companies meet the needs of the market-participants based on the interaction of supply and demand. The State abstains from a qualitative evaluation of the services provided. 1 However, the State has to establish and uphold minimum-requirements for a humane existence of its citizens (cf. Articles 1, 20(1) and 28(1) of the German Constitution). 2 Therefore, the State can define a particular public interest in the supply of certain services and their performance (e. g. quantity, quality, and price). If, under free market conditions, these services are insufficiently provided compared to the performance requirements predefined by the State, then the State may intervene. A reason for action might be that the actual required fee for the service is higher than the one desired by the State under socio-political aspects; hence, not all customers who rely on the service can actually obtain it.3 In such cases, the State may intervene in market processes instead of providing the service itself. The State could impose a public service obligation on companies to ensure that the previously defined demand (e. g. concerning quantity, quality and price) will be met.4 The so called “universal service obligation” requires a company to provide a certain service throughout the entire territory of a State at affordable tariffs and on similar quality conditions, irrespective of the profitability of individual operations.5 It might be necessary to grant particular or exclusive rights or to establish special funding-mechanisms to an undertaking (Article 106(1) TFEU) in order to fulfil these obligations. 2 In case that public services provided by either a public or a private company would lead to an economic deficit, the government may offer financial support. However, providing individual companies with selective advantages could lead to a distortion of competition and affect trade among the Member States. Due to the European Union’s fundamental decision in favour of an open market economy with free competition (Article 119(1) TFEU), there is a need of consistency between the legitimate interest in ensuring compliance with competition and internal market rules on the one hand and ensuring the provision of SGEI on the other hand.6 Therefore, any support granted by the State needs to comply with the prohibition of State aid under Article 107 TFEU. Nevertheless, the peculiarities of SGEI need to be taken into account (Article 14 TFEU and Protocol No. 26). In cases of conflict, Article 106(2) TFEU reconciles both, the interest for a system of effective competition and the interest of providing SGEI. 1

1 BVerfGE 117, 202, 225 and 227; BVerfGE 82, 60, 80; BVerfGE 103, 197, 221; BVerfG, order of 25 February 2009–1 BvR 120/09, mn. 13; BVerwG NJW 1954, 1541; BVerfG DVBl. 2007, 1555 mn. 71. 2 Cf. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 195. 3 Schebstadt DVBl. 2004, 737, 742; Britz ZHR 169(2005), 370, 372. 4 The Directive 2002/22/EC defines universal service as the “minimum set of services of specified quality to which all end-users have access, at an affordable price in the light of specific national conditions, without distorting competition”. 5 Commission, Communication on Services of General Interest in Europe, OJ 2001 C 17/4 mn. 14. 6 Commission, Communication on Services of General Interest in Europe, OJ 2001 C 17/4 mn. 19.

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Article 106(2) TFEU grants exemptions from the rules of the treaties, notably from Articles 107 et seq. TFEU.7 The conditions under which State aid complies with the TFEU will be discussed in the following paragraphs, in particular the precise conditions under which compensation for public service obligations constitutes State aid (paras 8 et seq.), the conditions under which State Aid may be regarded as compatible with the Treaty in the light of Article 106(2) TFEU (paras 59 et seq.) and under which conditions there is an exemption from the notification requirement of Article 108(3) TFEU (paras 143 et seq.).

II. Implications of the Treaty of Lisbon Article 106(2) TFEU is the central provision for reconciling the Union’s objectives, 3 including those of competition and internal market freedoms on the one hand, with the effective fulfilment of SGEI on the other hand. Its application depends on the importance that the EU treaties attach to each of these interests. Article 3(1)(g) TEC, applicable until 30 November 2009, emphasized the objective of a system of undistorted competition in the internal market. The rules of the Treaties had to be applied and interpreted in the light of these objectives.8 The Treaty of Lisbon9 has not changed the legal situation. Indeed, the preceding catalogue of objectives, which is now mainly to be found in Article 3(3) TEU,10 with both treaties having the same legal value (sentence 2 of Article 1(3) TEU, sentence 2 of Article 1(2) TFEU), does not contain the aim to protect competition in the internal market. Nevertheless, the Protocol (No 27) on the internal market and competition11 affirms that “the internal market includes a system ensuring that competition is not distorted” and “to this end, the Union shall, if necessary, take action under the provisions of the Treaties, including under Article 352 of the Treaty on the Functioning of the European Union.”12 This protocol with its close resemblance to Article 3(1)(g) TEC has been declared an integral part of the treaties by Article 51 TEU13 and has the same legal effect as the text of the Treaties itself. 14 Even though it may look rather odd from a methodical point of view,15 it is obvious that the importance of the protection of competition has not diminished.16 Furthermore, Article 119(1) TFEU, which is a continuation of the former Article 4(1) TEC, stresses the Union’s commitment to an open market economy with free competition. Article 119(2), 120 TFEU (previously Article 98 TEC) as well as Article 2 of Protocol (No. 4) on the Statute of the European System of Central Banks and of the European Central 7

ECJ Case C-265/08 Federutility et al. v AEEG [2010] ECR I-3377, mn. 28. ECJ Case 32/65 Italy v Commission [1966] ECR 458, 483; 229/83 Leclerc [1985] ECR 1, mn. 8 et seq. 9 Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, signed in Lisbon on 13 December 2007, OJ 2007 C 306/1. 10 This means the consolidated version of the EU-Treaty on the basis of the Treaty of Lisbon. See OJ 2007 C 306/11, No. 4. Regarding this ‘list of values’, cf. also Hofmann/Wessels integration 2008, 3, 8. 11 OJ 2007 C 306/156. 12 It is alleged by some, that the reference to a system that protects competition from distortions is not a provision of the 6th Protocol but only its reasoning. Weber EuZW 2008, 7, denies the legal relevance of this statement for the rules of competition law. Anyhow, the second part which constitutes the ‘agreement’ in a stricter sense seems pointless without the introduction. The Union shall ‘to this end’ take action, thus referring to the introduction. This static reference incorporates the introductory considerations into the scope of the protocol. 13 See OJ 2007 C 306/41, No. 59. 14 This has been recognised by the ECJ for quite some time, cf. ECJ Joined Cases 7/54 and 9/54 Groupement des industries side´rurgiques luxembourgeoises v Hohe Beho¨rde [1956] ECR 55, 90. 15 Mu ¨ ller-Graff integration 2008, 123, 137. 16 Rabe NJW 2007, 3153, 3154; cf. also Mu ¨ ller-Graff integration 2008, 123, 137. 8

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Bank contain the same phrasing. Besides, the objectives of the Union are reflected in rules on competition in Articles 101 et seq. TFEU which ensure the enforcement of the principle of an open market economy with free competition.17 4 As well as the scope of Article 106(2) TFEU has not been changed to the disadvantage of the protection of competition, it has not been extended in favour of a protection of SGEI. Indeed, the Protocol (No 26) on services of general interests aims “to emphasise the importance of services of general interest”18 in addition to Article 14 TFEU (previously Article 16 TEC). However, the Protocol simply reiterates the principles developed by case law regarding Article 106(2) TFEU, according to which Member States possess broad discretionary powers to define what they consider to be a SGEI (for details in this respect, see paras 77 et seq.). 19 Due to the scope of EU competition rules that limits their application to ‘undertakings’ (for further details in this respect, see paras 9 et seq.), non-economic services of general interest do not in any way play a role in regard to EU competition rules.20 Thus, the legal framework conditions of Article 106(2) TFEU have not been changed by the Treaty of Lisbon.

III. The SGEI package of the European Commission On 20 December 2011, the European Commission adopted a revised package of EU State aid rules for the assessment of public compensation for SGEI. The package comprises four instruments: 1. a Communication, clarifying basic concepts of State aid according to Article 107(1) TFEU, which are relevant for SGEI (SGEI Guidelines), among other things, the term “undertaking” and the ECJ’s Altmark decision, which establishes that under certain circumstances compensatory payments made by public authorities do not constitute an advantage for the beneficiary relevant to State Aid Rules and thus do not fall within the scope of Article 107 TFEU, 2. a ‘block exemption’ Decision as referred to in Article 106(3) TFEU, which exempts Member States from the obligation to notify public service compensation for certain SGEI-categories to the Commission (SGEI Decision), 3. a Framework for assessing large compensation amounts in application of Article 106(2) TFEU (SGEI Framework), 4. the de minimis Regulation No 360/2012 based on Article 2(1) of the Council Regulation (EC) No. 994/98, which was adopted later on 25 April 2012, providing that compensation not exceeding a total of EUR 500 000 over three tax years does not fall under State aid scrutiny. 6 The SGEI Guidelines and the de minimis Regulation set out the conditions for applying Article 107(1) TFEU, whereas the SGEI Decision and the SGEI Framework cover the application of Article 106(2) TFEU and apply only if the compensation constitutes State aid according to Article 107(1) TFEU. The SGEI Framework and thus Article 106(2) TFEU is applied by the Commission on notified State aid. The SGEI Decision on the other hand already exempts from the requirement of a prior notification to the Commission according to Article 108(3) TFEU. Since the standards of both, the SGEI Decision as well as the SGEI Framework, are directly derived from Article 106(2) TFEU, 21 both texts 5

17

Cf. Terhechte EuR 2008, 143, 176 et seq.; Behrens EuZW 2008, 193. OJ 2007 C 306/158. 19 Article 1 of the protocol notice. 20 Article 2 of the protocol notice. 21 Cf. Commission decision of 2 July 2009, State aid NN 8/2009, mn. 72, 91 – Germany – Conservation areas. 18

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may be taken into account while interpreting Article 106(2) TFEU. It should be noted that only the de minimis Regulation and the SGEI Decision have a binding legal effect. The SGEI Framework and the Communication on the other hand are only ‘Guidelines’ for the application of Article 107(1) and Article 106(2) TFEU. With these Guidelines the Commission limits the use of its discretionary powers in principle, but it may deviate from them in particular cases.22 The package partly replaces the so-called ‘Monti-Package’ of November 2005, which 7 consisted of three documents as follows: 1) a binding decision based on Article 106(3) TFEU (2005/842/EC), b) a communication binding the Commission’s administrative practices (SGEI Framework 2005), 3) the Directive 2005/81/EC. 23 The directive amended the Transparency-Directive 80/723/EEC, which was consolidated in the meantime by Directive 2006/111/EC and continues to apply. It stipulates the requirement to keep separate accounts for all undertakings that hold special or exclusive rights or that have received compensation payments for the provision of a SGEI and at the same time, performs other activities in competition with private undertakings. Since 2005, the application of the directive does no longer require that the compensation constitutes State aid in the meaning of Article 107 TFEU. This modification has proved necessary following a ruling of the ECJ stating that certain compensations paid for a SGEI do not constitute State aid according to Article 107(1) TFEU.24

B. Application of Article 107 TFEU to compensation granted for the provision of SGEI Neither the social character of a state measure is sufficient to exclude it outright from 8 being categorized as aid for the purposes of Article 107 TFEU, nor is the fact that it is carried out in the public interest.25 The Court has consistently held that measures of state intervention are not characterised by reference to their causes or aims but defined in relation to their effects.26 Thus, there is no room for a per se exclusion of specific sectors such as culture, security, taxation or social affairs from the application of the State aid rules. Nevertheless, under certain circumstances state measures promoting services of general economic interest (SGEI) do not constitute State aid. Hence, those measures are not covered by Article 107 TFEU at all. Firstly, Article 107 AEUV is only applicable on measures promoting undertakings that provide economic services. According to the case law, purely social activities have to be characterized as noneconomic. Thus, they lay outside the scope of the State aid rules (see paras 9 et seq.). Based on the Altmark Jurisprudence even a compensation granted to an undertaking might fall outside the scope of the State aid rules if it lacks an advantage because it only covers all or part of the necessary costs incurred in the discharge of public service obligations (see paras 23 et seq.). Furthermore, an exemption may be granted by the De22

Cf. GC Case T-301/01 Alitalia v Commission [2008] ECR II-1753, mn. 405. Germany implemented the directive through the Act amending the German Transparency Directive Implementation Act, BGBl. 28 December 2006 Part 1, entering into force on 29 December 2006. 24 Cf. recital 3 and 4 Directive 2005/81/EC. 25 ECJ Cases 173/73 Italy v Commission [1974] ECR 709, mn. 27 et seq.; ECJ Cases C-241/94 France v Commission [1996] ECR I-4551, mn. 21; C-75/97 Belgium v Commission [1999] ECR I-3671, mn. 25; C251/97 France v Commission [1999] ECR I-6639, mn. 37; C-342/96 Spain v Commission [1999] ECR 1999, I-2459, mn. 23. 26 ECJ Cases C-5/01 Belgium v Commission [2002] ECR I-11991, mn. 44–48; 173/73 Italy v Commission [1974] ECR 709, mn. 27; C-241/94 France v Commission [1996] ECR I-4551, mn. 20; C-480/98 Spain v Commission [1998] ECR I-8717, mn. 16. 23

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minimis-Regulation (EU) No 360/2012 on aid granted to undertakings providing SGEI (see paras 49 et seq.). Finally, a state measure that is subject to Article 107 TFEU can still be found compatible with the internal market based on the exemption provided by Article 106 (2) TFEU in two different ways. On the one hand, the Commission Decision 2012/21/EU lays down the conditions under which certain types of public service compensation are to be regarded as compatible with the internal market pursuant Article 106(2) TFEU and are exempt from the requirement of prior notification under Article 108(3) TFEU (see paras 143 et seq.). On the other hand, regarding aid that does not fulfil the conditions of the SGEI Decision, the Commission clarified its understanding of the application of Article 106 (2) TFEU in the Framework for State aid in the form of public service compensation (see paras 70 et seq.) under which the Commission has legally bound itself in the exercise of its discretion. 27

I. Concept of undertaking 1. Economic activities In case that financial aid is not allocated to an undertaking, competition as protected by the EU competition rules is not concerned and there is no obligation of prior notification to initiate a procedure pursuant Article 108 TFEU. 28 However, the Commission is not prevented from considering financial support granted to multiple recipients as unlawful State aid, in case that both, undertakings as well as miscellaneous entities, benefit.29 Nevertheless, any aid granted that is likely to affect the internal market, might also infringe upon the fundamental freedoms set out in the TFEU, even if the recipient is not an undertaking.30 However, the Commission is not obliged to ascertain, definitively and comprehensively, whether the notified State measures infringe other provisions of Union law. It follows, a fortiori, that the complete failure to mention provisions other than those relating to State aid in a Commission’s decision adopted pursuant to Article 108 TFEU, is not capable of adversely affecting an individual. Therefore, such pleas against the Commission’s decision are rejected as inadmissible. 31 Under those conditions, proceedings brought under national law against granted aid due to an infringement of the fundamental freedoms remain possible. 10 The concept of an undertaking is identical for the State aid rules and for the rules applying to undertakings (Article 101 and 102 TFEU).32 This concept covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed.33 Any activity consisting in offering goods and services on a given market has 9

27

Cf. GC Case T-301/01 Alitalia v Commission [2008] ECR II-1753, mn. 405. ECJ Case C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, mn. 113 et seq.; Commission, SGEI Guidelines, mn. 8; Commission decision of 10 October 2007, N 597/2006, mn. 100 et seq.; see also Commission decision of 23 July 2008, C 48/06, OJ 2008 L 346/1, mn. 166 et seq. – Airport Leipzig/Halle; not answered by CFI, Cases T-254/00 et al. Hotel Cipriani v Commission [2008] ECR II3269, mn. 107; cf. also ECJ Cases C-71/04 Xunta de Galicia [2005] ECR I-7419, mn. 32; C-91/83 and 127/ 83 Heineken Brouwerijen, [1984] ECR 3435, mn. 11. 29 ECJ Case C-66/02 Italy v Commission [2005] ECR I-10901, mn. 92. 30 Cf. Commission, SGEI Guidelines, mn. 15; regarding the application of the fundamental freedoms besides competition law, see also ECJ Cases C-519/04 P Meca-Medina v Commission [2006] ECR I-6991, mn. 29–33; C-156/98 Germany v Commission [2000] ECR I-6857, mn. 78. 31 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 313 et seq. 32 Expressively GC Case T-443/08 Airport Leipzig/Halle [2011] ECR II-1311 mn. 117. 33 Cf. ECJ Cases C-237/04 Enirisorse [2006] ECR I-2843, mn. 28; C-222/04 Ministero dell’Economia e delle Finanze et al. [2006] ECR I-289, mn. 107; C-55/96 Job Centre [1997] ECR I-7119, mn. 21; C-41/90 28

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to be considered as an economic activity.34 At first glance, it seems that purchasing activities are excluded from that definition. However, according to the FENIN judgement of the ECJ, there is no need to dissociate the activity of purchasing goods from the subsequent use to which they are put in order to determine the nature of that purchasing activity. Therefore, the nature of any purchasing activity must be determined according to whether or not the subsequent use of the purchased goods amounts to an economic activity.35 On the other hand, each market activity has to be assessed separately irrespective of the entity’s legal form and status according to the rules of a Member State (functional approach).36 Thus, the same entity can perform economic and non-economic activities at the same time. Only the first ones are subject to the rules on competition. But it is irrelevant whether or not the entity operates for profit or not, 37 whether or not the services are profitable or whether or not the activity was carried out by private actors.38 The economic activity does not need to be carried directly on the market by the aided 11 legal entity itself. An entity which owns controlling shareholdings in a company and actually exercises that control by involving itself directly or indirectly in the management must be regarded as taking part in the economic activity carried on by the controlled undertaking. It may therefore itself, in that respect, be regarded as an undertaking within the meaning of Article 107 TFEU. A mere legal separation of an undertaking into two separate units must not be sufficient to deprive the rules relating to State aid of their practical effect. It would enable the entity in control to receive subsidies or other advantages granted by the state or by means of state resources and to use them in whole or in part for the benefit of the economic activity of the controlled entity. 39 On the other hand, the mere fact of holding shares, even controlling shareholdings, is insufficient to characterize the entity which is holding those shares as an undertaking, when it gives rise only to the exercise of the rights attached to the status of shareholders or members, as well as the receipt of dividends. However, the fact that members of the management committee and the controlling body of that entity are appointed to the equivalent bodies of the controlled company indicates the exercise of functions relating to control, direction and financial support going beyond the simple placing of capital by an investor.40

2. Non-economic activities of a purely social nature and those related to State prerogatives Economic activities need to be distinguished from non-economic activities which fall 12 within the exercise of public powers41 and those that fulfil an exclusively social function. Ho¨fner and Elser [1991] ECR I-1979, mn. 21; C-264/01 et al. AOK Bundesverband [2004] ECR I-2493, mn. 46; GC Cases T-61/89 Dansk Pelsdyravlerforening v Commission [1992] ECR II-1931, mn. 50; T-513/ 93 Consiglio Nazionale degli Spedizionieri Doganali v Commission [2000] ECR II-1807, mn. 36. 34 ECJ Cases C-237/04 Enirisorse [2006] ECR I-2843, mn. 29; C-222/04 Ministero dell’Economia e delle Finanze et al. [2006] ECR I-289, mn. 108; C-35/96 Commission v Italy [1998] ECR I-3851, mn. 36; C-180/ 98 to C-184/98 Pavlov [2000] ECR I-6451, mn. 75; T-196/04 Ryanair v Commission [2008] ECR II-3643 mn. 87. 35 ECJ Case C-205/03 P FENIN [2006] ECR I-6295, mn. 26. 36 Commission, SGEI Guidelines, mn. 9. 37 ECJ Cases C-49/07 MOTOE v Dimosio [2008] ECR I-4863, mn. 28; C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 116 et seq. 38 GC Case T-443/08 et al. State of Saxony et al. v Commission [2011] ECR II-1311, mn. 115. 39 ECJ Cases C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, mn. 109–114; C-480/ 09 P AceaElectrabel Produzione v Commission [2010] ECR I-13355, mn. 49 et seq. 40 ECJ Cases C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, mn. 115 et seq.; C480/09 P AceaElectrabel Produzione v Commission [2010] ECR I-13355, mn. 51, 56. 41 ECJ Case C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 70.

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Typical examples of the exercise of State prerogatives are activities related to the military or the police,42 the maintenance of air navigation safety, air traffic control 43 and maritime traffic control and safety,44 anti-pollution surveillance45 and the organisation, financing and enforcement of prison sentences.46 Regardless of its legal status, an organisation founded by one or several States exercises State prerogatives as far as it indirectly holds public powers and replaces the State in its capacity as a public authority.47 Furthermore, the ECJ decided that municipalities act in their capacity as public authorities when they conclude contracts for concessions with concessionaires entrusted with responsibility for a public service.48 However, this interpretation by the Court appears to be too narrow since it enables the possibility of circumventing the application of competition law. It also is not in line with the former case law. E. g., the ECJ rightly examined a concession granted by an authorised public undertaking on the basis of Articles 101 et seq. TFEU.49 Furthermore, the decision of a State not to allow third parties to provide a certain service but to provide the service in-house, does not rule out the existence of an economic activity, provided that other operators are interested in and capable of providing said service.50 13 Under certain conditions, activities of a purely social nature may be regarded as of a non-economic nature. In its Poucet and Pistre decision, the ECJ rejected the economic nature of managing a sickness and maternity insurance scheme for self-employed persons in certain occupations.51 The key factors for the ECJ were, that the organisation in question was involved in the management of a public social security system, which fulfilled an exclusively social function and performed an activity based on the principle of national solidarity which was entirely non-profit-making. This approach was confirmed by the ECJ in its Fe´de´ration française des socie´te´s d’assurances,52 Albany53 and Pavlov54 decisions. In its Cisal v INAIL decision, the ECJ held that an organisation legally entrusted with the management of a scheme providing compulsory insurance against accidents at work and occupational diseases does not constitute an undertaking.55 The ECJ stated that the system’s benefits and contributions were subject to supervision by the State and the fact that contributions and benefits were not proportionally linked (principle of solidarity), thus INAIL carried out an activity of purely social function.56 By referring to this case law, banking foundations were not considered 42

Commission, SGEI Guidelines, mn. 16. ECJ Cases C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 79; C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43, mn. 19 et seq.; cf. also ECJ Case 29/76 LTU v Eurocontrol [1976] ECR 1541, mn. 4 et seq. 44 Commission decision of 16 October 2002, N 438/02, mn. 12 et seq. – Port Authority. 45 ECJ Case C-434/95 Calı` v SEPG [1997] ECR I-1547, mn. 23. 46 Commission decision of 19 July 2006, N 140/2006 – Correction Houses. 47 Cf. ECJ Cases 30/87 Bodson [1988] ECR 2479, mn. 18; C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43, mn. 19 et seq. 48 ECJ Cases C-231/03 Coname [2005] ECR I-7287, mn. 12; 30/87 Bodson [1988] ECR 2479. 49 Cf. ECJ Case C-82/01 P Ae ´roports de Paris [2002] ECR I-9297. 50 ECJ Case C-41/90 Ho ¨ fner and Elser v Macrotron [1991] ECR I-1979, mn. 22; Commission, SGEI Guidelines, mn. 12; cf. also ECJ Case C-180/98 et al. Pavloof [2000] ECR I-6451, mn. 122. 51 ECJ Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, mn. 18 et seq. 52 ECJ Case C-244/94 Fe ´de´ration française des socie´te´s d’assurance (FFSA) [1995] ECR I-4013, mn. 15 et seq. 53 ECJ Case C-67/96 Albany [1999] ECR I-5751, mn. 78–80; the same wording also in ECJ Cases C115/97 to C-117/97 Brentjens [1999] ECR I-6025, mn. 78–80; and ECJ Case C-219/97 Maatschappij Drijvende Bokken [1999] ECR I-6121, mn. 68–70. 54 ECJ Cases C-180/98 to C-184/98 Pavlov [2000] ECR I-6451, mn. 109 et seq. 55 ECJ Case C-218/00 Cisal v INAIL [2002] ECR I-691, mn. 31 et seq. 56 ECJ Case C-218/00 Cisal v INAIL [2002] ECR I-691, mn. 42 et seq. 43

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as undertakings as far as they managed their own assets and only used the resulting proceeds for non-profit purposes, on condition that a market does not exist for this particular type of activity, as is the case for proceeds for grants to not-for-profit entities operating in the social field.57 In addition, a State aid measure to a state-owned health insurer has been qualified as a measure outside the scope of the State aid rules. 58 The objective of nature management as such does not exclude organizations from the scope of the State aid rules.59 It must however be kept in mind that such systems are not except from the scope of the European fundamental freedoms, yet, said restrictions can be justified only as far as necessary for an adequate functioning of social security systems.60 Based on the case law, to assume a non-economic activity of a purely social nature, 14 the following four conditions must be met cumulatively:61 – Firstly, the activity needs to be carried out within a social security system with a social purpose that is clearly separate from any economic activity pursued simultaneously. Examples of this purpose are the management of statutory insurance schemes regarding mortality,62 disability,63 accident,64 health65, maternity66 and pensions.67 The pursuit of a social purpose is not sufficient to prevent an activity from being regarded as economic, for instance, where it leads to competitive disadvantages for competitors. In such a case granting special rights may be justified pursuant Article 106 (2) TFEU.68 – Secondly, the system has to be based on the principle of solidarity. This is the case if contributions and benefits are not proportionate which means that a system of compulsory contribution is indispensable for the scheme.69 E. g. an insurance scheme needs to be based on the principle of distribution, according to which the paid contributions are used directly for financing services granted to other members. This is the case, where the risks are spread among all members, for instance, if the amount of the members’ contributions are based on the total financial need of the insurer calculated on the basis of the services provided in the previous year.70 A high degree of solidarity is also supported by financing the scheme through fixed contributions that do not take into consideration factors such as age, state of health or any particular risks 57 Commission decision of 22 August 2002(2003/146/EC), OJ 2003 No. L 55/56 mn. 42 et seq. (Case C 54/B/2000) – Italy banking foundations, see also Commission, XXXII Report on Competition Policy 2002, mn. 366 et seq.; furthermore cf. Commission decision of 10 October 2007, N 597/2006, mn. 100 et seq.; approved by ECJ Case C-222/04 Ministero dell’Economia e delle Finanze et al.[2006] ECR I-289, mn. 120 et seq. 58 Commission decisions of 15 October 2014 ((EU) 2015/248), SA.23008 (2013/C), OJ 2015 No. L 41/ 25 – Slovak health insurance. 59 GC Case T-347/09 Germany et. al. v Commission, mn. 24 et seq. 60 ECJ, Case C-350/07, Kattner Stahlbau [2009] ECR I-1513, mn. 74 et seq. 61 Summarizing ECJ Cases C-264/01 et al. AOK Bundesverband et al. [2004] ECR I-2493, mn. 47; ECJ Case C-437/09 AG2R [2011] ECR I-973 mn. 43 et seq.; Commission decision (EU) 2015/248 of 15 October 2014 on the measures SA.23008, OJ 2015 No. L 41/25, mn. 76 et seq. – Slovak health insurance. 62 ECJ Case C-159/91 and C-160/91 Poucet und Pistre [1993] ECR I-637, mn. 9. 63 ECJ Case C-159/91 and C-160/91 Poucet und Pistre [1993] ECR I-637, mn. 9. 64 ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 36 (Accident insurance). 65 ECJ Case C-264/01 AOK Bundesverband [2004] ECR I-2493, mn. 51 (statutory health insurance companies); ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 36 (insurance for labor related diseases). 66 ECJ Case C-159/91 and C-160/91 Poucet und Pistre [1993] ECR I-637, mn. 7, 9. 67 ECJ Case C-159/91 and C-160/91 Poucet und Pistre [1993] ECR I-637, mn. 7, 9. 68 ECJ Case C-244/94 FFSA [1995] ECR I-4013, mn. 20. 69 The same approach in ECJ Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, mn. 13. 70 ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 46, 55–59.

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inherent in the occupation of the insured employee; accordingly, the rate is not proportionate to the insured risk.71 Determining the individual contribution according to income is permissible, as long as the insured benefit is not dependent on wages. 72 A contribution cap indicates the implementation of the solidarity principle; yet, it is not an obligatory prerequisite.73 Calculating contributions according to typical risks by the whole group of professionals to which a member belongs is compatible with the solidarity principle, as long as a nationwide costs and risks compensation takes place among industry branches.74 A further indication of the solidarity nature of an insurance scheme is the fact that in certain cases rights accrue independent of contribution payments, e. g. during periods of illness, invalidity, unemployment and military service.75 A scheme is on the other hand regarded as of economic nature, if it is based on the principle of capitalisation as it is the case for private insurance companies that invest insurance fees on the financial market and then repay them in the form of a life annuity or lump-sum payments.76 – Thirdly, the activity has to be carried out with a non-profit purpose. The purpose has to be determined objectively and may usually be deduced from the solidarity principle that the system follows. An indication for said purpose would be that it was clear right from the time when the system was established, that it would not be able to cover its own costs. However, in general the lack of such a purpose is irrelevant. 77 It is not a necessary prerequisite of the concept of an undertaking, 78 but rather a cumulative one to qualify an activity with a social purpose in exceptional cases as non-economic. – Fourth, the benefit must be provided by law and independent of the amount of contributions paid. The scheme has to be subject to State control, which eliminates the option to act autonomously.79 As was the case in Poucet and Pistre, as well as in Cisal/INAIL, it is particularly important that the decision about the grant of a benefit in general as well as its modalities are beyond the control of the active entity itself. However, minor rights to act granted in the interests of the proper functioning of a social security system do not change the nature of a social activity. 80

3. Service Monopolies 15

Developing the ECJ’s definition of ‘economic activity’, the European Commission understands it as offering products on an existing market.81 According to this view, the economic nature of certain services could differ from one Member State to another and the classification of a given service could change over time due to political choice. The 71

ECJ Case C-437/09 AG2R [2011] ECR I-973, mn. 47–50. ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 45. 73 ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 51. 74 ECJ Case C-350/07 Kattner Stahlbau [2009] ECR I-1513, mn. 47 et seq. 75 ECJ Case C-437/09 AG2R [2011] ECR I-973, mn. 51; cf. the Advocate General Tesauro’s Opinion of 29 September 1992, mn. 11, regarding ECJ Cases C-159/91 and C-160/91 Poucet and Pistre [1993] ECR I637, mn. 13. 76 Cf. the Advocate General Tesauro’s Opinion of 29 September 1992, mn. 11, regarding ECJ Cases C159/91 and C-160/91 Poucet and Pistre [1993] ECR I-637, mn. 13. 77 ECJ Cases C-244/94 FFSA [1995] ECR I-4013, mn. 21; C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 116 et seq. 78 Cf. ECJ Case C-49/07 MOTOE/Dimosio [2008] ECR I-4863, mn. 28; ECJ Case C-113/07 P SELEX/ Commission [2009] ECR I-2207, mn. 116 et seq. 79 ECJ Case C-437/09 AG2R [2011] ECR I-973, mn. 46, 53 et seq. 80 ECJ Case C-264/01 AOK Bundesverband [2004] ECR I-2493, mn. 56. 81 Commission, SGEI Guidelines, mn. 12. 72

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Commission’s view has to be clarified. The application of European competition law would depend on a Member States’ decision and therefore reduce the effectiveness of the Treaties, which must be prevented according the well-established case law of the ECJ.82 Accordingly, the ECJ concluded that the fact that a State decides not to allow private operators to provide a certain service and instead reserves the service provision for a state owned monopoly, does not rule out the economic nature of an activity, provided that other operators are interested in and capable of providing such a service. 83 The ECJ requires the assessment, whether or not the activity in question has always been provided by public entities or whether or not it is essential that it be carried out by such an entity in order to determine the existence of a market and by extension of an undertaking under competition law. In view of the above, the ECJ came to the conclusion that despite its monopoly status guaranteed by law, the former German Federal Employment Office had to be characterized as an undertaking according to EU competition law.84 Accordingly, a potential market is sufficient to characterise an activity as of economic nature. Activities are only considered as of non-economic nature if the interpretation by EU law results in qualifying the activity as non-economic, taking due account of the circumstances as a whole in the Member States. The questions of whether or not a measure distorts competition or affects trade among Member States needs to be distinguished from the concept of undertaking. Our conclusion is corroborated by Article 106 (1) TFEU which knows undertakings that obtain an exclusive right. Finally, it would be paradoxical if Article 102 TFEU – following the same concept of undertaking – would be inapplicable to cases where the strongest dominant position possible is held, as is the case of a legally protected monopoly. The concept of an undertaking must be suitable to meet the objectives of the competition rules of the European Union committed to the principle of an open market economy with free competition (Article 119(1) TFEU).85

4. Specific sectors According to the case law on social security systems, the ECJ held that in the field of 16 health care public hospitals, such as the ones in Spain that are funded by social security contributions and other state funding and provide services free of charge to its members on the basis of universal cover, do not act as undertakings. 86 Due to the ECJ’s definition of the term undertaking according to which demand is not dissociable from the subsequent use, the purchase of medical goods by such entities for distribution free of charge does not amount to an economic activity.87 However, if hospitals or health care providers offer their services for remuneration, they act as undertakings

82 ECJ Cases 118/85 Commission v Italy [1987] ECR 2599, mn. 10 et seq.; C-84/03 Commission v Spain [2005] ECR I-139, mn. 27; EC C-220/06 Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia v Administracio´n General del Estado [2007] ECR I-12175, mn. 50; C-399/98 Ordine degli Architetti delle Province di Milano et Lodi et al. [2001] ECR I-5409, mn. 73; Wolf, VergabeR 2011, 27. 83 ECJ Case 311/84 CBEM v CLT and IPB [1985] ECR 3261, mn. 16et seq. 84 ECJ Case C-41/90 Ho ¨ fner and Elser v Macrotron [1991] ECR I-1979, mn. 22; Commission, SGEI Guidelines, mn. 12; cf. also ECJ Case C-180/98 et al. Pavloof [2000] ECR I-6451, mn. 122. The concept of an undertaking adopted by German competition law covers a monopoly position guaranteed by law, cf. German Federal Court of Justice, 7 November 1960 – KZR 1/60, NJW 1961, 172, 173; German Federal Court of Justice, 7 March 1989 – KZR 15/87, NJW 1989, 3010, 3011. 85 GC Case T-443/08 et al. State of Saxony et al. v Commission [2011] ECR II-1311 mn. 117. 86 GC Case T-319/99 FENIN v Commission [2003] ECR II-357, mn. 39. 87 ECJ Case C-205/03 P FENIN v Commission [2006] ECR I-6295, mn. 25 et seq.

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regardless of whether the patients themselves or their health insurances pay for it. 88 In addition, self-employed doctors and practitioners, as well as pharmacists, act as undertakings.89 17 State funded and supervised public education activities forming part of the national educational system are excluded from the concept of services within the meaning of Article 57 TFEU.90 The Commission therefore concludes, in accordance with the EFTA Surveillance Authority and the EFTA Court, that organizations carrying out these activities do not constitute undertakings according to competition law.91 The EFTA Surveillance Authority held that a public institution purchasing, developing and publishing digital educational material in competition to private companies, does not act economically. However, this conclusion is not fully in line with the case law of the ECJ.92 Both, remuneration and a profit-making purpose may be relevant for the application of the rules protecting the fundamental freedoms, 93 but they are not prerequisites to affirm the status of an undertaking. 94 Regulation (EC) No 68/2001 regarding educational training aids also assumes that educational training may constitute an economic activity.95 Therefore, the EFTA Surveillance Authority ultimately assessed the criteria regarding social security systems established by case law. 18 In accordance with the Framework for State aid for research and development and innovation, the Commission qualifies certain activities carried out by universities and research institutions as non-economic.96 This refers to the core activities of research institutions, namely (a) education for more and better skilled human resources, (b) independent research and development, also with regards to knowledge and understanding and (c) dissemination of research results. The Commission, furthermore, considers that technology transfer activities (licensing, spin-off creation or other forms of management of knowledge created by the research organisation) are of noneconomic character if these activities are of an internal nature and if all income from these activities is reinvested in the primary activities. 97 Nevertheless, the particular circumstances of the case are essential to establish whether or not State aid affects any remaining economic activity, which is generally the case if results will not be made freely available to the public by the entity and the entity acts on licensing and technology markets.98

88

Commission, SGEI Guidelines, mn. 24 with further references. Commission, SGEI Guidelines, mn. 24 with further references. 90 ECJ Cases C-318/05 Commission v Germany [2007] ECR I-6957, mn. 68; 263/86 Humbel [1988] ECR 5365, mn. 18. 91 Commission, SGEI Guidelines, mn. 26; EFTA Surveillance Authority; decision of 12 October 2011, Case No. 68123, mn. 35 – Nasjonal digital læringsarena. 92 A different view takes the EFTA Surveillance Authority, decision of 12 October 2011, Case No. 68123, mn. 35 – Nasjonal digital læringsarena. 93 ECJ Case 263/86 Humbel [1988] ECR 5365, mn. 15 et seq.; ECJ Case C-109/92 Wirth [1999] ECR I6447, mn. 17. 94 Cf. ECJ Case C-244/94 Fe ´de´ration française des socie´te´s d’assurance et al. (CCMSA) [1995] ECR 1995, 4013, mn. 21. 95 See Commission decision of 25 April 2001, N 118/00. 96 Framework for State aid for research and development and innovation, OJ 2014 C 198/1, mn. 18; Commission, SGEI Guidelines, mn. 29. 97 Commission, SGEI Guidelines, mn. 30. 98 Cf. Commission, Guidelines on technology transfer agreements, OJ 2004 C 101/2 mn. 22; Commission decision of 22 May 2007, COMP/M.4404, mn. 11 et seq. – Universal/BMG Music Publishing; see also GC Case T-155/04 SELEX v Commission [2006] ECR II-4797, mn. 76; ECJ Case C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 119. 89

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5. Relativity of the concept The economic character has to be determined separately for each activity exercised by 19 a given entity, provided that they can be separated.99 In this context, the ECJ has held that a banking foundation does not act as an “undertaking” by paying contributions to non-profit-making organizations, since that constitutes an activity of exclusively social nature and is not carried out on the market in competition with other operators. Concerning that activity, a banking foundation acts as a charitable organization and not as an undertaking. On the other hand, the foundation acts as an undertaking regarding its financial, commercial, real estate and asset operations in competition with other market operators.100 The General Court also made a distinction between the policing (public) activity of Ae´roports de Paris – which according to French law was a public corporation enjoying financial independence and which managed several airports – and the economic activity concerning the provision of airport services. 101 For a separate assessment of activities in regard to their economic nature they have to 20 be separable from each other.102 The jurisprudence is inconsistent in this point. Legal independence is not necessary. Thus, the ECJ distinguished the non-economic participation of a legal person in the decision-making process of the public authorities from its economic activities, such as the organisation and commercial exploitation of motorcycling events.103 On the other hand establishing legal independence does not suffice to divide a uniform activity into an economic and a non-economic part. In that context, the General Court pointed out that the construction of a runway cannot be separated from its subsequent operation since the purpose of a State promoted construction of a runway is linked to the airport’s main economic activity, namely the provision of airport services.104 However, the possibility to have activities carried out by different legal entities can be an indication of severability.105 The activities are not separable if one is accessory to the other. In this case, the accessory one is qualified like the main activity. The ECJ does not require that the activity is essential or indispensable for reaching the main objective; it only needs to be functionally associated with it. 106 In the case SELEX v Commission purchasing prototypes and the management of intellectual property rights were characterized as needful preliminary activities for the non-economic preparation and development of technical standards in security related sectors and therefore of non-economic character itself.107 In order to qualify the common 99 ECJ Case C-49/07 MOTOE [2008] ECR I-4863, mn. 25; GC Cases T-443/08 et al. Airport Leipzig/ Halle, mn. 98; T-155/04 SELEX [2006] ECR II-4797, mn. 54 et seq.; T-128/98 Ae´roports de Paris v Commission [2000] ECR 2000, II-3929, mn. 108; ECJ Cases C-264/01 et al. AOK Bundesverband et al. [2004] ECR I-2493, mn. 58 et seq.; see ECJ Case 107/84 Commission v Germany [1985] ECR 2655, mn. 14 et seq.; Commission decision of 26 July 2000, K(2000) 2466, OJ 2001 No. L 18/18 mn. 91 – SICAN. 100 ECJ C-222/04 Ministero dell’Economia e delle Finanze [2006] ECR I-289, mn. 119 et seq. 101 GC Cases T-128/98 Ae ´roports de Paris v Commission [2000] ECR II-3929, mn. 112 et seq.; T-443/08 et al. Airport Leipzig/Halle [2011] ECR II-1311 mn. 76 et seq. 102 Cf. GC Case T-155/04 SELEX v Commission, [2006] ECR, II-4797, mn. 55. 103 ECJ Case C-49/07 MOTOE [2008] ECR I-4863, mn. 26. 104 GC Case T-443/08 et al. State of Saxony et al. v Commission [2011] ECR II-1311, mn. 96–100, 110, 114. 105 GC Case T-155/04 SELEX v Commission [2006] ECR II-4797, mn. 60, as countercheck of separability; in the end, the ECJ had a different opinion: ECJ Case C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 89 et seq. 106 ECJ Case C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 79. 107 ECJ Case C-113/07 P SELEX v Commission [2009] ECR I-2207, mn. 102; GC Case T-155/04 SELEX v Commission [2006] ECR II-4797, mn. 65.

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assignment of fix amounts by the statutory German health insurances as a purely social activity, the ECJ highlighted that the amounts concerned a statutory obligation and they secured the continuance of the German social security system through securing health care. The Court also pointed out the fact that extensive statutory guidelines existed, as well as that the insurance companies did not compete with one another in this area. Hence, the assignment of fix amounts did not follow an individual interest that could be separated from the purely social purpose of the system of statutory health insurances; instead, it fulfilled an obligation that entirely formed part of the activity of health insurances within the scope of the German statutory health insurance system. 108

6. Payments to an entity engaged in economic and non-economic activities Payments to an entity engaged in economic and non-economic activities are excluded from Article 107 (1) TFEU only as far as they do not benefit economic activities. 109 Even earmarked funds can constitute aid according to Article 107(1) TFEU if they indirectly affect a non-economic and an economic activity being carried out by the recipient simultaneously.110 However, the Commission examines, as far as commercial activities are carried out alongside non-economic activities, whether the compensation paid by the public authorities remains equal to or less than the net costs incurred for the performance of these tasks, in order to exclude any cross-subsidisation. 111 Any given advantage must be assessed separately, e. g. by means of the de-minimis threshold. 22 To prevent a support of economic activities and to make sure that the grant relates solely to non-economic activities, the granted funds have to be tied to the achievement of non-economic goals, they shall not exceed what is necessary to fulfil those goals and the risks of cross-subsidies have to be eliminated (see paras. 111 et seq.). 112 Like in the Ministero dell’Economia e delle Finanze/Cassa di Risparmio decision State tax benefits, even if their scope is related to non-economic activities, are not spared from Article 107 (1) TFEU because all activities of that entity including economic activities could benefit.113 In addition, the free transfer of federally-owned national nature reserves to organisations having the objective of nature management has been seen as State aid, since the organisations could use the areas for economic activities as well. 114 However, the Commission did not object to the financial support granted to a Spanish wine business for the restoration of historic monastery buildings in its possession, since the buildings were not used for business’ activities.115 21

108

ECJ Case C-264/01 AOK Bundesverband [2004] ECR I-2493, mn. 61–64. Also Heidenhain § 4 mn. 8. 110 Cf. the reasoning in GC Case T-443/08 et al. State of Saxony et al. v Commission [2011] ECR II1311, mn. 128 et seq. According to this decision, a public fund may only be a granted aid if it does not carry out an economic activity. 111 Commission decision of 22 November 2006, COM(2006) 5477, OJ 2007 No. L 95/25 mn. 121 – LNE. 112 Cf. Commission decision of 26 July 2000, K(2000) 2466, OJ 2001 No. L 18/18 mn. 91 – SICAN; Commission, Case N 503/99, OJ 2000 No. C 33/9 of 5 February 2000 and in XXIX Report on Competition Policy 1999, mn. 229; Heidenhain § 4 mn. 8. 113 ECJ Case C-222/04 Ministero dell’Economia e delle Finanze et al. [2006] ECR I-289, mn. 107 et seq. 114 GC Case T-347/09 Germany et. al. v Commission, mn. 24 et seq. 115 Commission, XXIX Report on Competition Policy 1999, mn. 229 regarding the case N 503/99 (OJ 2000 No. C 33/9 of 5 February 2000). The Commission discussed this issue only within the context of the concept of advantage and disregarded the settled case law. 109

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II. Advantage (Altmark-Trans) Any given advantage by a State mitigating the normal budgetary burdens imposed on 23 an undertaking can constitute State aid in the meaning of Article 107 (1) TFEU. 116 On the contrary, the criterion is not satisfied if no economic benefit remains for the undertaking since the benefit rendered to the undertaking corresponds to an appropriate counter-performance by the undertaking. Accordingly, a financial contribution does not constitute State aid if the State acts in the same manner as every other investor in its position as a shareholder or because the financial contribution is part of a normal exchange transaction, in which the State pays an appropriate price for providing a service. In case that an undertaking receives compensation for the costs incurred for providing SGEI, the question must therefore be, whether or not an undertaking has obtained an economic benefit from the compensation paid for the provision of a statutory tasks carried out due to public interest. In the Altmark-Trans decision, the ECJ set out this principle for the compensation for services provided by the recipients due to public service obligations. According to this, a public measure is not caught by Article 107(1) TFEU, if it must be regarded as compensation for the services provided by the recipient undertakings in order to discharge public service obligations, so that those undertakings do not enjoy a real financial advantage and the measure thus does not put them in a more favourable competitive position than its competitors. 117 Four conditions have to be satisfied to ensure, that those payments do not give any 24 advantage in the meaning of Article 107 (1) TFEU:118 – First, the recipient undertaking must actually have public service obligations to discharge, and the obligations must be clearly defined. – Second, the parameters on the basis of which the compensation will be calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings. – Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations. – Fourth, where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations.

1. 1st Altmark criterion: Entrustment with the fulfilment of a clearly defined public service obligation According to the first Altmark criterion, the awarded undertaking needs to be 25 entrusted with the operation of clearly defined SGEI.119 Thus, it has to be examined 116

ECJ Case C-5/01 Belgium v Commission [2002] ECR I-11991, mn. 48. ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 83 et seq. 118 ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 89 et seq. 119 Cf. also GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 181. 117

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whether 1) the compensated service is of general economic interest, 2) whether the undertaking has the obligation to discharge the service, 3) whether the Member State has entrusted the awarded undertaking with this obligation by an individual act of entrustment and 4) if the obligation is clearly defined by the act of entrustment. The established case law regarding Art. 106(2) TFEU must be taken into account while assessing those conditions.120 a) SGEI. The question as to whether the compensated service is of public interest coincides with that of Article 106(2) TFEU.121 Nevertheless, the definition of the SGEI has to be distinguished from the entrustment act. Overlaps occur frequently only because a Member State has to define its general interests in a specific service in a transparent way in order for it to be taken into account within the provisions of Union law and that definition is usually expressed through the entrustment of one or several undertakings with discharging this service.122 27 According to settled case law, Member States enjoy a broad scope of discretion to define what they regard as SGEI, because it depends on their own cultural, societal and economic conditions whether or not a service meets the real needs of a large part of the population. It is also left up to the Member States to decide which proportion of the population is considered large enough in order to define a particular general interest. 123 The Member States may also define general interests, even if these are not yet supported by a current need of a part of the population as in case of fostering new environmental, social or health standards. A Member State must express, however, that for the discharge of this service there is a general economic interest exhibiting special characteristics as compared to the interest of other economic activities. 124 The Member States’ scope of discretion is limited the more the regulatory area in question has been harmonised.125 28 Contrary to the Commission’s view, services may be of general economic interest even if they can be provided under conditions consistent with the public interest, as defined by the State, by undertakings acting in accordance with market rules and under normal market conditions.126 Nevertheless, in such cases public service obligations cannot justify exemptions from the provision of Union law, but for other reasons. 127 In order to prevent a Member State from pretending a public interest in order to camouflage State aid according to Article 107(1) TFEU, the ECJ requires an explicit obligation of the undertaking based on an act of entrustment, which clearly defines the SGEI. Furthermore, favouring an individual undertaking in such markets is not necessary in order to provide the SGEI in the meaning of the 3rd Altmark criterion, since it has already been offered on the market (para. 37 et seq.). In the same manner, such an entrustment with a particular public service obligation, which impedes trade or the provision of services among Member States, is not justified because it is not necessary in order to satisfy a public interest. The same objective could be attained by 26

120 Expressively: GC Cases T-222/04 Italy v Commission [2009] II-1877, mn. 111; T-189/03 ASM v Commission [2009] ECR II-1831, mn. 126; cf. regarding the possibility of different precision levels: Mu¨nchKommEUWettbR/Gundel, Article 86 mn. 153; with further references. 121 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 165. 122 Commission, decision of 19 July 2006, C 33/2006, OJ 2006 C 202/18, mn. 68 – DVB-T Bayern. 123 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 195. 124 ECJ Cases C-179/90 Porto di Genova [1991] ECR I-5889, mn. 27; C-242/95 GT-Link v DSB [1997] ECR I-4449, mn. 53; C-34/01 et al. Enirisorse [2003] ECR I-14243, mn. 33, with reference to the judgment on Article 106(2) TFEU- GT-Link. 125 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 167. 126 ECJ Case C-451/03 Servizi Ausiliari Dottori Commercialisti [2006] ECR I-2941, mn. 63. 127 Misleading: Commission communication SGEI Guidelines, mn. 48.

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measures less restrictive, namely the provision through the market. 128 An exemption from the application of the rules of competition pursuant Article 106(2) TFEU is also not necessary in such cases.129 The service in question needs to be provided for the benefit of citizens or in the 29 interest of the society as a whole.130 The assumption of a public interest is neither hampered by the fact that the service is provided only to a part of the population, nor by the fact that the consumer may choose whether or not to accept the offer. But it is not sufficient if carrying out an activity only serves the economic interests of an individual undertaking or economic development as such.131 Such a definition of public interest by a Member State is merely aimed at the elimination of competition. This is contrary to the Union’s general interest of an open market economy with free competition (Article 119(1) TFEU, protocol No. 27).132 The Commission’s investigation is confined to the question of whether the Member State committed a manifest error of assessment.133 A stricter control shall be applied in case that Union legislature has already adopted provisions for the concerned public interest. b) Obligation to carry out. Furthermore, the undertaking must be obliged to carry out 30 the SGEI. An obligation arises even if no obligation to contract exists, but where the undertaking has still scope to determine price and service conditions. It is not required that the obligation already existed prior to the State measure to be assessed pursuant Article 107(1) TFEU. Moreover, the obligation can be subject to the condition that the compensation in question has been paid by the State. This may even be the normal case if the obligation is contractually agreed upon or if it is accompanied by imposing a service concession, because the undertaking will generally be prepared to be bound by such a stipulation only if the Member State agrees to grant it a quid pro quo, such as financial compensation.134 c) Entrustment Act. The obligation must be based on an act of entrustment. This 31 feature corresponds entirely with the one in Article 106(2) TFEU (see para. 84 et seq.). The act of entrustment must show an adequate degree of individualisation. It does not matter whether the obligation is the result of a contract, a legislative or regulatory instrument, if these measures emanate from the public authority and are binding. 135 However, a general scheme for all market operators would not be sufficient. On the other hand, a simultaneous entrustment of several undertakings is possible. Yet, in case that compensation measures benefit not all undertakings which carry out comparable services in a market, the entrustment act of the beneficiaries must single out the particular features of their mandate by exposing the differences concerning the scale of the specific obligations justifying the financing measures which are added to those 128 ECJ Case C-451/03 Servizi Ausiliari Dottori Commercialisti [2006] ECR I-2941, mn. 31 et seq.; cf. also ECJ Case C-2005/99 Analir [2001] ECR I-1271, mn. 35. 129 ECJ Case C-451/03 Servizi Ausiliari Dottori Commercialisti [2006] ECR I-2941, mn. 31 et seq.; ECJ Case C-179/90 Porto di Genova [1991] ECR I-5889, mn. 26; Cf. ECJ Case C-41/90 Ho¨ fner and Elser [1991] ECR I-1979. 130 SGEI Guidelines, mn. 50. 131 Commission decision of 3 May 2005, N 382/2004, mn. 41 – Dorsal; Commission, decision of 19 July 2006, C 33/2006, OJ 2006 C 202/18, mn. 68et seq. – DVB-T Bayern; Commission decision of 19 July 2006, C 34/2006, OJ 2006 C 204/9, mn. 41, 75et seq. – DVB-T Bayern. 132 ECJ Case C-439/08 VEBIC [2010] ECR I-12471, mn. 56; GC Case T-45/98 Van den Bergh Foods v Commission [2001] ECR II-3757, mn. 170; Recital 35 Regulation 1/2003. 133 SGEI Guidelines, mn. 48. 134 ECJ Case C-205/99 Analir [2001] ECR I-1271, mn. 63; GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 188. 135 GC Case T-137/10 CBI v Commission, mn. 108, 109; SGEI Guidelines, mn. 52.

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applicable to all the other entities entrusted with a public service in the same domain. 136 32 The involvement of the service provider in the process through which it is entrusted with the public service task does not mean that the task does not derive from a State act even if the entrustment is issued at the request of the service provider. In some Member States, it is not uncommon for public authorities to finance services, which were developed and proposed by the service provider itself. However, the authority has to decide whether it approves the provider’s proposal before it may grant any compensation. It is not important whether the necessary elements of the act of entrustment are inserted directly into the decision to accept the provider’s proposal or whether a separate legal act, for example, a contract with the provider, is used. 137 According to case law, it is – so far – irrelevant whether the act of entrustment was necessary. The Commission however, wishes to exercise control in this respect. 138 d) Definition in the Entrustment Act. The State has to define both, the SGEI as well as the obligation to provide the SGEI. Thus, this condition imposes formal requirements on the act of entrustment. In the view of the Commission, the act or series of acts must at least specify:139 – the content and duration of the public service obligations; – the undertaking and, where applicable, the territory concerned; – the nature of any exclusive or special rights assigned to the undertaking by the authority in question; – the parameters for calculating, controlling and reviewing the compensation; and – the arrangements for avoiding and recovering any overcompensation. 34 This enumeration corresponds to the one provided by the Commission in the SGEI framework concerning the application of Article 106(2) TFEU on compensation for a SGEI (para 87 et seq.).140 The last two points concerning the compensation refer to the parameters for determining the compensation and therefore can be attributed systematically to the second Altmark criterion. It may not be deduced based on the case law in this matter that the entrustment act itself needs to establish these parameters. They may also be part of a legislative provision applying to an entrusted undertaking, which was entrusted later on by an individual act. In the interest of verifiability by the Commission the act of entrustment needs to refer to the legislative provision. 33

2. 2nd Altmark-criterion: Ex ante objectivity and transparency 35

Second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner. The aim of this requirement is to prevent the State from conferring an economic advantage to the recipient over his competitors. How the compensation is to be determined needs to be clear from the outset.141 The third and the fourth Altmark criterion have to be reflected in the parameters established by the second Altmark criterion. 142 It should therefore be stipulated in the entrustment act how costs directly associated with the provision of the SGEI will be determined and calculated and which revenue accruing to the undertaking from the provision of the SGEI must be deducted. The same holds for the criteria for calculating a 136

GC Case T-137/10 CBI v Commission, mn. 97 et seq. (esp. 166). SGEI Guidelines, mn. 53. 138 SGEI Guidelines, mn. 48. 139 SGEI Guidelines, mn. 52. 140 The exemption according the SGEI-BED additionally requires a reference to legal provisions. (Article 4(f) SGEI-BED). 141 SGEI Guidelines, mn. 55. 142 Cf. SGEI Guidelines, mn. 60. 137

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reasonable profit and the arrangements for the review and any impact it may have on the total amount of compensation during the entrustment period.143 If a competitive tendering is organized according to the fourth Altmark criterion, the parameters for calculating the compensation must be included in the tendering conditions.144 The Member States are free to choose how to comply with this condition in practice. 36 The Member State has a wide discretion not only when defining an SGEI mission but also when determining the compensation for the costs connected with the SGEI, as long as the parameters are defined in such a way as to preclude any abusive recourse to the concept of an SGEI on the part of the Member State. Thus, the criterion at issue leaves Member States free to choose how to comply with it in practical terms, if the rules for determining the compensation are objective and transparent. 145 It is not necessary to calculate the compensation on the basis of a specific formula. 146 If national authorities determine the compensation on a statutory basis in a specific case, the second Altmark criterion will be met even if they enjoy certain discretion because determining the compensation for the costs calls for an assessment of complex economic factors. 147 This assessment is subject to only restricted control by the Union institutions. A legal provision must therefore include objective and transparent parameters, which are defined in such a way as to preclude any abusive recourse to the concept of an SGEI on behalf of the Member State. Their very existence is subject to complete control by the Union institutions.148 A high complexity of the used economic and mathematical formulas does not by itself affect the precision and clarity of the relevant parameters. 149 The setting up of an annual budget establishing a link between compensation and output is not imperatively required.150

3. 3rd Altmark criterion: Necessity (avoidance of overcompensation) According to the third Altmark criterion, the compensation must not exceed the 37 amount needed to cover all or part of the costs incurred in discharging the public service obligation, taking into account all relevant receipts and a reasonable profit for discharging the service. Under any circumstances, an overcompensation must be avoided. Compliance with such a condition is essential to ensure that the recipient undertaking is not granted any advantage that distorts or threatens to distort competition by strengthening that undertaking’s competitive position. This condition corresponds to the one provided for by Article 106(2) TFEU (para. 88 et seq.). E. g., a success-related payment, which is not based on the costs, increases the danger of overcompensation. However, ex-post compensation mechanisms can ensure that the payment will be based on the costs. 151 Only the additional costs (net extra costs) can be compensated. 152 To ensure that none of the other economic activities provided by the recipient benefits from any compensation measures, the correct imputation of some costs to the one or the other sector of activity should be 143

SGEI Guidelines, mn. 56–58. SGEI Guidelines, mn. 59. 145 GC Case T-137/10 CBI v Commission, mn. 191, 192; GC Cases T-309/04 et al. TV 2/Danmark v Commission [2008] ECR II-2935, mn. 227, 228. 146 SGEI Guidelines, mn. 55. 147 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 214; GC Case T-106/95 FFSA et al. v Commission [1997] ECR II-229, mn. 99 et seq. 148 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 214. 149 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 217. 150 GC Cases T-309/04 et al. TV 2/Danmark v Commission [2008] ECR II-2935, mn. 227. 151 Cf. Commission, Decision of 16 May 2006, C (2006) 1847(No. N 604/2005), mn. 55–57 – Public bus services in Wittenberg. 152 Cf. Koenig, BB 2003, 2185, 2186 et seq. 144

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verifiable. Thus, an account separation should be implemented; otherwise, any retroactive compensations could entail a risk of overcompensation.153 38 The third Altmark criterion is inseparably linked to the fourth one, which aims to limit the amount of compensation of actual costs incurred, insofar as such costs correspond to the principle of efficient service provision costs. The same standard applies to reasonableness of the profit gained by providing the compensated service. A reasonable profit, according to the Commission, is the rate of return on capital, which a typical undertaking, considering the relevant risk, takes as basis to decide whether it will provide the relevant SGEI for the whole period of entrustment. 154 The rate of return on capital in this light means the Internal Rate of Return (IRR) that the undertaking makes on its invested capital over the lifetime of the project, that is to say the IRR over the cash flows of the contract. The principles developed for the Market-Economy-Operator-Test (MEOT) can be applied,155 where IRR may be used to decide whether a private investor would consider the economic risk of investment.156 The risk level depends on the sector, the nature of the service and the compensation mechanism. Therefore, both market and undertaking related factors have to be considered. 157 The rate of return on capital should be determined by a comparison with the ones achieved on similar types of public service contracts under competitive conditions, e. g. contracts awarded under a tender (comparative market concept). In sectors without undertakings comparable to the one entrusted with the SGEI, the assessment can be based on comparable undertakings situated in other Member States or in other sectors, if the particular characteristics of each sector are taken into account sufficiently. 158 Member States may determine a reasonable profit based on incentive criteria especially relating to the quality of the provided service and to increases in efficiency of productivity levels. Those increases of efficiency must not come at the expense of the quality of the provided services as defined by the SGEI.159

4. 4th Altmark-criterion: Efficiency 39

The fourth Altmark criterion sets out the conditions to assure that the service will be provided at the least cost to the community.160 The underlying idea is that a commercial customer, who has to buy at least costs to remain competitive on its downstream activities would choose the economically most advantageous offer, which means the provider that is most competitive at fulfilling the needs of the customer, in particular in pricing, quality and service. In order to ensure that the compensation follows the concept of competitive pricing, which reflects the trend that has led to the commercialisation of public tasks, the ECJ proposes two mechanisms: the compensation offered must either be the result of a public procurement procedure which allows for selection of the tenderer capable of providing those services at the least cost to the community, or the result of a benchmarking exercise, calculating the costs of a typical efficient undertaking, well run and adequately provided with the necessary means to meet the necessary public service requirements. In the calculation the actual revenue 153 Cf. Commission, Letter to the Member State of 20 February 2014 regarding State aid SA.35843 (2012/NN), mn. 37 – Additional PSO compensation for Buonotourist (Italy). 154 SGEI Guidelines, mn. 61. 155 See Article 107 para. 150 et seq. for more information on the Market-Economy-Operator-Test. 156 See GC Case T-301/01 Alitalia v Commission [2008] ECR II-1753, mn. 236 et seq. 157 See GC Case T-301/01 Alitalia v Commission [2008] ECR II-1753, mn. 268. 158 SGEI Guidelines, mn. 61. 159 SGEI Guidelines, mn. 61. 160 ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 93.

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as well as a reasonable profit for discharging the obligations have to be taken into account. This criterion aims at ensuring that the compensation does not include the possibility of being compensated for costs, which are caused by the undertaking’s lack of efficiency.161 Member States carry the burden of proof regarding the compliance with this aim.162 a) Amount of compensation where the SGEI is assigned under an appropriate 40 tendering procedure. One way for public authorities to meet the fourth Altmark criterion is to conduct an open, transparent and non-discriminatory public procurement procedure in line with the Directives 2014/24/EU, 2014/25/EU and 2014/23/EU even in cases where it is not a legal requirement.163 However, the Commission differentiates between the different procedures provided for by the Directives. 164 According to the Commission, an open procedure in line with the requirement of the public procurement rules as well as a restricted procedure can satisfy the fourth Altmark criterion, unless interested operators are prevented to tender without valid reasons. On the other hand, a competitive dialogue or a negotiated procedure with prior publication can only be deemed sufficient to satisfy the fourth Altmark criterion in exceptional cases, because these procedures confer a wide discretion upon the adjudicating authority and may therefore restrict the participation of interested operators. Hence, they may only fulfil the requirements of the fourth Altmark criterion in exceptional cases. The Commission generally does not regard the negotiated procedure without publication of a contract notice sufficient to meet the above-mentioned conditions. Nevertheless, the public tender hast to be open, transparent and non-discriminatory. 41 It must allow determining the level of compensation based on a comparison between several potential offers.165 The tender procedure has to ensure an effective and free competition of the tenderers.166 First, it is necessary to fully and uniformly announce the essential conditions of the service of general economic interest to ensure nondiscrimination and an appropriate level of transparency. A call for tender, which is limited only to a region, does not meet the requirements of a transparent public tender procedure.167 In the case of important economic services with relevance to the internal market, a union wide publication in the EU’s official journal should be required to avoid discrimination pursuant Article 18 TFEU and to guarantee the fundamental freedoms.168 The period between the announcement and the call has to be determined regarding two aspects. Firstly, the announcement has to take place timely to allow the undertakings to develop their own concept of services along the lines of the tender requirements. Secondly, the call should not take place too long before the commencement of the contract to avoid that only a specific undertaking, for instance one that has already obtained a concession and only needs to continue its business, may participate.169 161

GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 249. SGEI Guidelines, mn. 75. 163 SGEI Guidelines, mn. 63. 164 SGEI Guidelines, mn. 66. 165 SGEI Guidelines, mn. 64. 166 SGEI Guidelines, mn. 68. 167 Commission decision of 26 November 2008, C 3/08(ex NN 102/05), OJ 2009 No. L 97/14 mn. 74, 75 – Czech Republic concerning public service compensation for southern Moravia bus companies. 168 Cf. Article 7(2) Regulation No. 1370/2007; Ruhland, Die Dienstleistungskonzession, 2006, p. 236 et seq.; Schro¨der, NVwZ 2008, 1288, 1290; Gro¨ning, NZBau 2001, 123, 125. 169 Sa ¨ cker/Mohr/Wolf, Dienstleistungskonzessionen im System des europa¨ischen und deutschen Wettbewerbsrechts, 2010, p. 88. 162

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Both, qualitative aspects and social objectives170 must be taken into account as they reflect the pre-defined specific public interest. 171 The award criteria have to include at least the standards that are necessary to achieve the objective of the public service. The Member States are free to take into account additional quality standards, which have to be met by all market participants, or quality aspects linked to the different tenders. 172 The conditions of the tender are to be formulated in an objective manner and must not be tailored to a single undertaking, e. g. by requiring specific characteristics of the service or existing intellectual property rights or by requiring that the necessary infrastructure is owned by a specific candidate. 173 Since the prior publication of the terms of reference constitutes an essential part of competition procedure, 174 the tender procedure should follow the conditions set by the Public Procurement Directives. 43 The decision awarding the contract must be grounded on a comparison of different offers. If only one offer has been submitted, it cannot be assumed that the procedure has sufficiently ensured that the service will be provided at least costs for the community. In this case, the Member State is obliged to benchmark the efficiency according to the second alternative of the fourth Altmark criterion.175 The award criterion of the “lowest price” in accordance with the directives meets the requirements of the fourth Altmark critierion.176 The Commission regards a call for the “tender most economically advantageous” in accordance with the Directives as sufficient, if the award criteria, including ecological and social criteria, are closely linked to the provided service and if the most economically advantageous tender corresponds to the market price. If a tender procedure is only based on qualitative criteria such as, for example, on the environmental benefits of projects protecting nature, it does not meet the requirements of the fourth Altmark criterion according to the Commission.177 The costs of the undertaking receiving aid are irrelevant.178 42

44

b) Amount of compensation where the SGEI is not assigned under a tendering procedure (efficiency benchmark). Where a Member State decides not to perform a tendering procedure or where such a procedure is not appropriate, the amount of compensation must be determined on the basis of an analysis of the costs that a typical undertaking, well run and adequately provided with material means so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations. The standard of the “average well-managed undertaking” which is adequately equipped with the means necessary for the performance of the relevant SGEI, corresponds with the concept of the efficient performance of services used in sector specific price regulation, e.g. Article 14(1) Regulation (EC) No. 714/2009. 179 The compen-

170

Cf. Diemon-Wies, VergabeR 2010, 317 et seq.; Mohr, VergabeR 2009, 543 et seq. Cf. regarding Article 106(2) TFEU, GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 211. 172 SGEI Guidelines, mn. 67. 173 SGEI Guidelines, mn. 68. 174 German Federal Court of Justice, WuW/E DE-R 1951, 1952 et seq. 175 SGEI Guidelines, mn. 68. 176 SGEI Guidelines, mn. 67. 177 Commission decision of 2 July 2009, State aid NN 8/2009, mn. 65 – Nature conservation projects (Germany). 178 Cf. Commission decision of 1 October 2003, N 37/2003, mn. 23 – BBC; of 3 May 2005, N 541/04 and N 542/04, p. 23 et seq. – NL Risk equalisation system and retention of financial reserves. 179 Cf. also SGEI Guidelines, mn. 75; Commission decision of 23 February 2011, C 58/06, OJ 2011 No. L 210/1 mn. 202 et seq. – BSM and RBG (Germany). 171

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sation must reflect actual costs incurred only insofar as they correspond to those of an efficient and structurally comparable undertaking. Thus, it is necessary to assess the costs that an efficient undertaking incurs in order to determine the upper limit for permissible compensatory payments, while also considering a reasonable profit. Subsequently, any revenue the undertaking concerned obtains through providing the SGEI is to be deducted. The underlying idea is that compensating all of the recipient’s actual costs reduces the economic risk inherent to competition to which the recipient would (usually) be subject and can thereby minimize any incentives to enhance efficiency. Without an adequate incentive for participating undertakings to increase their efficiency there is always a risk that SGEI will not be provided at least costs for the community. Granting a service monopoly without effective competition stipulates even more, according to industrial economic experience, not only a risk that this would lead to higher profit margins but furthermore that incentives for efficient management will diminish (‘monopolistic inertia’).180 It is inadmissible to only consider the cost structures of the recipient. The Member 45 State still has to verify if the actual costs correspond to those of an efficient and structurally comparable undertaking.181 Even the ECJ’s Chronopost decision does not allow to base decisions on the actual costs of the recipient in case of a lack of comparable monopolistic competition undertakings. Indeed, the ECJ stated, that if it is impossible to compare the situation of a public undertaking with a private group, which does not have a monopoly, the hypothetical “normal market conditions” based on the actual cost structures of the public undertaking, as the only available objective and verifiable factors, are to be assessed.182 However, this case was about the provision of a service by a public entity with a legal monopoly to its competing subsidiary. Providing that service in-house at a price lower than under normal market conditions would be considered State aid to the benefit of the subsidiary. Thus, the question arose as to whether the potential aid provider took into account all of its own costs as any other comparable private operator.183 State aid could only be excluded, if it can first be stated that the price demanded included all additional variable costs incurred by the provision of logistic and commercial assistance, as being an appropriate contribution to the fixed costs due to the use of the infrastructure and an adequate return on the capital investment, which is used for competitive activity, second, if there is no reason to believe that elements have been underestimated or fixed arbitrarily. 184 The Member States basically have two options to establish if the cost structure of the 46 recipient complies with the one of an efficient and structurally comparable undertaking. On the one hand the costs can be calculated on the basis of an analytical cost model, which assumes an average cost-efficient discharge of services. 185 On the other hand they can be determined by the cost structure of existing comparable undertakings. 186 In practice, the benchmark with other undertakings operating in the same or in a similar relevant market is most suitable. The established competition law principles of the

180

Leibenstein, Ao¨R 56(1966), 413. GC Case T-388/03 Deutsche Post v Commission [2009] ECR II-199, mn. 114–116. 182 ECJ Cases C-83/01 P et al. Chronopost [2003] ECR I-6993, mn. 38–40; ECJ Cases C-341/06 P and C342/06 P Chronopost II [2008] ECR I-4777, mn. 146–149; assenting Bartosch EuZW 2004, 295, 300. 183 Cf. ECJ Case C-305/89 Alfa Romeo [1991] ECR I-1603 mn. 19 et al. The private investor to be compared has to be of similar size and in a similar situation as the public investor. Cf. Leibenath EuZW 2003, 509, 510. 184 ECJ Cases C-83/01 P et al. Chronopost [2003] ECR I-6993, mn. 40. 185 Cf. ECJ Case C-438/04 Mobistar v BPT [2006] ECR I-6675, mn. 36. 186 Cf. Koenig, BB 2003, 2185, 2187 et seq. 181

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comparative market concept which the ECJ187 and the Commission188 used to determine which price would arise in a competitive market are useful. In determining the object of comparison, the Member States do not possess full discretion. The comparison with an undertaking that receives compensation, which is not in accordance with EU law is inadmissible, as well as a comparison with the costs of an undertaking in a monopoly or a dominant position pursuant Article 102 TFEU, which operates on a different market.189 The aim is to ensure that the high costs of an inefficient undertaking are not taken as the benchmark. Unlike undertakings facing effective competition, dominant undertakings usually have no incentive to act efficiently. 190 Thus, it cannot be assumed that the costs of the recipient undertaking match those of an efficient undertaking, if it has a monopoly or even a dominant position.191 Competition causes higher rates of productivity growth and inefficient undertakings are regularly displaced by the more efficient ones.192 This relationship is confirmed by experiences in the telecommunications and energy sectors,193 indicating stricter regulation efforts.194 It is also not sufficient to calculate the necessary costs based on the average real costs of other undertakings as such. There is no proof that an average of these costs represents the costs of an efficient undertaking. Without further evidence, such data cannot exclude that in the open public tender the regional authorities could have been able to find operators representing lower costs and consequently offering to provide the services demanding lower remuneration.195 That is why the assessment must not base on the average costs on the market,196 but on the efficient costs, even if none of the known other active operators have to be considered as acting efficiently. 197 Therefore, an average assessment may only be considered if it is done in a competitive market. This requires an analysis of the competitive situation on the relevant market, e. g. based on the Commission’s practice regarding Article 101 et seq. TFEU and the Merger Regulation (EC) No 139/2004, as well as the Commission guidelines on market analysis and 187 Cf. ECJ Case 78/70 Deutsche Grammophon [1971] ECR 1971, 487, mn. 19; ECJ Case 27/76 United Brands v Commission [1978] ECR 207, mn. 253 et seqq. 188 Cf. Commision decision of 25 July 2001, COMP/36.915, OJ 2001 No. L 331/40 mn. 159 – Deutsche Post. 189 SGEI Guidelines, mn. 74. 190 Cf. ECJ Case C-179/90 Porto di Genova [1991] ECR I-5889, mn. 19 et seq.; ECJ Cases 110/88, 241/ 88 and 242/88 SACEM [1989] ECR 2811, mn. 29: “[…]that it is precisely the lack of competition on the market in question that accounts for the heavy burden of administration and hence the high level of royalties.” Röller/Stennek/Verboven, Efficiency gains from mergers, p. 48. 191 Cf. Ro ¨ ller/Stennek/Verboven, Efficiency gains from mergers, p. 48; Kwoka/Warren-Boulton, Antitrust Bulletin 31 (1986), 431, 434; Fox, ALJ 64(1996), 725, 731; Hart Bell Journal of Economics 14(1983), 366; critisising Scharfstein RAND Journal of Economics 19(1988), 147; Nickell Journal of Political Economy 104(1996), 724 et seq. 192 Jovanovic, Econometrica 50(1982), 649 et seq, who compares small undertakings with large undertakings when examining concentrated markets. Cf. also Nickell Journal of Political Economy 104(1996), 724, 741; Motta, Competition Policy, p. 53 et seq. 193 Cf. regarding this the study by Olley/Pakes, Econometrica 64(1996), 1263 on the impacts of the restructuring of the U.S. telecommunication annex market for the productivity of this industry. See also the study by Peter/Tittel/Mu¨ller-Gerndt/Peisl et 4/2006, 8, 9. 194 Cf. Directive 2003/54/EC, OJ 2003 No. L 176/37. 195 Commission decision of 26 November 2008, C 3/08(ex NN 102/05), OJ 2009 No. L 97/14 mn. 79 et seq. (82) – Czech Republic (public service compensation for southern moravia bus companies); Commission decision of 26 November 2008, C 16/07, OJ 2009 No. L 306/26 mn. 87 – Postbus (Austria); Commission decision of 23 February 2011, C 58/06, OJ 2011 No. L 210/1 mn. 202 et seq. – BSM und RBG (Germany). 196 The criticism of Britz is, for example, still based on this assumption Britz ZHR 169(2005), 370, 391; Jennert NVwZ 2004, 425, 427. 197 Ku ¨ hling/Wachinger NVwZ 2003, 1202, 1203; Koenig/Haratsch ZHR 169(2005), 77, 84.

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the assessment of significant market power in the telecommunications sector. 198 Therefore, undertakings which operate in markets that were long dominated by monopolies and contracted without tender cannot serve as a benchmark. 199 Even if a competitive market has been found, some conditions have to be met to 47 determine comparable undertakings. A comparable undertaking must be adequately provided with material means. According to the Commission, this only applies to an undertaking that has the resources that are necessary for the immediate performance of the SGEI.200 Therefore, the compensation of initial investment costs does not meet the 4 th Altmark criterion but has to rely on an exemption under Article 106(2) TFEU. Comparable are undertakings that provide the same service on another relevant geographic market in another Member State201 as well as undertakings that provides a similar or at least a comparable service on a different product market. It is virtually impossible to compare each individual cost factor because the cost 48 structures of undertakings differ from each other on a regular basis, even if they are in direct competition with each other and have the same overall efficiency. Therefore, an efficiency comparison may be based on, among other, analytic ratios that provide information on productivity, such as turnover relative to the invested capital, total costs in relation to turnover, turnover per employee, value added per employee or staff costs in relation to value added as far as it is available.202 Observed differences between the compared undertakings are not necessarily a result of inefficiency. These may also be attributed to different competitive conditions such as different tax burdens or legal quality requirements of the various jurisdictions in which the concerned undertaking has no influence (regarding neither their nature nor their amount). Such inevitable costs are also reflected by prices under competitive constraint. 203 Any benchmark company would have included these costs in its price, if it were in the position of the recipient. Thus, different market conditions must be regarded by adequate increases or reductions of the benchmark costs.204 However, the differences between the markets must not be so extensive that the comparison is primarily based upon assumptions. In addition, the comparative data must not be overaged.205 The same applies to a particular customer or supply structure or topographic features that cannot be influenced by the recipient. Hence, while comparing costs, structural peculiarities of the comparable undertaking or other markets must be taken into account.206 Different costs can therefore not automatically lead to the assumption that there is an inefficient cost structure. 207 In addition, 198

OJ 2002 C 165/6. Commission decision. of 26 November 2008, C 16/07, OJ 2009 No. L 306/26 mn. 85 – Postbus (Austria). 200 SGEI Guidelines, mn. 76. 201 SGEI Guidelines, mn. 74; ECJ Case 27/76 United Brands v Commission [1978] ECR 207, mn. 261 et seqq; cf. also GC Case T-198/98 Micro Leader Business v Commission [1999] ECR II-3989, mn. 54 et seq. The Commission faces the obligation to investigate if it has been informed by complaints. 202 Cf. also SGEI Guidelines, mn. 72. 203 German Federal Court of Justice, order of 31 May 1972 – KVR 2/71, BGHZ (Report of the German Federal Court of Justice) 59, 42, 47 – Stromtarif. 204 SGEI Guidelines, mn. 74; cf. regarding the application of countervailing factors in competition law ECJ, decision of 13 July 1989, 110/88 et al., ECR 1989, 2811, mn. 26 et al. – Lucazeau; German Federal Court of Justice, order of 16 December 1976, KVR 2/76, BGHZ 68, 23, 33 – Valium I; German Federal Court of Justice, order of 12 February 1980, KVR 3/79, BGHZ 76, 142, 150 – Valium II. 205 Commission decision of 23 February 2011, C 58/06, OJ 2011 No. L 210/1 mn. 203 – BSM und RBG (Germany). 206 Cf. ECJ Cases 110/88, 241/88, 242/88 Lucazeau [1989] ECR 2811, mn. 26 et seq. 207 ECJ Case 24/67 Parke Davis [1968] ECR 86, 113; ECJ Case 53/87 CICRA et al.v Renault [1988] ECR 6039, mn. 17. 199

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the undertaking entrusted with the provision of SGEI is granted a reasonable profit according to the third Altmark criterion (see para 38). 208

III. Trade affecting distortion of competition (de-minimis) 1. Introduction State Aid is incompatible with the internal market, if it distorts or threatens to distort competition as far as it affects trade between Member States. Both elements are strongly intertwined and are thus usually examined together. Regarding the primary law there is no absolute threshold or percentage below which it may be considered that competition or trade are not affected. Neither the relatively small amount of the aid, nor the relatively small size of the recipient rule out, in principle, the possibility of an impact on trade among Member States (in detail Article 107 para. 489 et seq.). 209 Due to the uncertainties regarding these criteria of Article 107(1) TFEU the de minimis exemptions granted by the Commission on the basis of the Regulation (EC) No. 994/98 are of great practical importance. Aid at a local level is covered by the general de minimis Regulation (EU) No. 1407/2013, if the total aid granted to one undertaking does not exceed EUR 200 000 over a period of three fiscal years (Article 107 para. 459 et seq.). Special de minimis caps apply to the transport, agricultural and fisheries sector. 210 The Commission adopted a further de minimis Regulation for services of general economic interest, which is printed and discussed below. The Regulation provides for a higher threshold value of up to EUR 500 000 over any period of three fiscal years for aid granted for providing SGEI. 50 Outside the scope of those Regulations any compensation measures in favour of undertakings that provide SGEI typically have a significant detrimental impact on competition and trade. Strengthening the competitive position of an undertaking through payments is likely to distort competition and trade among Member States. 211 The same applies if the aid allows the beneficiary undertaking to continue or extent the operation of services so that the opportunity for undertakings, established in other Member States, to enter the market is limited, especially in liberalized markets. 212 If the market has been opened up for competition, a decision to provide SGEIs through methods other than tenders would lead to detrimental distortions of competition due to the fact that market entry of new competitors may be impeded or the beneficiary may be facilitated in expanding into other markets.213 State aid granted to an undertaking, which is active in a non-liberalized market, could have a particularly detrimental effect on trade if the undertaking benefiting from such aid is also active in a liberalized market.214 However, in some cases, services of purely local nature were regarded as incapable of distorting trade among Member States. Such services of purely local nature are for instance swimming pools mainly used by local residents,215 local hospitals 49

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SGEI Guidelines, mn. 75, 77. ECJ Case C-142/81 Belgium v Commission [1990] ECR I-959, mn. 43; ECJ Case C-278/92 Spain v Commission [1994] ECR I-4103, mn. 42; ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 81. 210 Article 2(2) Regulation (EC) No. 1998/2006 (Transport); Regulation (EC) No. 875/2007 (Fisheries); Regulation (EC) No. 1535/2007 (Agriculture). 211 GC Case T-298/97 Alzetto Mauro v Commission [2000] ECR II-2319, mn. 76 et seqq. 212 ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 77–79; ECJ Case C-278/92 Spain v Commission, [1994] ECR I-4103, mn. 40. 213 SGEI Guidelines, mn. 37. 214 GC Case T-298/97 et al. Mauro Alzetta and a. v Commission [2000] ECR II-2319, mn. 143–147. 215 Commission decision of 21 December 2000, N 258/2000 – Germany (Leisure pool Dorsten). 209

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exclusively for local residents,216 local museums that do not attract foreign visitors217 or local cultural events with a locally limited potential audience.218

2. De-minimis-Regulation (EU) No 360/2012 (text) Article 1 Scope and definitions 1. This Regulation applies to aid granted to undertakings providing a service of general economic interest within the meaning of Article 106(2) of the Treaty. 2. This Regulation does not apply to: (a) aid granted to undertakings active in the fishery and aquaculture sectors, as covered by Council Regulation (EC) No 104/2000 (11)219; (b) aid granted to undertakings active in the primary production of agricultural products; (c) aid granted to undertakings active in the processing and marketing of agricultural products, in the following cases: (i) when the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on the market by the undertakings concerned, (ii) when the aid is conditional on being partly or entirely passed on to primary producers; (d) aid to export-related activities towards third countries or Member States, namely aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to the export activity; (e) aid contingent upon the use of domestic over imported goods; (f) aid granted to undertakings active in the coal sector, as defined in Council Decision 2010/787/ EU220; (g) aid granted to undertakings performing road freight transport for hire or reward; (h) aid granted to undertakings in difficulty. If undertakings are active in the sectors referred to in points (a), (b), (c) or (g) of the first subparagraph as well as in sectors not excluded from the scope of application of this Regulation, this Regulation applies only to aid granted in respect of those other sectors or activities, provided that Member States ensure that the activities in the excluded sectors do not benefit from the de minimis aid under this Regulation, by appropriate means such as separation of activities or distinction of costs. 1. For the purposes of this Regulation: (a) ‘agricultural products’ means products listed in Annex I to the Treaty, with the exception of fishery products; (b) ‘processing of agricultural products’ means any operation on an agricultural product resulting in a product which is also an agricultural product, except on-farm activities necessary for preparing an animal or plant product for the first sale; (c) ‘marketing of agricultural products’ means holding or display with a view to sale, offering for sale, delivery or any other manner of placing on the market, except the first sale by a primary producer to resellers or processors and any activity preparing a product for such first sale; a sale by a primary producer to final consumers shall be considered as marketing if it takes place in separate premises reserved for that purpose.

Article 2 De minimis aid 1. Aid granted to undertakings for the provision of a service of general economic interest shall be deemed not to meet all the criteria of Article 107(1) of the Treaty and shall therefore be exempt from the notification requirement of Article 108(3) of the Treaty if it fulfils the conditions laid down in paragraphs 2 to 8 of this Article. 2. The total amount of de minimis aid granted to any one undertaking providing services of general economic interest shall not exceed EUR 500 000 over any period of three fiscal years. 216

Commission decision of 27 February 2002, N 543/2001 – Ireland (Capital allowances to hospitals). Commission decision of 18 February 2004, N 630/2003 – Italy (Aid to local museums in the Region of Sardinia). 218 Commission decision of 27 June 2007, N 257/2007 – Spain (Promotion of theatre production in the Basque country). 219 OJ L 17, 21.1.2000, p. 22. 220 OJ L 336, 21.12.2010, p. 24. 217

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This ceiling shall apply irrespective of the form of the de minimis aid and regardless of whether the aid granted by the Member State is financed entirely or partly by resources of Union origin. The period shall be determined by reference to the fiscal years used by the undertaking in the Member State concerned. 1. The ceiling laid down in paragraph 2 shall be expressed as a cash grant. All figures used shall be gross, that is, before any deduction of tax or other charges. Where aid is awarded in a form other than a grant, the aid amount shall be the gross grant equivalent of the aid. Aid payable in several instalments shall be discounted to its value at the moment of it being granted. The interest rate to be used for discounting purposes shall be the discount rate applicable at the time of grant. 1. This Regulation shall apply only to aid in respect of which it is possible to calculate precisely the gross grant equivalent of the aid ex ante without need to undertake a risk assessment (‘transparent aid’). In particular: (a) aid comprised in loans shall be considered as transparent de minimis aid when the gross grant equivalent has been calculated on the basis of the reference rate applicable at the time of the grant; (b) aid comprised in capital injections shall not be considered as transparent de minimis aid, unless the total amount of the public injection does not exceed the de minimis ceiling; (c) aid comprised in risk capital measures shall not be considered as transparent de minimis aid, unless the risk capital scheme concerned provides capital only up to the de minimis ceiling to each target undertaking; (d) individual aid provided under a guarantee scheme to undertakings which are not undertakings in difficulty shall be treated as transparent de minimis aid when the guaranteed part of the underlying loan provided under such scheme does not exceed EUR 3 750 000 per undertaking. If the guaranteed part of the underlying loan only accounts for a given proportion of this ceiling, the gross grant equivalent of that guarantee shall be deemed to correspond to the same proportion of the ceiling laid down in paragraph 2. The guarantee shall not exceed 80 % of the underlying loan. Guarantee schemes shall also be considered as transparent if: (i) before the implementation of the scheme, the methodology to calculate the gross grant equivalent of the guarantees has been accepted following notification of this methodology to the Commission under a regulation adopted by the Commission in the State aid area, and (ii) the approved methodology explicitly addresses the type of guarantees and the type of underlying transactions at stake in the context of the application of this Regulation. 2. Where the overall amount of de minimis aid under this Regulation granted to an undertaking for the provision of services of general economic interest exceeds the ceiling laid down in paragraph 2, that amount may not benefit from this Regulation, even for a fraction not exceeding that ceiling. In such a case, the benefit of this Regulation may not be claimed for this aid measure. 3. De minimis aid under this Regulation shall not be cumulated with State aid in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding that stipulated in the specific circumstances of each case by a block exemption regulation or decision adopted by the Commission. 4. De minimis aid under this Regulation may be cumulated with de minimis aid under other de minimis regulations up to the ceiling laid down in paragraph 2. 5. De minimis aid under this Regulation shall not be cumulated with any compensation in respect of the same service of general economic interest, regardless of whether or not it constitutes State aid.

Article 3 Monitoring 1. Where a Member State intends to grant de minimis aid under this Regulation to an undertaking, it shall inform that undertaking in writing of the prospective amount of the aid expressed as gross grant equivalent, of the service of general economic interest in respect of which it is granted and of the de minimis character of the aid, making express reference to this Regulation and citing its title and publication reference in the Official Journal of the European Union. Where de minimis aid under this Regulation is granted to different undertakings on the basis of a scheme and different amounts of individual aid are granted to those undertakings under that scheme, the Member State concerned may choose to fulfil that obligation by informing the undertakings of a fixed sum corresponding to the maximum aid amount to be granted under that scheme. In such case, the fixed sum shall be used for determining whether the ceiling laid down in Article 2(2) is met. Prior to granting the aid, the Member State shall also obtain a declaration from the undertaking providing the service of general economic interest, in written or electronic form, about any other de minimis aid received under this Regulation or under other de minimis regulations during the previous two fiscal years and the current fiscal year.

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The Member State shall grant the new de minimis aid under this Regulation only after having checked that this will not raise the total amount of de minimis aid granted to the undertaking concerned to a level above the ceiling laid down in Article 2(2) and that the cumulation rules in Article 2(6), (7) and (8) are complied with. 1. Where a Member State has set up a central register of de minimis aid containing complete information on all de minimis aid granted to undertakings providing services of general economic interest by any authority within that Member State, the first subparagraph of paragraph 1 shall cease to apply from the moment the register covers a period of three years. 2. Member States shall record and compile all the information regarding the application of this Regulation. Such records shall contain all information necessary to demonstrate that the conditions of this Regulation have been complied with. Records regarding individual de minimis aid shall be maintained for 10 fiscal years from the date on which the aid was granted. Records regarding a de minimis aid scheme shall be maintained for 10 years from the date on which the last individual aid was granted under such a scheme. On written request, the Member State concerned shall provide the Commission, within a period of 20 working days or such longer period as may be fixed in the request, with all the information that the Commission considers necessary for assessing whether the conditions of this Regulation have been complied with, and in particular the total amount of de minimis aid under this Regulation and under other de minimis regulations received by any undertaking.

Article 4 Transitional provisions This Regulation shall apply to de minimis aid granted for the provision of services of general economic interest before its entry into force, provided that such aid fulfils the conditions laid down in Articles 1 and 2. Any aid for the provision of services of general economic interest which does not fulfil those conditions shall be assessed in accordance with the relevant decisions, frameworks, guidelines, communications and notices. At the end of the period of validity of this Regulation, any de minimis aid which fulfils the conditions of this Regulation may be validly implemented for a further period of six months.

Article 5 Entry into force and period of validity This Regulation shall enter into force on the third day following that of its publication in the Official Journal of the European Union. It shall apply until 31 December 2018.

3. De-minimis-Regulation (EU) No 360/2012 (annotations) a) Scope of application. The scope of application of the regulation is stipulated by 51 Article 1. The regulation only applies to State aid granted to undertakings providing SGEI according to Article 106(2) TFEU. According to Article 1 (2) certain sectors are excluded from the scope of application as they are covered by specific provisions. The exceptions of aid granted to undertakings active in the fishery and aquaculture sectors (lit. a), in the primary production of agricultural products (lit. b) and in the processing and marketing of agricultural products (lit. c), as well as of aid to export-related activities (lit. d) and aid contingent upon the use of domestic over imported goods (lit. e) are conform with the ones under the former de minimis Regulation (EC) 1998/ 2006. The definitions given in Article 1(3) are conform with the definitions in Article 1(2) Regulation (EC) 1998/2006. In this respect, reference can be made to the case law and the literature regarding Regulation (EC) 1998/2006. 221 Additionally, the Regulation does not apply to aid in the coal sector as defined in Council Decision 2010/ 787/EU (lit. f).222 Undertakings in those sectors are rarely entrusted with services of See Zuleger, in: Heidenhain, European State Aid Law, 2010, § 5 mn. 8 et seq. Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines, OJ L 336, 21.12.2010, p. 24. 221 222

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general economic interest and their subsidised coal only gives small contribution to the overall energy mix.223 Aid granted to undertakings performing road freight transport, which is excluded from the scope of this Regulation as well, may be seen as de minimis aid only up to an amount of EUR 100000 (Article 2 Regulation (EU) No 1407/2013). The Commission justifies the exclusion of aid granted to undertakings in difficulty with the difficulties linked to determining the gross grant equivalent of such aid. 224 Anyhow, such undertakings cannot provide the SGEI for sure. Concerning the temporal scope, the regulation also covers aid granted before the regulation came into force (Article 4 Regulation (EU) No 360/2012). This is in accordance with the Commission’s standard practice, as confirmed by the Court of Justice.225 b) Conditions. According to Article 2(1) aid granted to undertakings for the provision of a SGEI shall be exempt from the notification requirement of Article 108(3) TFEU under certain conditions. Thus, it is not enough that the aid is granted to an undertaking entrusted with a SGEI, but the aid must be granted to compensate the costs of the SGEI. Not all Altmark criteria need to be fulfilled. Otherwise, the de minimis regulation would not make any sense, as the payment would not constitute aid. 53 In contrast to the general de minimis Regulation, the threshold was increased to the overall amount of aid up to EUR 500 000 over any period of three fiscal years. Apart from that, the text follows the one of the former de minimis Regulation (EC) No 1998/ 2006. Thus, the new Regulation has to be seen in the light of the relevant case law pronounced to that Regulation. Even if this is not expressively stipulated, the de minimis aid should be considered as having been granted at the moment when the legal right to receive the aid is conferred to the beneficiary under the applicable national legal regime.226 54 According to Article 2(5), the regulation is not applicable to the part of the total aid that exceeds the cap of EUR 500 000. In such a case, the benefit of the regulation cannot be claimed for the relevant overall aid measure. The same prohibition was stipulated by Article 2(2) of the Regulation (EC) No. 1998/2006. This aims to prevent that State aid measures exceeding the de minimis ceiling are broken down into a number of smaller parts in order to bring such parts within the scope of this Regulation and therefore circumvent its conditions.227 55 According to Article 2(6), de minimis aid shall not be cumulated with other State aid covering the same eligible costs if such cumulation would result in an aid intensity exceeding that stipulated in the specific circumstances of each case by a Block Exemption Regulation or decision adopted by the Commission. That rule corresponds to Article 2(5) of the Regulation (EC) No. 1998/2006 and Article 5(2) Regulation (EU) No 1407/2013 (see in this respect Article 107 para. 459 et seq.). This provision aims at avoiding the circumvention of maximum aid laid down in different Union instruments. It prevents that an exemption based on acts of the EU will be combined with a de minimis exemption by this regulation. But Article 2(5) does not rule out aid compensating other costs of an undertaking.228 On the other hand, de minimis aid pursuant 52

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Recital 7 Regulation (EU) No 360/2012; Recital 2 of the Council Decision 2010/787/EU. Recital 11 Regulation (EU) No 360/2012. 225 Nordmann, EuZW 2007, 752, 753; ECJ Case C-334/07 Commission v Freistaat Sachsen [2008] I-9465, mn. 43 et seq. 226 Recital 12 Regulation (EU) No 360/2012. 227 Recital 5 Regulation (EU) No 360/2012. 228 Zuleger, in: Heidenhain, European State Aid Law, 2010, Section 5(2)6; Bartosch, EU-Beihilfenrecht, 2010, Article 2(7) Regulation 1998/2006. 224

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Regulation (EU) No 1407/2013 may be cumulated up to the ceiling of EUR 500000 (Article 2(7) Regulation (EU) No 360/2012). Pursuant Article 2(8) de minimis aid shall not be cumulated with any compensation 56 in respect of the same SGEI, regardless of whether or not it constitutes State aid. Thus, even payments which fulfil the Altmark criteria – and therefore do not constitute State aid pursuant Article 107(1) TFEU – may hinder an exemption within three years’ time regardless of its amount, as well as any compensation payments fulfilling the conditions of the SGEI Decision 2012/11/EU.229 Thus, Member States cannot use the Regulation to exclude those parts of compensation payments from the notification requirement under Article 108(1) TFEU, which go beyond the permitted scope under the 3rd and 4th Altmark criterion or under Article 5 of the SGEI Decision 2012/11/EU. In such cases, the payments have to be notified and reviewed in the light of Article 106(2) TFEU and the SGEI Framework. c) Monitoring. Article 3 of the Regulation (EU) No 360/2012 substantiates the princi- 57 ple of sincere cooperation and the obligation to carry out all tasks which flow from the Treaties under Article 4(3) TEU by setting out a procedure for Member States, which contains both the necessary transparency and precautions to ensure that the sum of deminimis State aid granted to an undertaking for providing a SGEI does not exceed the maximum admissible amount.230 To this end Member States can, pursuant Article 3(2) Regulation (EU) No 360/2012, establish a central register for de-minimis aid containing information on all de-minimis aid granted by the respective Member State’s authorities to undertakings that generate a SGEI. Alternatively, Article 3(1) obliges Member States to carry out an information procedure for each individual case. In addition, the Member State concerned shall provide the Commission with specific information on request. These obligations under Article 3 Regulation (EU) No. 360/2012 correspond to the ones under the former De minimis Regulation (EC) No 1998/2006. Pursuant Article 3(1) Member States shall prior to granting any new de minimis aid 58 under this Regulation inform the recipient about the amount and the purpose of the compensation or publish those information in the central register pursuant Article 3(2), check that the compensation will not raise the total amount laid down in Article 2(2) and that the cumulation rules are complied with. The legal consequences of breaching those obligations under Article 3 are not clearly determined. Whereas the draft stipulated that aid that fulfils the conditions laid down in this Regulation (i.e. all of them) shall be exempt from the notification requirement of Article 108(3) TFEU, like the current Regulation (EU) No 1407/2013 on de minimis aid, the version which entered into force already exempts aid that fulfils the condition laid down in paragraphs 2 to 8 of Article 2, the same way the former Regulation (EC) No. 1998/2006 did in Article 2(1). Consequently, the interpretative approach towards Article 3 of the Regulation (EC) No 1998/2006, which, in particular, does not regard the information and notification requirements as essential for the exemption,231 should be applied.232

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Recital 15 Regulation (EU) No 360/2012. Recital 20 Regulation (EU) No 360/2012. 231 Nordmann, EuZW 2007, 752, 756; critical Bartosch, EU-State Aid law, 2009, Article 3 Regulation 1998/2006 mn. 5. 232 Recital 16 Regulation (EU) No 360/2012. 230

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C. Exemptions pursuant Article 106(2) TFEU and the SGEI Framework I. Purpose of Article 106(2) TFEU within State aid law Article 106(2) TFEU in principle sets out exemptions from all provisions of the Treaties. The following passages shall outline only those aspects, which are relevant to the application of Article 106(2) TFEU in relation to Article 107 et seq. TFEU. Article 106(2) awards exemptions across all sectors from the general prohibition on State aid which go beyond those pursuant Article 107(2) and (3) TFEU. Furthermore, Article 106(3) TFEU obliges the Commission to monitor compliance with the exemption requirements. The failure to mention Article 106(2) TFEU correctly leads to the right to challenge the Commission’s decision on State aid in accordance with the procedure laid out in Article 263 TFEU.233 60 Due to its exceptional nature, Article 106(2) TFEU may only lead to an exception from the prohibition under Article 107(1) TFEU if the provisions of State aid law are applicable to the particular case. There is no need for an exemption in cases that are not already covered by these provisions. Hence, the ECJ concluded that as long as the Commission was unable to ascertain the incompatibility of an existing grant of State aid with the internal market, it would be unnecessary to examine, whether and to what extent such State aid could be exempted pursuant Article 106(2) TFEU from the general prohibition in Article 107 TFEU.234 61 Whether Article 106(2) TFEU also grants an exception from State aid procedures, specifically from the duty to notify the Commission (Article 108(3) sentence 1 TFEU) and from the prohibition of putting measures into effect (Article 108(3) sentence 3 TFEU)235, or whether the provisions on State aid procedure do, in fact, take priority 236 is a controversial issue. After a period of prolonged hesitation by the ECJ, especially with regards to the Corbeau237 and Almelo238 decisions, it finally clarified the direct applicability of Article 106(2) TFEU and that it could be dealt with by national courts. 239 This leads to the question as to whether the application of the State aid provisions pursuant Article 108 et seq. TFEU may also be excluded, so that a prior notification is not required and therefore the Commission is not obliged to issue an exemption decision. 240 Some 59

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Cf. ECJ Case 41/83 Italy v Commission [1985] ECR 873, mn. 30. ~a [1994] ECR I-877, mn. 21; the same approach in ECJ ECJ Case C-387/92 Banco Exterior de Espan Case C-332/98 CELF [2000] ECR I-4833, mn. 22 et seq. 235 Cf. regarding this Ross, CMLR 37(2000), 401, 418 et seq; restricting the substantive law Erhard, State Aid for public services, p. 360 et seq., according to him an exemption is generally not required. 236 Expressively, for example, Commission decision of 30 October 2001, OJ EC 2002 Nr. L 50/66 mn. 60 – SNCM; see also Commission, Report for the European Council in Laeken on public services of 17 October 2001, COM(2001) 598 final mn. 24. Immenga/Mestma¨cker/Mestma¨cker/Schweitzer, EGWettbR, Article 86(2) TEC mn. 38; Koenig/Ku¨hling, ZHR 166(2002), 656, 670. 237 ECJ Case C-320/91 Corbeau [1993] ECR I-2533, mn. 14. 238 ECJ Case C-393/92 Almelo [1994] ECR I-1477, 49 et seq. 239 Cf. also ECJ Case C-218/00 Cisal v INAIL [2002] ECR I-691, mn. 16–19; Dauses/Emmerich H. II. mn. 190; Immenga/Mestma¨cker/Mestma¨cker/Schweitzer, EG WettbR, Article 86(2) EC-Treaty mn. 35; Loewenheim/Meessen/Riesenkampff/Ehricke Article 86 TEC mn. 94; Advocate General Tizzano’s Opinion of 8. May 2001, C-53/00, mn. 78 – Ferring/ACOSS. 240 This question was not answered, for example, by the Commission in its Notice on the application of the competition rules to the postal sector and on the assessment of certain State measures relating to postal services (OJ 1998 Nr. C 39/2, 13(No. 7). 234

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presume that such an evaluation of Article 106(2) TFEU may be carried out within the context of the procedure pursuant Article 108 TFEU241. Other presume that an evaluation may be carried out within the context of the procedure set out under Article 106(3) TFEU242. Furthermore, an exemption only from the prohibition of putting measures into effect under Article 108(3) TFEU is advocated to a certain extent 243. The ECJ points to the exclusive competence of the Commission to continuously review State aid244 and the protective purpose of Article 108(3) TFEU245 that should prevent granting of State aid that breaches the Treaty. In addition, Article 108(3) TFEU constitutes a control mechanism essential for guaranteeing a functioning internal market. Therefore, a Member State is forbidden from disregarding Article 108(3) TFEU, even if it considers the relevant State aid measures to be compatible with the internal market. With the current SGEI framework, the Commission now states that State aid that may fall under an exemption pursuant Article 106(2) TFEU still has to be notified. 246 The ECJ emphasized that according to the wording of Article 106(2) TFEU it 62 contains exceptions from all provisions of the Treaties, including Article 108 TFEU, upon which the Commission’s reviewing authority is based.247 However, as a provision granting exemptions, Article 106(2) TFEU is to be interpreted restrictively according to the ECJ’s case law.248 There are barely any conceivable cases in which the implementation of the aid process could impede the fulfilment of tasks of general public interest, especially since the Member State would be responsible for applying at a too short notice. Nowadays, this dispute has been rendered virtually irrelevant in legal practice. Pursuant Article 106(2) TFEU, the Commission issued a block exemption decision (SGEI Decision). The block exemption covers the compensation of costs, which are incurred by an undertaking responsible for services of public economic interest. Article 3 of the SGEI Decision249 declares State aid, which is granted in form of compensation for the provision of SGEI and which fulfils the requirements of this decision, as compatible with the internal market. Member States granting such aid are exempt from the duty to give notice under Article 108(3) TFEU.250 Cases falling outside the SGEI Decision are covered by the Commission’s publication “European Union framework for State aid in the form of public service compensation (2011)” which 241 Koenig/Ku ¨ hling, ZHR 166(2002), 656, 670; Advocate General Le´ger’s Opinion of 19 March 2002 and 14 January 2003, C-280/00, mn. 56 – Altmark Trans; Advocate General Jacobs’s Opinion of 30 April 2002, C-126/01, mn. 113 – GEMO; Advocate General Lenz’ Opinion of 11 January 1994, C-387/92, ~a; ditto Frenz, Handbuch Europarecht, volume 3, mn. 1155. mn. 66 – Banco Exterior de Espan 242 Jennert, NVwZ 2004, 425, 429 et seq. In his view this procedure prevails the application of Article 106(2) TFEU by Member States’ courts. Regarding this, see also ECJ Case C-303/88 Italy v Commission [1991] ECR I-1433 mn. 58. 243 Gundel, RIW 2002, 222, 229 et seq.; regarding this, see Advocate General Tizzano’s Opinion of 8 May 2001, C-53/00, mn. 73 et seq. – Ferring/ACOSS. ~a [1994] ECR I-877, mn. 16 et seq. 244 ECJ Case C-387/92 Banco Exterior de Espan 245 ECJ Case C-332/98 CELF [2000] ECR I-4833, mn. 31. 246 SGEI Framework, mn. 7 and 66. 247 Ditto Jennert, NVwZ 2004, 425, 429. 248 ECJ Case 127/73 BRT/SABAM and Fonior [1974] ECR 313, mn. 19. 249 OJ 2012 No. L 7/3. 250 However, this dispute could become significant when addressing the question of whether the Commission could base this decision on Article 106(3) TFEU or whether it ought to have granted a block exemption based on Council Regulation (EC) No. 994/98 from 7 May 1998, in turn based on Article 109 TFEU. Critically also Czerny, Die Beihilferechtliche Beurteilung der staatlichen Finanzierung im allgemeinen wirtschaftlichen Interesse, p. 170 et seq. The Commission regards the adoption and publication of its draft of a decision on the application of Article 106(3) TFEU as equivalent to a published formal analysis pursuant to Article 108(2) TFEU (cf. GC Case T-167/04 Asklepios Kliniken v Commission [2007] ECR II-2379, mn. 74).

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replaces the Community Guidelines of 2005251 according to which the notification duty and prohibition on implementation were to be applied. 63 Article 106(2) TFEU is becoming increasingly important for State aid cases. In particular, the Altmark-Trans decision according to which compensation for the provision of a SGEI shifted the focus on to Article 106(2) TFEU which gains significance if the Altmark-Trans criteria have not been fulfilled.252 Approval of aid is sometimes partially based on both the Altmark case law as well as on Article 106(2) TFEU. 253 64 According to the above mentioned a step-by-step examination is necessary. Should such an examination not fulfill the Altmark-Trans criteria, then Article 106(2) TFEU is to be applied.254 However, these two methods of examination are not always strictly separable – assessing the Altmark-Trans criteria is often expressly done in conjunction with applying Article 106(2) TFEU.255 Sometimes the Commission draws on both the Altmark-Trans criteria as well as on Article 106(2) TFEU in order to ascertain the compatibility of the granting of certain advantages with the internal market. 256 This approach was further endorsed by the GC. It additionally endorsed the fact that Article 106(2) has not been mentioned in the ruling since neither the relevant provisions nor the case-law stipulate that the pivotal part of the decisions pursuant Article 107 TFEU in conjunction with Article 106(2) TFEU need to be based on any given criteria. Furthermore, in examining the actual legal consequences of a legal measure, the decisive part of which cannot be separated from its reasoning. Said legal measure is, in so far as it is necessary, to be interpreted in a way which gives consideration to the reasons for its initial implementation.257 Although it might appear desirable, in the interest of clarity and legal certainty, 251

OJ 2005 C 297/4. Cf., for example, Commission decision 2006/217/EC of 19 May 2004, OJ 2006 L 85/1, correction in OJ 2006 L 368/112 – TV 2/Denmark (set aside because of a lack of reasoning with regards to the fulfillment of the Altmark criteria, GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935); Commission decision of 20 April 2005, State Aid E 10/2005 [ex C 60/1999] – France (confirmed by GC Case T-354/05 TF v Commission [2009] ECR II-471); Commission decision 2004/838/EC of 10 December 2003, OJ 2004 L 361/2 – France 2 and France 3(requests for review has been declared inadmissible by the GC Case T-144/04 TF1 v Commission [2008] ECR II-761); Commission decision of 30 October 2001, OJ 2002 L 50/66 – SNCM; Commission decision of 22 November 2006, OJ 2007 L 95/25 mn. 119 – LNE. 253 Cf. Commission decision of 13 May 2004, State Aid N 46/2003 – Implementation of a risk compensation system for the Irish market of private health insurance (confirmed by ECJ Case T-289/03 BUPA/Commission [2008] ECR II-81). According to the Commission’s reasoning for its legal analysis the measure was “either to not be qualified as State Aid pursuant Article 87(1) EC or was in line with the internal market pursuant Article 86(2) EC” (mn. 37, 61 of the decision). 254 Cf. GC Case T-354/05 TF1 [2009] ECR II-471, mn. 124 et seq., 135; see also ECJ Cases C-34/01-C38/01 Enirisorse [2003] ECR I-14243, mn. 31–40; ECJ Case C-451/03 Servizi Ausiliari Dottori Commercialisti [2006] ECR I-2941, mn. 61–72; ECJ Case C-526/04 Laboratoires Boiron [2006] ECR I-7529, mn. 50–57; ECJ Case C-206/06 Essent Netwerk Noord et al. [2008] ECR I-5497, mn. 79 bis 88; GC Case T-157/01 Danske Busvognmænd v Commission [2004] ECR II-917, mn. 97 et seq.; GC Case T-274/01 Valmont v Commission [2004] ECR II-3145, mn. 130 et seq., GC Case T-349/03 Corsica Ferries France v Commission [2005] ECR II-2197, mn. 310; GC Case T-289/03 BUPA et al. v Commission [2008] ECR II81, mn. 258; Commission decision of 20 April 2005, State Aid E 10/2005(ex C 60/1999) – France Te´le´visions (licence fee). 255 GC Case T-266/02 Deutsche Post v Commission [2008] ECR II-1233, mn. 68–74(especially mn. 74). When examining the Altmark criteria, according to the court, Article 106(2) TFEU must not be deprive of all practical effectiveness, referring to GC Case T-106/95 FFSA et al. v Commission [1997] ECR II-229, 188 et seq., which expressively examined Article 106(2) TFEU. 256 Commission decision of 13 May 2003, State Aid N 46/2003 – Risk equalization scheme in the Irish health insurance market (confirmed by GC Case T-289/03 BUPA v Commission [2008] ECR II-81). While legally examining the case, the Commission was of the opinion that the notified measure constitutes either aid in accordance with Article 87(1) TEC or may be regarded as compatible with the Common Market according to Article 86(2) TEC (mn. 37 and 61 of the decision). 257 Cf. ECJ Case C-355/95 P TWD v Commission [1997] ECR I-2549, mn. 21; GC Cases T-346/02 and T-347/02 Cableuropa et al. v Commission [2003] ECR II-4251, mn. 211 with further references. 252

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that the Commission expressly mentions in the operative part of the act the applied provisions, the failure to do so does not constitute an error of law provided that it is quite clear upon reading the statement of reasons in conjunction with the operative part of the act precisely what those provisions are. If the Commission cites Article 106(2) TFEU in the reasoning, a reader of average attentiveness should thus be able to identify the actual legal consequences of a decision.258

II. Scope of applicability – Article 106(2) TFEU beyond the Altmark criteria The Altmark criteria and the conditions of Article 106(2) TFEU significantly overlap.259 Thus, both are often applied together in the decision-making practice. 260 However, a comparison of both these criteria shows that the scope of Article 106(2) is separate from and more far-reaching than that of the Altmark criteria. 261 The equivalent to the first Altmark criterion which requires the beneficiary undertaking to have been entrusted with carrying out clearly defined obligations in the public service sector is found in Article 106(2) TFEU in the requirement that the relevant undertaking be assigned the provision of a SGEI.262 In both its Communication on the application of the European Union State aid rules and its publication of the SGEI Framework regarding Article 106(2) TFEU, the Commission requires a certain degree of specificity that, to a certain extent, goes beyond the requirements of the ECJ. 263 Based on the second Altmark criterion the parameters, according to which the amount of compensation is to be calculated, are to be set up objectively and transparently. Accordingly, the act of entrustment within the meaning of Article 106(2) TFEU has to contain the parameters for calculating, monitoring compensation and potential alterations in compensation.264 The third Altmark criterion states that compensation must not exceed the amount which is necessary to partially or completely cover the costs of carrying out the public service obligations, taking into account any revenue thus obtained and any profit made by fulfilling these obligations. This criterion corresponds to the analysis of necessity and adequacy inherent to Article 106(2) TFEU.265 According to the fourth Altmark criterion, not all the actual costs, but rather only those costs incurred by an average, well-managed undertaking are eligible for compensation, whereby a “reasonable profit” is held as being recoverable. 266 The purpose of such a criterion is to prevent payments that go beyond what is necessary under hypo258

GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 260. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 160. 260 Cf. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 224. 261 Cf. summarizing the presented concerns: Advocate General Jacobs’ Opinion of 30 April 2002, C126/01, mn. 116 et seqq – GEMO. 262 Expressively GC Case T-137/10 CBI v Commission, mn. 98; GC Case T-222/04 Italy v Commission [2009] ECR II-1877, mn. 111; GC Case T-189/03 ASM v Commission [2009] ECR II-1831, mn. 126; cf. regarding the possibility of different precision levels: Mu¨nchKommEUWettbR/Gundel, Article 86 mn. 153; with further references. 263 Community framework on State Aid, mn. 12; in more detail see below mn. 818 et seq. 264 Community framework on State Aid, mn. 12; regarding as equivalent also Koenig/Paul EuZW 2008, 359, 362; ditto GC Case T-222/04 Italy v Commission [2009] ECR II-1877, mn. 112; GC Case T-189/03 ASM v Commission [2009] ECR II-1831, mn. 127. 265 Cf. Community framework on State Aid, mn. 14; GC Case T-222/04 Italy v Commission [2009] ECR II-1877, mn. 112; GC Case T-189/03 ASM v Commission [2009] ECR II-1831, mn. 127; GC Case T-289/ 03 BUPA v Commission [2008] ECR II-81, mn. 224. 266 Cf. Po ¨ cker EuZW 2007, 167, 168. 259

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thetical competitive conditions and therefore to prevent any distortion of competition. An undertaking ought not to obtain an “advantage” enabling it to operate independent of market conditions – thereby even in an inefficient and loss-making manner – without suffering any economic disadvantage as a result, whilst its competitors are still subject to such competitive conditions, which penalize inefficiency. In this respect, the Altmark approach differs from Article 106(2) TFEU. According to the SGEI Framework 267 the exemption laid town in Article 106(2) TEFU covers any compensation for the actual costs without analysing the cost efficiency. 268 However, according to the view represented here Article 106(2) TFEU does not justify a permanent derogation from the efficiency rule. A compensation calculated upon the basis of the actual costs should only be justified as long as a more efficient performance of services is reached (para 91 et seq.). Nonetheless, regarding that question, Article 106(2) TFEU reaches its most significant independent scope in comparison to the ECJ’s Altmark conditions.

III. Application of Article 106(2) TFEU with regards to the SGEI Framework 1. Overview 70

Article 106(2) TFEU requires a multilevel examination. First, there must be a beneficiary undertaking otherwise an exemption will not be necessary. The definition of an undertaking is identical to the one pursuant Article 107(1) TFEU (para. 9 et seq.). Furthermore, the undertaking in question must have been entrusted with the provision of SGEI. The question, if the exemption laid down in Article 106(2) TFEU covers revenue-producing monopolies, which are granted to generate State income similar to that achieved through tax collection,269 is of no importance to the application of the rules about State aid.270 Finally, a test of necessity is required. In the area of competition law such an exemption will accordingly only be granted in so far as restrictions on competition, or even the exclusion of all competition, are necessary to ensure the performance of the particular tasks assigned to the undertakings. The exemption itself has to be a necessary requirement to enable the entrusted undertaking to carry out its assignment. The question to be determined, therefore, is whether the restriction of competition is necessary to enable the holder of an exclusive right to perform its task of general interest in economically acceptable conditions.271 Sentence 2 of Article 106(2) TFEU limits the exception, so far with little significance in the decision-making practice, according to which the development of trade must not be impaired to an extent contrary to the interests of the EU. The Commission accords heightened significance to this condition by extending the examination to the legality of the act of entrustment and its contents, which may be differentiated from any compensatory payment (para 124 et seq.).

2. Role and scope of the SGEI framework 71

With the SGEI framework the Commission has published a communication to ensure the application of Article 106(2) TFEU pursuant Article 106(3) TFEU. The SGEI frame267

SGEI Framework mn. 21 et seq. Consenting also Mu¨nchKommEUWettbR/Gundel Article 86 mn. 157; Do¨rr NZBau 2005, 617, 618; Jennert, Zum Verha¨ltnis von europa¨ischem Beihilferecht und mitgliedstaatlicher Daseinsvorsorge, 232 et seq; of different opinion: Nettesheim EWS 2002, 253, 262 et seq.; cf. below mn. 828 et seq. 269 Cf. Grabitz/Hilf/Nettesheim/Pernice/Wernicke Article 86 TEC mn. 43; Dauses/Emmerich H. II. mn. 67. 270 Cf. Mu ¨ nchKommEUWettbR/Gundel Article 86 TEC mn. 108. 271 Cf. ECJ Case C-475/99 Ambulanz Glo ¨ ckner [2001] ECR I-8089, mn. 56 et seq. 268

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work reduces the Commission’s discretionary powers by providing information on its administrative practice from which it is not allowed to deviate without providing satisfactory reasons, as not to do so would violate the principle of equal treatment. 272 It is for the European Union judicature to verify whether those rules have been observed by the Commission.273 The Commission may only bind itself in accordance with Union law.274 As such, it 72 cannot, based on Union guidelines, declare State aid as being compatible with the internal market that does not fulfil the requirements of Article 106(2) TFEU, as set out by the ECJ. However, the Commission is able to restrict the scope of the binding force itself. It did so by narrowing the scope of the SGEI framework. Furthermore, the conditions laid down in the framework are more strict than those pursuant Article 106(2) TFEU in light of the ECJ’s case law. Consequently, the Commission is not prevented from reaching a positive decision under Article 106(3) TFEU that goes beyond the constellations set out in the SGEI framework, be that upon an application by a Member State, a (national) court or of its own initiative.275 Nevertheless, the SGEI framework also contains to an extent universal statements on the application of Article 106(2) TFEU on State aid, so that it can be considered as a concrete standard of assessment.276 The SGEI framework does not apply to awards of compensation measures in the 73 land transport sector and – as opposed to the SGEI Decision 277 – to the public service broadcasting sector, which is covered by the Commission’s Broadcasting Communication.278 The principles set out in the framework apply without prejudice to stricter sector-specific rules.279 According to the Commission, the temporal scope covers all decisions since 31 Jan- 74 uary 2012 even those concerning past State aid which was granted and/or notified before this date.280 If the aid was granted before 31 January 2012, the following principles are not applicable:281 – the duty to set up a public consultation or to set up an alternative measure which was able to adequately reflect the demand for the provision of a certain public service; 282 – the duty to utilize the same method of calculating the compensatory payments made to different undertakings which were entrusted with performing the same SGEI; 283 – the priority of calculating the necessary net costs to achieve the performance of the SGEI according to the net-avoided-cost-method;284 272 Specifically regarding the community framework on State Aid GC Cases T-254/00 et al. Hotel Cipriani v Commission [2008] ECR II-3269, mn. 292; regarding the principles: ECJ Case148/73 Louwage v Commission, [1974] ECR 81, mn. 12; ECJ Case 343/82 Michael v Commission [1983] ECR 4023, mn. 14; ECJ Cases 80/81 et al. Adam et al. v Commission [1984] ECR 3411, mn. 22. 273 GC Cases T-254/00 et al. Hotel Cipriani v Commission [2008] ECR II-3269, mn. 292; GC Case T-27/ 02 Kronofrance v Commission [2004] ECR II-4177, mn. 79 with further references. 274 Cf. GC Case T-301/01 Alitalia v Commission [2008] ECR II-1753, mn. 405. 275 Cf. Jennert NVwZ 2004, 425, 430. 276 Ditto staff working paper SEK (2007)1516 final of 20 November 2007, p. 20 fn. 66. 277 Cf. Communication from the Commission on the application of State Aid rules to public service broadcasting, OJ 2009 No. C 257/1 mn. 19. Commission decision of 2 July 2009, State Aid NN 8/2009, mn. 72, 91 – Nature conservation ares (Germany). 278 OJ 2009 Nr. C 257/1. 279 SGEI Framework mn. 10. 280 SGEI Framework mn. 67 et seq. 281 SGEI Framework mn. 69. 282 See SGEI Framework mn. 14. 283 See SGEI Framework mn. 20. 284 See SGEI Framework mn. 24 et seq.

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– the duty to integrate efficiency incentives into the model used for calculating the compensatory payments;285 – the Member States’ general publication requirements which are to ensure transparency.286 75 As opposed to the 2005 Community guidelines, the SGEI framework does not have a fixed date of expiry. It is, however, the Commission’s intention to review it by 31 January 2017.287 76 The Commission regards the application of the exemption pursuant Article 106(2) TFEU as an integral part of the formal State aid procedure.288 On a legally substantive level, such an analysis follows the wording in Article 107(1) TFEU: “save as otherwise provided in the Treaties”. As a result, a complete application of Article 107 TFEU also requires the application of Article 106(2) TFEU.

3. Services of General Economic Interest (SGEI) Pursuant Article 106(2) TFEU undertakings which have been entrusted with the performance of a SGEI may be granted exemptions from the application of the provisions of the Treaty. The importance of this services for the European Union, as well as the need for ensuring their proper functioning were emphasized by including Article 16 EC in the Treaty (now Article 14 TFEU) through the Treaty of Amsterdam. 289 Regarding the question as to what kind of services are to be regarded as SGEI the ECJ acknowledges the Member States a wide margin of discretion, unless the question concerns sectors to which special Union measures apply.290 As such, the Commission is only obliged to check that this discretion is exercised without any manifest errors in relation to the definition of services of general economic interest.291 A SGEI is defined with reference to the general interest, which it is to serve and without any reference to the means used to provide the service in question.292 The term “service” is not affected by the difficulties in drawing distinctions, which are inherent to Article 56 TFEU (freedom to provide services). The term is to be understood in a broad sense and includes every market-related offer. 293 78 According to the definition, performing the relevant service must meet a general or public interest. Herein, the SGEI differ from those services which serve private interests, even if the latter may indeed be collectively regarded as legitimate or charitable, even if they are regarded as such by the State itself.294 Furthermore, the general or public interest as asserted by the State cannot be defined by the need to subject the relevant market to specific rules or to subject the business activity of the relevant economic actors to an obligation to seek permission. The mere fact that the national legislature, in a widely interpreted general interest, imposes certain rules regarding authorization, operation and monitoring upon a sector’s relevant economic actors for the purpose of security does not in and of itself constitute a public service assignment.295 77

285

See SGEI Framework mn. 39 et seq. See SGEI Framework mn. 60. 287 SGEI Framework mn. 65. 288 SGEI Framework mn. 66 and 63. 289 GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 102; Order of the court’s president of 28 May 2001, T-53/01 R, ECR 2001, II-1479, mn. 132 – Poste Italiane/Commission. 290 Cf. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 172 with further references. 291 GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 101; GC Case T17/02 Olsen v Commission [2005] ECR II-2031, mn. 216; Community framework on State Aid, mn. 9. 292 GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 203. 293 Mu ¨ nchKommEUWbR/Gundel Article 86 TEC mn. 80 et seq. 294 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 178; ECJ Case C-179/90 Porto di Genova, [1991] ECR I-5889, mn. 27. 295 ECJ Case 172/80 Zu ¨ chner [1981] ECR 2021, mn. 7; ECJ Case 7/82 GVL v Commission [1983] ECR 483, mn. 31, 32; GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 178. 286

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Contrary to what the wording of Article 106(2) TFEU may indicate, the service in 79 question does not exclusively have to be of “economic” interest. 296 Rather, the interest attributed to the service has to be distinguished from other economic interests. 297 Consequently, the term “interest” also undoubtedly includes services of political and cultural relevance.298 The hint of an economic requirement ultimately constitutes a tautology of the element of economic activity inherent to the concept of undertaking (see para 9 et seq.). Art 106(2) TFEU merely grants exemptions to benefit undertakings. An exemption to benefit other entities is therefore not possible and yet not necessary since the employed definition of undertaking is the same as the one used in Article 107 TFEU. Hence, such benefits do not constitute aid. If the elements of the definition of an undertaking are not present, then the service constitutes a noneconomic service of public interest.299 Therefore, the requirements to fulfil the definition of an undertaking are identical to the criteria under which a service in public interest may be qualified as being economic.300 Union law does not require a service to be universal in a strict sense in order to 80 qualify it as a service of general economic interest, as e. g. it is required of the public social security system. According to Union law “universal service” does not mean that the relevant service has to fulfil a universal need of the population as a whole or has to fulfil this need throughout the Union’s entire territory.301 While these features correlate with the type of SGEI most prevalent in Member States, this does not exclude other admissible types which Member States may determine in exercising their discretion. 302 Therefore, the fact that an obligation is of limited material scope, or that the service only benefits a limited number of users, does not necessarily put its character of being a public service assignment according to Union law into question.303 It is harmless that the consumer may choose the service freely, as is e. g. the case with 81 an insurance cover, which is additional or supplementary to the universal services regarded as mandatory by the public health insurance system. The relevant service’s mandatory character may be one of the essential requirements for the existence of a public service assignment – however, this requirement merely dictates that an undertaking entrusted with such a public service assignment by a State measure is under a general obligation to offer the relevant service on the market according to public service obligations. The provider must be subject to an obligation to enter into a contract, which impedes its freedom of decision in accordance with the principles of free competition. 304 Such an obligation can inter alia manifest itself in the duty to exercise a specific business activity independently of the costs incurred by doing so. This duty constitutes the counterpart of the protection of the public service assignment and of the market position associated with such an assignment.305 Should no exclusive or special right be granted, the 296

Mu¨nchKommEUWbR/Gundel Article 86 TEC mn. 82. ECJ Case C-179/90 Porto di Genova [1991] ECR I-5889, mn. 27. 298 Cf. ECJ Case 155/73 Giuseppe Sacchi [1974] ECR 409, mn. 15. 299 Cf. Commission decision of 26 July 2000, COM(2000) 2466, OJ 2001 No. L 18/18 mn. 87 et seq. – SICAN; Commission decision of 22 November 2006, C 24/2005, OJ 2007 Nr. L 95/25, mn. 56 et seq. – LNE; Commission, Communication on Services of General Interest, OJ 2001 Nr. C 17/4 mn. 28–30. 300 Ditto Mu ¨ nchKommEUWbR/Gundel Article 86 TEC mn. 82; Loewenheim/Meessen/Riesenkampff/ Ehricke, Article 86 mn. 103; cf. also ECJ Case C-179/90 Porto di Genova [1991] ECR I-5889, mn. 27. 301 Cf. GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 186 et seq. 302 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 186. 303 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 187. 304 Busche, Privatautonomie und Kontrahierungszwang, p. 110 et seq.; different opinion: GC Case T289/03 BUPA v Commission [2008] ECR II-81, mn. 188. 305 Based of these arguments, a stricter abuse control for undertakings under a legal or natural monopoly will be justified. cf. BGH, Order of 15 November 1994 – KVR 29/93, Report of the BGH 128, 17. 297

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mandatory character of a public service assignment can manifest itself in the obligation to which the relevant economic actor is subject as set out by a State measure to offer specific services to every citizen who demands them.306 A public service assignment’s mandatory character does not, however, require public bodies to make a final decision on the content of that service. It does not exclude that the economic actor enjoys a certain discretion on the market, even with regard to the service’s contents and the fees charged. Under these requirements, economic actors are guaranteed a minimum level of freedom of action and thereby a minimum level of competition regarding quality and content of the relevant services. Such minimums are in the interest of the Union because the scope of any distortion of competition which can result from such public service assignments can thereby be limited without impeding the fulfilment of any of the goals the assignment is set out to pursue.307 A service’s mandatory character and thereby the existence of a public service assignment are proved if the service provider is subject to an obligation to contract according to uniform conditions without being able to reject the other contracting party. Thus, a service carried out under a public service assignment can be distinguished from any other service provided on the market and consequently from any other activity which is completely freely exercised.308 82 It is not necessary for the relevant service to be offered free of charge or without regard to economic viability. The fact that some potential users may not possess the necessary financial means to be able to utilize several services available on the market does not impair their universal character in so far as that the relevant services are offered at a non-discriminatory, uniform tariff rate and are offered at quality conditions comparable to all customers.309 83 The following services have been recognized as a SGEI:310 the postal service available to all users at uniform rates and in the same quality,311 a duty to provide electricity in a non-discriminatory and comprehensive manner,312 maintaining the navigability of waterways,313 ensuring a basic supply of voice telephony,314 employment services,315 aviation and transport services, in so far as a duty to operate and tariff obligations exist,316 waste management especially to help overcome environmental problems317 and a well-balanced radio and television program.318

4. Act of entrustment 84

Article 106(2) TFEU requires the relevant undertakings to have been entrusted with the performance of a particular task by an act of a state authority. 319 Apart from those 306

GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 188. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 189. 308 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 190; cf. ECJ Case C-179/90 Merci convenzionali porto di Genova v Siderurgica Gabrielli [1991] I-5889, mn. 27. 309 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 203; cf. ECJ Case C-320/91 Corbeau, [1993] ECR I-2533, mn. 15; ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 48; ECJ Case C-475/99 Ambulanz Glo¨ckner [2001] ECR I-8089, mn. 55. 310 For further details see Mu ¨ nchKommEUWettbR/Gundel Article 86 TEC mn. 81 et seq. 311 ECJ Case C-320/91 Corbeau [1993] ECR I-2533, mn. 15. 312 ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 48. 313 ECJ Case 10/71 Hafen von Mertert [1971] ECR 723, mn. 11. 314 ECJ Case C-18/88 RTT v GB-Inno-BM [1991] ECR I-5941, mn. 16; cf. also ECJ Case 41/83 Italy v Commission [1985] ECR 873, mn. 30–35. 315 ECJ Case C-41/90 Ho ¨ fner and Elser [1991] ECR I-1979, mn. 24. 316 ECJ Case 66/86 Ahmed Saeed Flugreisen [1989] ECR 803, mn. 55–57. 317 ECJ Case C-209/98 FFAD [2000] ECR I-3743, mn. 75. 318 Cf. ECJ Case 155/73 Giuseppe Sacchi [1974] ECR 409, mn. 15. 319 ECJ Case 10/71 Port of Mertert [1971] ECR 723, mn. 8–12; GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 186. 307

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sectors subject to particular Union regulations, the criteria and requirements for the performance of such services are determined by the state itself, regardless of whether or not the services in question are performed under competitive conditions. In this sense, the term ‘state’ includes both the Member State itself as well as regional and local authorities.320 The consent of the entrusted undertaking, as with the award of concessions321, or any other kind of involvement on the part of the undertaking in the entrustment procedure322 is deemed irrelevant. Furthermore, a tendering procedure prior to entrustment is not required.323 Merely permitting a certain type of activity does not constitute an act of entrustment.324 The mere fact that the national legislative body has subjected several economic actors in a sector to certain rules regarding authorization, operation and monitoring does not constitute an act of entrustment of a public service assignment.325 However, it is not necessary to individually transfer the relevant assignment on to every economic actor subject to such obligations by creating individual measures or tasks.326 The entrustment of a public service assignment may also arise through a legal obligation imposed on several or all economic actors on a certain market. The difference between a general authorizing act and an act of entrustment addressed to a group of undertakings is to be determined with regard to the overall circumstances of an individual case. A high level of detail of the relevant duties, expressly describing the activity in question as one of general interest, as well as restricting the undertakings’ commercial freedom of contraction all hint at an act of entrustment which goes beyond a mere act of authorization.327 If these legal obligations are supplemented by a concession contract, then this equally indicates an act of entrustment pursuant Article 106(2) TFEU.328 The Commission has qualified the following measures as entrustment acts: a conces- 85 sion contract and tender documents,329 ministerial program contracts,330 ministerial decisions,331 legislation,332 legislative acts,333 annual or multi-annual service agreements,334 legislative decrees,335 a description of nature conservation tasks for land gratuitously as part of a gift and the entry into the land register. 336 320

Community framework on State Aid, mn. 11. Cf. ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 47. 322 GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 188. 323 GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 239. 324 Commission, staff working paper SGEI, No. 5.2. 325 ECJ Case 172/80 Zu ¨ chner [1981] ECR 2021, mn. 7; ECJ Case 7/82 GVL v Commission [1983] ECR 483, mn. 31, 32; GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 178. 326 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 183. 327 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 182. 328 ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 66. 329 Commission decision of 16 May 2006, State Aid N 562/2005 – Tunnel du Montblanc (ATMB) et Tunnel Maurice Lemaire (Italy), announced in, OJ 2007 No. C 90/12; see also ECJ Case C-159/94 EDF [1997] ECR I-5815, mn. 65 et seqq. 330 Commission decision of 26 September 2006, State Aid NN 51/2006 – compensation for discharging the universal postal service obligations 2000–2005(Italy), announced in OJ 2006 Nr. C 291/17. 331 Commission decision of 22 February 2006, State Aid N 166/2005 – Government rural network support funding to Post Office Limited (2006–2008) (UK), announced in OJ 2006 No. C 141/2. 332 Commission decision of 7 March 2007, State Aid NN 8/2007(ex N 840/2006) – Financing of workforce reduction measures for RTVE, announced in OJ 2007 No. C 109/2. 333 Commission decision of 7 December 2005, State Aid N 395/05 – Loan Guarantee for social infrastructure schemes funded (Ireland), announced in OJ 2007 No. C 77/1. 334 Commission decision of 22 November 2006, State Aid C 24/2005, OJ 2007 No. L 95/25 mn. 99 – LNE. 335 Cf. ECJ Case C-451/03 Servizi Ausiliari Dottori Commercialisti v Calafiori [2006] ECR I-2941. 336 Commission decision of 2 July 2009, State Aid NN 8/2009, mn. 76 – Nature conservation areas (Germany). 321

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Article 106(2) TFEU does not require that any exclusive or exceptional rights are granted to the entrusted undertaking in order for it to perform the SGEI. According to Article 106(1) and (2) TFEU, an exclusive or exceptional right is to be distinguished from the entrustment as such.337 Granting such a right is simply a means to allow the entrusted undertaking to fulfil its public service assignment.338 87 Article 106(2) TFEU requires that the undertaking is entrusted by a specific act of a public authority due to reasons of legal certainty and transparency and in order to determine the proportionality of such a measure.339 The Member States themselves have the discretion to decide on the form of the measure.340 Article 106(2) TFEU requires the public authority’s act of entrustment to clearly set out and define the public service obligations, as does the first Altmark criterion.341 According to the Commission the following must follow from the act itself: a) Subject matter and duration of the public service obligations342, b) the entrusted undertakings and the geographic scope, c) where applicable, the nature (and duration343) of the exclusive and exceptional rights awarded to an undertaking, d) a description of the compensation mechanism, in addition a listing of the parameters for calculating and monitoring as well as alterations of any compensatory payments, e) measures to avoid and recover any overcompensation. 344 In part, the Commission’s stringent conditions go beyond those set out by the ECJ’s case law. Yet, other than the obligation to refer to the relevant legal basis, the Commission’s conditions are identical to those set out in Article 4 of the SGEI Decision. Nevertheless, a detailed list of all activities relating to the SGEI in questions is not required. 345 The act of entrustment, however, must enable the assessment of whether an exemption under Article 106(2) is necessary, especially the allocation and calculation of the cost which is necessary for effective performance of the assignment at hand and which is to be compensated. Should the nature of the assignment require flexibility and adaptability to changing circumstances, the requirements of clarity of the act of entrustment are also fulfilled if the act of entrustment sets out ex-post correction mechanisms that allows subsequent amendments.346 86

5. The Necessity for aid 88

a) Introduction. Article 106(2) TFEU exempts State measures only insofar as the application of the State aid rules obstruct the performance of the particular tasks as337 ECJ Case C-179/90 Merci convenzionali porto di Genova v Siderurgica Gabrielli [1991] ECR I-5889, mn. 9 and 27; ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 46–50; ECJ Case C-67/96 Albany [1999] ECR I-5751, mn. 98, 104–111. 338 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 179; ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 47. 339 Cf. Commission, Communication on services of general interest of 20 September 2000, COM (2000) 580, mn. 22. 340 ECJ Case C-159/94 EDF [1997] ECR I-5815, mn. 65 et seq. 341 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 181; cf. regarding this ECJ Case 172/ 80 Zu¨chner [1981] ECR 2021, mn. 7; ECJ Case 66/86 Ahmed Saeed Flugreisen [1989] ECR 803, mn. 55. 342 The GC has not answered the question whether this criterion needs to be fulfilled outside the SGEI framework, GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 201. 343 Whereas, according to the Community framework on State Aid 2005, it was expressively required to communicate the duration of the right awarded, the duration being part of the right’s character is still part of the description according to the SGEI framework. 344 SGEI Framework, mn. 16. 345 Staff working paper SEK (2007)1516 final of 20 November 2007, 5.3. 346 Regarding this Commission decision of 3 May 2005, State Aid N 541/2004 and N 542/2004 – Retention of financial reserves by sickness funds and Risk equalization system (Netherlands), announced in OJ 2005 No. C 324/30.

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signed to the undertakings entrusted with the operation of SGEI. To determine the scope of this provision the interpretation of the words ‘obstruct’ and ‘in so far’ is significant in this context.347 The latter can be described as necessity, under which less far-reaching exceptions are taken into account up to the limit of ‘prevention’, a so-called proportionality test.348 According to this test in cases of State aid the amount of benefit deriving from the aid in particular is to be assessed. In addition, it is to be assessed whether granting aid at all is the appropriate and effective means of providing the SGEI, or whether, e. g., the implementation of a tender would be more fitting. 349 Finally, it is necessary to consider whether any distortions of competition within the given, or other markets, are proportionate to the purpose of the aid.350 Proportionality under Article 106(2) TFEU implies that the means used to fulfil the general interest task do not create unnecessary distortions of trade. Specifically, it has to be ensured that any restrictions imposed on the rules of the EU Treaties do not exceed what is necessary to guarantee effective fulfilment of the task.351 The performance of the SGEI must be ensured. Therefore, the entrusted undertakings 89 must be able to bear the specific burden and the net extra costs of the particular task assigned to them.352 According to the ECJ’s case law, it is not necessary, that the financial balance or economic viability of the undertaking entrusted with the operation of a SGEI should be threatened. It is sufficient that, in the absence of the State measures at issue, it would not be possible for the undertaking to perform the particular tasks entrusted to it, defined by reference to the obligations and constraints to which it is subject, or that maintenance of those rights is necessary to enable the holder of them to perform tasks of general economic interest which have been assigned to it under economically acceptable conditions.353 The ECJ stresses that, since Article 106(2) is a provision, which permits, in certain circumstances, derogation from the rules of the Treaty, it must be interpreted restrictively. 354 It follows from this case law in accordance with the wording of Article 106(2) TFEU (‘the particular tasks assigned to them’) that the commissioned undertaking is not what is to be protected, but rather the delegated public task. Aid must therefore be necessary to enable the entrusted task to be carried out and not to ensure the existence of the entrusted undertaking. 355 Hence, the decision of the CFI that a SGEI is to be defined based on the general interest meant to be achieved, and not based on the financial means which are necessary to provide the service, is in line with the above mentioned reasoning.356 On the other hand, a mere threat to the fulfilment of a public task sufficiently fulfils the conditions of Article 106(2) TFEU.357 Prevention does not require an actual impossibility of the performance of the task. With the necessary (financial) effort, almost every public interest can be served. However, the amount of such a (financial) effort required to fulfil said 347

Koenig/Ku¨hling ZHR 166(2002), 656, 675. Cf. as an example Commission decision of 22 November 2006, C 24/2005, OJ 2007 No. L 95/25, mn. 101 – LNE. 349 Koenig/Ku ¨ hling ZHR 166(2002), 656, 678 et seq. 350 GC Case T-231/06 NOS v Commission [2010] ECR II-5993, mn. 122, 216. 351 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 101 – LNE. 352 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 101 – LNE. 353 Cf. ECJ Case C-340/99 TNT Traco v Poste Italiano [2001] ECR I-4109, mn. 54; ECJ Case C-67/96 Albany [1999] ECR I-5751, mn. 107; ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 59. 354 ECJ Case C-340/99 TNT Traco v Poste Italiano [2001] ECR I-4109, mn. 56. 355 Lecheler/Gundel RdE 1998, 92, 97; Weiß Ao ¨ R 128(2003), 91, 106; Koenig/Ku¨hling ZHR 166(2002), 656, 678; more detailed Mu¨nchKommEUWettbR/Gundel Article 86 TEC mn. 94. 356 GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 203. 357 Another view: Koenig/Ku ¨ hling ZHR 166(2002), 656, 677. 348

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interests may discourage undertakings from performing or the State from commissioning them or even jeopardize their sustainability.358 Furthermore, measures may be necessary that take into account circumstances that may potentially occur in the future and that with a sufficiently high degree of certainty would impose on and thus prevent the completion of the task. This requires a predictive decision, taking into account all the factual and legal circumstances. To accept any risk would be contrary to the objectives of Article 106(2) TFEU. On the other hand, a Member State may not justify just any measure without an analysis of the overall circumstances by arguing that there is a theoretical risk. 90

b) Quality control. The funding of SGEI can be declared compliant with the provisions of the State aid rules only inasmuch as the qualitative requirements set out in the public service remit are complied with. These qualitative requirements are part of the justification for funding, and there is therefore no reason to grant a privilege if they are not met.359 According to the opinion of the CFI, only the Member State is able to assess the compliance with the quality standards defined in the entrustment act. The Commission may only check whether there is a mechanism for the monitoring by an independent body of compliance.360 The Member States have an obligation to establish an appropriate monitoring system to assess whether, and how, the task of the public interest is being performed. An obligation to establish an audition by official auditors is regularly insufficient, because the statutory duty of an auditor does neither entail checking to verify whether an undertaking provides public services or not, nor is it to make an assessment of the ‘public service’ classification of services which have been recorded in the accounts, nor yet is it to assess what costs may be attributed to those provisions. The statutory role of the auditor solely entails, generally, to certify the accounts, thereby giving an external and independent appraisal of the validity and fairness of the accounts and of the question whether the impression they give of the state of the company is a faithful one. Nevertheless, an auditor may be entrusted, alongside his duty to statutorily certify the accounts, with giving ad hoc advice on other questions, relating, for example, to the performance of a public service remit. 361

91

c) Cost control. aa) Reduced cost-plus approach (Efficiency Principle). The amount of financial compensation cannot exceed what is necessary to cover the costs incurred in performing the public service obligations, taking into account the relevant receipts and having amounted for a reasonable profit in exchange for fulfilling the contractual obligations. The SGEI Framework follows – unlike the fourth Altmark criterion (see para. 39 et seq.) – a cost-plus-scale. Said scale recognizes the actual incurred costs by the providing undertaking regardless of whether they were efficiently or necessarily incurred.362 The General Court takes also the view that “the criterion linked to the economic efficiency of an undertaking in supplying the SGEI is unconnected with the assessment of the compatibility of State aid in the light of Article 106(2) TFEU, and the choice made by the national authorities relating to the economic efficiency of the public operator cannot therefore be criticised in that regard.”363 In previous case law, in order to justify the necessity of the financial allocation all costs incurred by the undertaking 358 More critically Dauses/Emmerich H. II. mn. 170 et seq., who regards the ECJ’s case law as clearly softening and entending Article 106(2) TFEU. 359 GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 211. 360 GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 212–214. 361 GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 228, 230. 362 Community guidelines on State Aid, mn. 14. 363 GC Case T-137/10 CBI v Commission, mn. 300; see also GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 208.

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commissioned were regularly assessed.364 This approach is widely supported with the arguments that the efficiency of the service provision falls within the organizational competence of the Member States, or rather that a duty to provide a loss-making service may not be reasonably imposed on any undertaking.365 However, considering that Article 106(2) TFEU does not protect the entrusted 92 undertaking, but the task at hand irrespective of the performing entity (see para 88, 89), this view seems doubtful. In principle, necessary are only those costs, actually required to accomplish the task at the lowest possible costs, i. e. calculated based on the costs of an efficiently acting undertaking.366 Squandering is never necessary.367 If squandering were tolerated as a matter to be dealt with by Member States, 368 the economic inefficiency of the entrusted undertaking could influence the competitive situation. If all costs are compensated by the State, a lack of sufficient pressure would be in place to minimize costs, the undertaking would have no incentive to demand an effective competition and thus could cause a price increase in the procurement markets to the detriment of other undertakings.369 There is also, whenever lower revenues are covered by State aid, the risk that the beneficiary undertakings add on extra costs for accompanying activities that are not directly related to the SGEI, but which are closely linked to it. For example, the prices for advertising in the broadcasting sector, in order to reduce the revenue of competitors (exclusionary conduct). 370 Reimbursement of all costs incurred protects the undertaking of the disciplinary risk of market withdrawal due to pressures of competition. Lack of competition leads to inefficiency. Ultimately, if significant efficiency gains result in the possibility that the SGEI is provided independently by the future market, hence, compensation, which indeed would only be an exception of the concept of ‘prohibited’ aid would be unnecessary. Therefore, an aim of EU law is to simulate the results of competition, if the aspired competition does not (yet) take place for economic reasons. This is why a statute which is actually in breach of Article 106(1) TFEU in conjunction with Article 102 TFEU (it provided that ambulance and rescue services only be provided by certain undertakings) is only exempted under Article 106(2) TFEU, if the recipients of aid, are actually able ‘to provide the ambulance transport services efficiently.’371 Price discrimination in accordance with Article 102 TFEU cannot be justified by higher costs related to a group of buyers, if it is possible that the high rate was just a result of the lack of competition in the market 372 and if no 364

Cf. GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 208. Jennert NVwZ 2004, 425, 427; Bartosch NVwZ 2002, 174, 175; the same, EU-Beihilfenrecht, Article 86(2) TEC mn. 14; Mu¨nchKommEUWettbR/Gundel Article 86 TEC mn. 96; denying Nettesheim EWS 2002, 253, 262 et seq; Koenig/Ku¨hlingZHR 166(2002), 656, 681; Britz ZHR 169(2005), 370, 389 et seq. 366 Britz ZHR 169(2005), 370, 390; see also ECJ Case C-475/99 Ambulanz Glo ¨ ckner [2001] ECR I-8089, mn. 64; Koenig/Ku¨hling ZHR 166(2002), 656, 677; undecided GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 297. 367 Due to this reasoning, excessive or reckless expenditures may for instance not even be compensated though the European Aid Programs, cf. Commission, guidelines on financing projects within the EUs Seventh Framework Programme for Research, Annex II B II. 19, 2(h). 368 Cf. for example Commission, Green Paper on Services of General Interest of 21 May 2003, COM (2003) 270 final mn. 61. 369 Nettesheim EWS 2002, 253, 262. 370 Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 131 (correction in OJ 2006 No. L 368/112) – TV 2/Denmark (set aside because of lack of reasoning by GC Cases T-309/04 et al. TV 2/ Denmark v Commission, [2008] ECR II-2935. 371 ECJ Case C-475/99 Ambulanz Glo ¨ ckner [2001] ECR I-8089, mn. 64. 372 ECJ Cases 110/88, 241/88, 242/88 Lucazeau [1989] ECR 2811, mn. 29; ECJ Case 395/87 Tournier [1989] ECR 2521, mn. 42; cf. also ECJ Case 226/84 British Leyland v Commission [1986] ECR 3263, mn. 28; cf. also ECJ Case 30/87 Bodson [1988] ECR 2479, mn. 35. 365

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justification for the failure of rationalization exists.373 Accordingly, it would be inconsistent if a measure of a Member State that could potentially distort competition, as opposed to creating a competitive environment situation, would be seen as compatible with the internal market “for eternity”. 93 Having regard to the foregoing arguments, only a somewhat different approach is appropriate, one that makes a distinction between the 4th Altmark criterion and Article 106(2) TFEU on the one hand and considers the mandatory principle of an open market economy with free competition (Article 119(1) TFEU) on the other hand. The starting point of the reasoning is that a compensation measure may be justified only as far as it is really necessary to provide the SGEI. Ideally, i. e. on a competitive market, necessary are only the hypothetical financial expenses incurred by an efficient undertaking for the fulfilment of these tasks. The costs of a competing undertaking may suffice as a benchmark. This requires, similarly to the fourth Altmark criterion, basically a cost-effectiveness test. Nevertheless, Article 106(2) TFEU plays an important role alongside the Altmark test. Article 106(2) TEFEU covers situations in which an inefficient fulfilment of the SGEI may be necessary initially, for example, because only an inefficient undertaking meets the conditions necessary for the fulfilment of the SGEI, since it is the only undertaking operating in all Member States. Even the selection decision is based on necessity within the meaning of Article 106(2) TFEU, which is in any case present when the contract was preceded by competition proceedings. In the long term, however, only payments are exempted which are required to cover costs, which arise after reasonable utilization of efficiency potentials. There is no reason to accept the cost situation of an undertaking as immutable, since the task itself and not the undertaking is the object of protection of Article 106(2) TFEU. The undertaking participates in the protection of the said Article only to the extent necessary for task completion. From the proportionality test of Article 106(2) TFEU follows that the State must ensure that the entrusted undertaking takes all reasonable measures to improve its efficiency, as it would do by itself in a market with effective competitive. The view represented here appears to be adopted by the Commission within the new SGEI framework assuming that Member States generally have a duty, during the preparation of the compensation model, to include incentives in order for the SGEI to be provided in a cost-effect manner while still maintaining its quality standards, unless this would be impossible or inappropriate.374 In addition, Article 5(6) SGEI Decision expressly allows the introduction of appropriate incentive elements to increase efficiency (see further at para. 174). Because of the approach of Article 106(2) TFEU, this condenses the possibility to a basic obligation, unless, by alternative instruments, e. g. mandatory targets, etc., efficient management may also be secured. 375 To determine the theoretical costs, reference may be made to the methods described within the fourth Altmark criterion (para. 39 et seq.) and sector-specific provisions. 376 94 Member States have a wide discretion with regard to the mechanism by which the efficiency incentives are included. The mechanism must, however, be based on objective and quantifiable data which is defined in the entrustment act and thus shall be subject to a transparent audit by an independent entity of the provider of the SGEI. 377 In addition, efficiency gains must not take place at the expense of the quality of the services 373

GC Case T-229/94 Deutsche Bahn v Commission [1997] ECR II-1689, mn. 88 et seq. SGEI Framework, mn. 39, with restrictions mn. 22. 375 Ditto Advocate General’s Ja ¨a¨skinen Opinion of 24 March 2010, C-399/08 P, mn. 55 – Commission/ Deutsche Post. 376 Cf. ECJ Case 66/86 Ahmed Saeed Flugreisen [1989] ECR 803, mn. 43. 377 SGEI Framework, mn. 42. 374

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to be provided (para. 90).378 The Member States may specify in advance a lump sum for the compensation in order to anticipate and take into account the undertaking’s possible efficiency gains achieved during the term of the contract. 379 They may also set specific targets for efficiency gains and make the compensatory amount depend on prior-to-agreement-set bonuses or penalties dependent upon on to what extent the targets were met. Premiums that are linked to productivity gains are to be defined so that an equal division of profits between the undertaking and the Member State and/or the consumers, is possible.380 Moreover, the efficiency gains or rewards may not lead to an unreasonably high profit margin.381 Another way to ensure an efficient service delivery is by conducting regular tenders. 95 This can ensure, to some extent, that no undertaking is commissioned, if from the outset of the process it does not meet the efficiency requirements and the selection decision in favour of a particular undertaking is fundamentally necessary and proportionate. However, this method only allows a one-time effectiveness control, and does not replace the permanent supervision of the undertaking in cases, where the financial benefits can be easily adjusted to a changing cost structure of the undertaking commissioned over time.382 Apart from the above-mentioned arguments, a cost-effectiveness test due to the 96 functional connection and the associated prohibition of overcompensation must always be done, if otherwise a risk of subsidizing other economic activities of the entrusted undertaking or associated undertaking, or the advantage of third-party undertakings exists. This risk is particularly eminent with the recognition of borrowing costs. If borrowing costs are unconventionally high, lenders are favoured indirectly, thus causing a risk of excessive distortions of competition through the circumvention of the prohibition of cross-subsidisation, particularly with regard to intercompany loans. bb) Cost components. In addition to the level of the individual cost components, it 97 must also to be determined what type of costs may be taken into account at all. How these are taken into account, on an actual cost basis or the costs of efficient service provisions, may remain undecided for the following analysis. According to the SGEI framework, the necessary costs for the provision of SGEI, and 98 probably required net costs, are accurately to be determined using the Net Avoided-cost method (method for calculating avoidable net cost), not only as far as their application is required by EU law or by national legislation, but also in all cases where it is not impossible or unsuitable.383 In other cases, the Commission accepts other methods of calculating the net cost, such as the cost allocation method. Both methods shown by the Commission, in principle, take into account efficiency targets.384 If the compensation is based on all or part of the projected costs and revenues, then they must be specified in the agreement. Coherent and comprehensible parameters must be taken into account and anticipated during the period of the agreement, keeping in mind efficiency gains and the economic environment on which the SGEI provided is based.385 These parameters may need to be based on the expertise of competent sector regulators or other enterprise-independent 378

SGEI Framework, mn. 43. SGEI Framework, mn. 40. 380 SGEI Framework, mn. 41. 381 SGEI Framework, mn. 50. 382 Cf. SGEI Framework, mn. 42. 383 SGEI Framework, mn. 24, 27. 384 See also SGEI Framework, mn. 22. 385 SGEI Framework, mn. 23. 379

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bodies. The Member States must provide the sources, on which their assumptions are based, such as information sources, business plans, industry reports, etc.386 99 According to the Net Avoided-Cost Methodology, the pre-requisitional (or expected) net costs enabling the provision of the service can be determined on the basis of the difference between the net costs of the undertaking providing the service on the one hand and the net costs of the service providers without these obligations on the other hand. 387 To determine the appropriate costs for the provision of the SGEI, there is a requirement for a precise determination of the normal market, i. e. the entrusted welfare elements. The price determination leads to establishing which costs the service provider would not have without the obligations, which income he would not gain, and which immaterial advantages he would not gain.388 The components of the provided service in question that can only be provided at a loss or under cost conditions that fall outside of normal commercial standards, are to be determined. If a standard market service is provided that is only supplemented by the obligation, for instance, providing of special services due to social welfare reasons to particular segments of the population (for instance, reduced entrance fees for retired persons and those with a disability), then only insofar does a need of compensation exist. Therefore, the true additional particular net costs are relevant.389 The total costs can only be covered, if the market, without the public service obligations, would not have provided the service at all. According to this method, for example, a part of the costs for an infrastructure could remain ignored, as far as the service would also be available to a smaller customer base or was operated to provide only part of the service. 100 According to the Cost-Allocation-Methodology, which may only be used in exceptional cases, the required net costs arise out of the difference between the costs and the revenues for a designated provider of fulfilling the public service obligations, as specified and estimated in the entrustment act.390 The costs which are to be taken into account include all costs required for the provision of the SGEI.391 If the operation of the undertaking is limited to the provision of the SGEI, all costs can consequently be compensated.392 If the undertaking is at the same time involved in other areas, only the costs, which arise out of the fulfilment of the contractual service being provided, may be taken into account. The costs to be taken into account include besides the direct costs, i. e. those only incurred because of the SGEI, also a calculated amount for general costs.393 To calculate an appropriate amount of general costs, the market price for the use of resources, as far as they are known, can be used as an indicator for a fixed value. If such market prices are not known, then an adequate amount of general costs may be calculated based on the amount of a reasonable profit that the undertaking gains with activities not related to the SGEI keeping efficiency incentives or if necessary through more suitable methods.394 General investments (e. g. with regard to infrastructure) can be taken into account, if they are required for the SGEI. With regard to appreciation 386

SGEI Framework, mn. 23. Cf. also Annex IV Directive 2002/22/EC and Annex I Directive 97/67/EC as well as the relevant case-law. 388 SGEI Framework, mn. 25. 389 Koenig/Ku ¨ hling ZHR 166(2002), 656, 681; cf. also Koenig BB 2003, 2185, 2186 et seq; Annex IV A of the Directive 2002/22/EC, OJ 2002 No. L 108/51, amended by the Directive 2009/136/EC, OJ 2009 No. L 337/11. 390 SGEI Framework, mn. 28. 391 SGEI Framework, mn. 29. 392 SGEI Framework, mn. 30. 393 See ECJ Cases C-83/01 P and C-94/01 P Chronopost [2003] ECR I-6993, mn. 40; SGEI Framework, mn. 31. 394 SGEI Framework, mn. 31. 387

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and infrastructure costs for materials, which are used in both the public and commercial domains, an analytical accounting system is to be used, which recognizes the materials’ dependence on the degree of utilization.395 Costs, which are connected to other activities, must cover all variable costs, an appro- 101 priate contribution to common costs and an adequate return on capital.396 These costs must not under any circumstances be affixed to the compensated costs incurred by the SGEI. The calculation of costs must follow criteria specified in the entrustment act with regard to generally accepted accounting principles.397 General costs must be broken down by customary and accepted professional standards. With depreciation costs, which come into existence as a result of the usage of buildings due to the provision of the SGEI or other activities, the Commission accepted a breakdown by the occupancy (i. e. utilisation).398 A reasonable global separation key applied to the most valuable items of property can also be extended to subordinate (lower grade) items, if these have only provided additional auxiliary functions.399 The approach of the French authorities, which applied a safety margin of 10 % for the determination of expenses due to the public activity, was accepted by the Commission as a ‘cautious’ one.400 In individual cases, the Commission accepts the cost-effective creation of a capital 102 reserve, in order to capture the typical market fluctuations, and therefore safeguard the fulfilment of the public contracts. The Commission does, however, state, that such reserves must be established for a specific purpose and be regularised at fixed times when the overcompensation that has been determined must be reimbursed. This obligation does not cover the accumulation of equity capital, which can be used for any purpose.401 On the revenue side the entire revenue earned from the SGEI has to be taken into 103 account.402 In addition, all advantages granted by the state or by state resources are to be deducted. If special or exclusive rights, which are linked to activities other than the SGEI, which was compensated through the aid, lead to excessive profits, which go above and beyond the reasonable profits, or does it get other advantages from the state, these must be added to the revenue.403 The Commission thereby establishes a kind of presumption of cross-subsidy. The level of the calculated profits for the other activities is, following the criteria mentioned in para. 104 et seq., to be assessed ex ante. 404 Profits arising out of other mere private-economic activities are to be taken into account, as far as they were assigned by the Member State as part or whole of the financing scheme of the SGEI.405 cc) Reasonable profit. According to Article 106(2) TFEU, a compensation can be 104 granted to an undertaking, up to an amount, which aside from the net costs allows for the possibility to generate a reasonable profit as compared to any other undertaking 395

Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 110 – LNE. SGEI Framework, mn. 31. 397 Cf. Community Guidelines on State Aid 2005, mn. 16. 398 Commission decision of 22 November 2006, No. C 24/2005, OJ 2007 No. L 95/25, mn. 108 – LNE. 399 Commission decision of 22 November 2006, No. C 24/2005, OJ 2007 No. L 95/25, mn. 111 – LNE. 400 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 113 – LNE. 401 Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 111–113(correction in OJ 2006 No. L 368/112) – TV 2/Denmark (insofar not contested by GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 192). 402 SGEI Framework, mn. 32. 403 SGEI Framework, mn. 31, 45. 404 SGEI Framework, mn. 45. 405 Cf. SGEI Framework, mn. 46, see also Community Guidelines on State Aid 2005, mn. 17. 396

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with the provision of the SGEI. Compensation may therefore be necessary, in order to provide the service provider with a return which could be achieved on a competitive market. Even if the service provider is in a monopolistic position, a competition-like return should be granted. The reasonable profit may therefore not be at level that would constitute a price abuse of a dominant undertaking, according to Article 102(2) (a) TFEU.406 By these standards, a fair, competitive and risk-adjusted return on capital is to be recognized.407 In the SGEI Framework, the Commission proposed several methods in order to calculate the reasonable profit. Additionally, the methods and standards used to determine the appropriateness of a return under the so-called Private-Investor-Test can be useful. 105 In the SGEI Framework the Commission defines reasonable profit as the rate of return on capital that would be required by a typical company considering whether or not to provide the SGEI for the whole duration of the entrustment act, taking into account the level of risk.408 The Commission defines return on capital as Internal Rate of Return (IRR), that the company makes on its invested capital over the lifetime of the project, that is to say the IRR on the cash flows of the contract. 409 In justified cases, the Commission allows, for the determination of the reasonable profit, indicators other than the return on capital, such as the average return on equity, to be used 410 during the entrustment period (return on equity (ROE)), return on capital employed (ROCE), return on assets (ROA) and return on sales (ROS).411 Whatever indicator is chosen by the Member State, pursuant Article 106(2) TFEU, the state has the obligation to provide proof to the Commission that the expected profit is not higher than under competitive conditions.412 A capital return that does not exceed the relevant swaprate, 413 plus a spread of 100 basis points, according to the SGEI Framework, would be appropriate in any event.414 The relevant swap rate is the swap rate whose duration and currency match the duration and currency of the entrustment act.415 The premium of 100 basis points is used, among other things, as a compensation for the liquidity risks, which exist, because the service provider binds the invested capital for the duration of the agreement and cannot sell its shares as quickly and conveniently as would be the case with liquidity risk-free assets.416 106 In determining the reasonable profit, the level of economic risk assumed by the undertaking entrusted is to be considered. The higher the risk, the higher the reasonable profit. It depends on the sector, the type of service and the design of the compensation 406 Cf. regarding this ECJ Case 26/75 General Motors [1975] ECR 1367, mn. 12; ECJ Case 27/76 United Brands v Commission [1978] ECR 207, mn. 248 et seq.; Commission decision of 25 July 2001, COMP/ 36.915, OJ 2001 No. L 331/40 mn. 166 et seq. – Deutsche Post. 407 Cf. § 21 para. 2 p. 1 EnWG (German Electricity and Gas Supply Act). 408 SGEI Framework, mn. 33. 409 SGEI Framework, mn. 33, footnote. 18. 410 In any given year the accounting measure return on equity (ROE) is defined as the ratio between earnings before interests and taxes (EBIT) and equity capital in that year. The average annual return should be calculated over the lifetime of the entrustment by applying as discount factor either the company’s cost of capital or the rate set by the Commission Reference Rate Communication, whatever more appropriate (SGEI Framework, mn. 34, footnote. 19). 411 SGEI Framework, mn. 34. 412 SGEI Framework, mn. 35. 413 The swap rate is the longer maturity equivalent to the inter-bank offered rate (IBOR rate). It is used in the financial markets as a benchmark rate for establishing the funding rate (SGEI Framework, mn. 36, footnote 20). 414 SGEI Framework, mn. 36. 415 SGEI Framework, mn. 36. 416 SGEI Framework, mn. 36, footnote 21.

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mechanism.417 If the state grants special or exclusive rights, which reduce the economic risk or even completely eliminate it, the reasonable return is to be reduced accordingly. In principle, the financial risk is very low because the compensation mechanism takes away a significant part of the market uncertainty. If the provision of the SGEI involves a significant commercial or contractual risk, the reasonable profit may not exceed the level that corresponds to a rate of return on capital that is commensurate with the level of risk.418 This rate of return should, if possible, be determined with reference to the return on capital, which is achieved under similarly awarded competitive public service contracts (e. g. contracts that are awarded through a public tender). 419 If it is not possible to apply such a method, in justified cases, other methods may be used to calculate the return on investment. The Commission gives the example of a comparison of the yield and the weighted average cost of capital (WACC) of the undertaking in relation to the activities in question or the average return on capital in the industry in past years, as far as the historical data for prediction is meaningful.420 The Commission acknowledges compensation in the form of a lump sum payment, which cover only the expected net costs and a reasonable profit while the undertaking is operating in a competitive environment, as an example of a significant risk.421 If the provision of the SGEI is not linked to a commercial or contractual risk, e. g. because the net costs for the provision of service from general commercial interests will be compensated ex post, the reasonable profit is permitted, following the relevant swap rate, to have an additional 100 basis points calculated, but it may not exceed this.422 The relevant comparison value for the values determined by the methods outlined 107 above, shall be those of a ‘typical undertaking’ on a competitive market. In competitive markets, the empirical average is relevant. 423 The particularities of the method of calculation used are to be taken into account. A low return on equity may also suggest a particularly high equity share, which in turn, may be regarded as an indication for a lack of competition.424 According to general business principles, it appears that, for instance, in the energy sector, it generally does not make sense in the long term to have a higher equity share than 40 % under competitive conditions.425 The excessive accumulation of capital can be an indication of overcompensation. 426 In sectors where there are no competing undertakings that could serve as a benchmark for the undertaking responsible for the provision of the SGEI, undertakings from other Member States or, if appropriate, from other sectors can be chosen for comparative purposes under the condition that the special characteristics of each sector are taken into account. This 417

SGEI Framework, mn. 33. SGEI Framework, mn. 37. 419 SGEI Framework, mn. 37. 420 SGEI Framework, mn. 37, footnote 22. 421 SGEI Framework, mn. 37. 422 SGEI Framework, mn. 38. 423 Cf. also GC Cases T-228/99 and T-233/99 Westdeutsche LB Girozentrale v Commission [2003] ECR II-435, mn. 203, 254, 256 –, with regards to the Private-Investor-Test. 424 Therefore, there is a maximum-limit of 40 per cent on the equity ratio that is to be taken into account regarding the calculation of use of the system charges according to mn. 6(2) sentence 4 of the Electricity Network Charges Ordinance. 425 BGH, order of 14 August 2008, KVR 42/07, WuW/E DE-R 2395 – Rheinhessische Energie; German Cartel Office, Decision of 14 February 2003, B11–45/01, ZNER 2003, 145 – TEAG. Report of the working group “Netznutzung Strom der Kartellbeho¨rden des Bundes und der La¨nder” of 19 April 2001, p. 27 et seq., 33, online: www.bundeskartellamt.de. 426 Cf. Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 113(correction in OJ 2006 No. L 368/112) – TV 2/Denmark (set aside because of a lack of reasoning by GC Cases T-309/04 et al. TV 2/ Denmark v Commission [2008] ECR II-2935). 418

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corresponds to the comparable market concept used in price abuse control pursuant to Article 102 TFEU427 and in the price regulation of network sectors428. 108 Corporate results that have negative values on average despite compensation are regularly lower than the reasonable profits of a comparable private undertaking. 429 If the net result/turnover ratio is much lower than the one of comparable competing undertakings, the public activity fields’ profits can be assessed as being reasonable. 430 109 In determining the reasonable profit, the Member States may establish criteria to give incentives for the quality of service provided and gains in productivity. 431 The Commission expects that the consideration of productivity gains as an incentive factor can result in requiring overcompensation.432 However, it must be kept in mind that with regard to a foreseeable possibility of productivity gains a compensation of the previous costs, in full, is no longer required. Taking into account the productivity gains rate, the return shall not go beyond the appropriate level.433 110 The question of the appropriateness of a return is also provided as part of the so-called private investor test. It is checked whether the public investor behaved like a market economy investor or whether the beneficiary has received an economic advantage which is below normal market conditions and which he would not have ordinarily received.434 The previously developed methods by the CFI and the ECJ can fundamentally also be used for the determination of a reasonable return by the entrusted undertaking. The behaviour of a private investor in a market economy is namely guided by prospects of profitability.435 A prudent private investor, an investor who wants to maximize the profit without too many risks in relation to other market participants, would while calculating the expected return on his investment request a minimum yield of the average return of an undertaking in the given sector.436 An undertaking must therefore operate with the aim of reasonable interest on these deposits. These capital market calculations of reasonable return are also used in the determination of allowable charges to the regulated network industries.437 111

dd) Functional connection. In any event, compensation may only be used for ensuring the provision of the SGEI.438 If the funds are used to operate on other markets, 427

Section 19(4) No. 2 GWB (German Competition Act). Cf. Section 35(1) sentence 1 No. 1 TKG (German Telecommunication Act); Para 29 sentence 1 No. 1 GWB (German Competition Act). 429 Commission decision of 22 November 2006, K(2006) 5477, OJ 2007 No. L 95/25 mn. 117 – LNE. 430 Commission decision of 22 November 2006, K(2006) 5477, OJ 2007 No. L 95/25 mn. 118 – LNE (–3,2 % for LNE’s activity in public services). 431 SGEI Framework, mn. 39 et seq.; already in Community Guidelines on State Aid 2005, mn. 18. 432 Commission decision of 16 May 2006, C (2006) 1847(No. N 604/2005), mn. 85 et seq. – Public bus services in Wittenberg. 433 Cf. SGEI Framework, mn. 50. 434 GC Cases T-228/99 and T-233/99 Westdeutsche LB Girozentrale v Commission [2003] ECR II-435, mn. 208. 435 ECJ Case C-305/89 Italy v Commission [1991] ECR I-1603, mn. 20; ECJ Cases C-278/92 et al. Spain v Commission [1994] ECR I-4103, mn. 21 et seq.; GC Case T-296/97 Alitalia v Commission [2000] ECR II-3871, mn. 84. 436 GC Cases T-228/99 and T-233/99 Westdeutsche LB Girozentrale v Commission [2003] ECR II-435, mn. 255. 437 Section 21 (2) sentence 1 EnWG (German Electricity and Gas Supply Act), Section 6 para. 2 Regulation on Charges for Access to Electricity Supply Networks and Regulation on Charges for Access to Gas Supply Networks, Section 31 (2) TKG (German Telecommunication Act – reasonable interests for invested capital), Section 3(2) of the German Postal Service Fee Ordinance (surcharge due to economic risk), Section 14(4) of the German General Railways Act (return that might be obtained on the market). 438 Cf. Commission decision of 2 July 2009, State Aid NN 8/2009, mn. 77 – Natural conservation areas (Germany). 428

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the compensation is not justified and therefore constitutes State aid incompatible with the internal market. Such a subsidy of competitive activities by reserved services, may also constitute a breach of Article 102 TFEU for distortion of competition. 439 In decisions on merger control, the Commission has therefore also tried to ensure that cross-subsidies are excluded in such cases.440 On the other hand, the reasonable profit achieved with the provision of SGEI, can also 112 be used in other markets, unless otherwise specified by the Member State. 441 Nevertheless, the reserves needed for maintaining and increasing the capacities necessary to provide the SGEI are to be guaranteed. Therefore, the free use of profit may not be to the detriment of the users by raising the prices just to satisfy a need for investments. Otherwise, the increase of fees would result in an undue promotion of competitive activities at the expense of the privileged special areas under Article 106(2) TFEU. 442 If the SGEI is only part of the activities of an undertaking, the income and expenses 113 in connection with their provision and of other services must be accounted and reported separately. Furthermore, the parameters for allocating costs and revenues must be shown clearly. Where an undertaking is entrusted with the operation of severable distinguishable SGEIs, the internal accounts must make it possible to verify whether there has been any overcompensation at the level of each SGEI. 443 The requirements of the Transparency Directive remain unchanged. In addition, the accumulation of reserves must be earmarked and may not simply 114 constitute an increase in equity.444 ee) Prohibition of overcompensation. As far as payments exceed the amount of net 115 costs required, taking into account a reasonable profit, they entail impermissible overcompensation. The prohibition of overcompensation follows from para. 2 of Article 106 TFEU, i. e. the principle of proportionality. 445 Overcompensation is not necessary for the functioning of SGEI. It therefore constitutes State aid which is incompatible with the internal market and which must be reimbursed. 446 The principle of purpose (see para 111 et seq.) and the prohibition of overcompensation are closely linked to each other. If the Commission notes that there is no overcompensation, it will

439 See also Commission, Guidelines on the application of EEA competition rules in the Telecommunications sector, OJ 1991 No. C 233/02 mn. 102 et seq.; notice from the Commission on the application of the competition rules to the postal sector and in particular on the assessment of certain state measures relating to postal services, OJ 1998 No. C 39/2 mn. 3; cf. also Broadcasting Communication, OJ 2009 No. C 257/1 mn. 76 and Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 131 (correction in OJ 2006 No. L 368/112) – TV 2/Denmark (set aside because of lack of reasoning by GC Cases T-309/ 04 et al. TV 2/Denmark v Commission [2008] ECR II-2935). 440 Commission decision of 26 June 1998, IV/M.1168 – DHL/Deutsche Post (referring to this GC Case T-175/99 UPS v Commission [2002] ECR II-1915, mn. 64); Commission decision of 2 December 1991, IV/M.102 – GD Net (referring to this ECJ Case C-119/97 P UFEX v Commission [1999] ECR I-1341, mn. 24); see also Commission decision of 17 July 1996, OJ 1996 No. L 239/23, 54 et seq. – Atlas; Commission, OJ 1996 No. L 239/57 mn. 71 – Global One. 441 Expressively SGEI-Framework 2005, mn. 15. 442 Cf. ECJ Case C-340/99 TNT Traco v Poste Italiano [2001] ECR I-4109, mn. 58. 443 SGEI-Framework, mn. 44. 444 Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 113(correction in OJ 2006 No. L 368/112) – TV 2/Denmark (set aside because of lack of reasoning by GC Cases T-309/04 et al. TV 2/ Denmark v Commission [2008] ECR II-2935, mn. 199 et seq.). 445 Cf. Commission decision of 22 November 2006, OJ 2007 No. L 95/25, mn. 103 – LNE. Commission decision of 19 May 2004, OJ 2006 No. L 85/1 (correction in OJ 2006 No. L 368/112) mn. 99 et seq. – TV 2/Denmark; cf. also GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 210; GC Cases T-309/ 04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 192. 446 SGEI Framework, mn. 48.

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see no further need to check for the existence of cross-subsidies in favour of the field of industrial activity.447 The CFI also excludes the possibility of cross-subsidy if the compensation granted is less than the additional costs arising from the performance of the particular task.448 In contrast, if an undertaking pushes the prices for activities other than the SGEI below a level that would be required from an efficient competitive company in a similar situation to cover its costs for the specific activity, this is an indication for a cross-subsidy, thus, for an overcompensation of public services. 449 116 The Member State must control the payments at regular intervals until the end of the entrustment period to control overcompensation. Following the SGEI Framework, there should be a control every three years, and if there is State aid without any public competition proceedings (e. g. in-house-procurement), every two years. 450 If the Member State finds evidence of overcompensation, the calculation measures must consequently be updated.451 The control of the annual budgets and prognoses concerning the general financial performance as well as the administrative and financial accounts by a third party such as an auditor, even if the auditor has no ability to prevent overcompensation, is permitted. In such a case, however, it must be ensured that another government agency conducts measures based on the auditor’s results. 452 This follows from the discretion of the Member States regarding the implementation of an effective control mechanism. If upfront a fixed compensation level has been defined which adequately anticipates and incorporates possible efficiency gains over the period of entrustment, the overcompensation check is in principle confined to verifying that level of profit looks reasonable from an ex ante perspective. 453 At the request of the Commission, Member States must provide appropriate evidence.454 117 If the compensation by public authorities is less than or equal to the net extra costs, which the contracted undertaking, due to the fulfilment of the SGEI has incurred, the requirements of the proportionality principle are fulfilled.455 A set of analytical accounts is required, which is based on commonly accepted and widely recognized professional standards.456 Income and expenses in the public and in the commercial sector must be properly assigned. The operating result of the public sector activity, including all subsidies in a fiscal year, must be negative or equal to zero or show not more than a reasonable profit depending on the activity and the sector concerned. 457 By this standard, the Commission recognized in the LNE decision that the applied analytical accounts for the separation of the commercial and the public activity, which was only based on full cost accounting, as valid, since it allowed to clearly assigned all revenues and costs for services of general economic interest.458 In the absence of analytical

447

Commission decision of 22 November 2006, COM(2006) 5477, OJ 2007 No. L 95/25 mn. 120 – LNE. GC Case T-106/95 FFSA et al. v Commission [1997] ECR II-229, mn. 188; cf. also GC Case T-266/02 Deutsche Post v Commission [2008] ECR II-1233, mn. 109. 449 Commission decision of 19 May 2004, OJ 2006 No. L 85/1 mn. 131 (correction in OJ 2006 No. L 368/112) – TV 2/Denmark (set aside because of lack of reasoning by GC Cases T-309/04 et al. TV 2/ Denmark v Commission [2008] ECR II-2935). 450 SGEI Framework, mn. 49. 451 Cf. SGEI Framework, mn. 49; expressively in the Community Guidelines on State Aid 2005, mn. 20. 452 GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 219. 453 SGEI Framework, mn. 50, 47. 454 SGEI Framework, mn. 49. 455 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 103 – LNE. 456 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 110, 114 – LNE. 457 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 103 – LNE. 458 Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 104–112 – LNE. 448

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accounting, the Commission held a drawing on an ex post implemented backward projection of the costs as admissible.459 This conclusion was confirmed by the CFI.460 According to the Community Guidelines 2005, an over compensation of more than 10 % of the annual compensation could be credited to the next year. For services with significant annual fluctuations in costs, mainly due to necessary investments, even temporary over compensation of more than 10 % was also acceptable. The circumstances which require an overcompensation of more that 10 % were to be notified and a balance to be drawn in intervals determined on the basis of the economic situation of the given sector was to be turned in, the latest after four years. The amount determined as overpayment were to be paid back.461 Even if the SGEI Framework does not expressly provide for such a possibility (but see Article 6(2) SGEI Decision), an overcompensation for ex-ante payments under certain circumstances may be unavoidable. A compensation mechanism which takes overcompensation into account from the outset, through handling overcompensation as credits for the next period under consideration of an adequate interest return, seems compatible with Article 106(2) TFEU, unless a subsequent compensation to avoid more overcompensation is sufficient by itself to restore balance. Overcompensation must not be reimbursed to the extent that it is used to finance another SGEI provided by the same undertaking. However, such a transfer must be reported transparently in the books. The other service is subject to an independent grant, which must be in accordance with Article 106(2) TFEU and is therefore to be assessed based on the provisions and principles of the SGEI framework, especially in relation to the notification in advance.462 Excessive compensation cannot be justified permanently on the grounds that it constitutes a stand-alone aid, which is in and of itself compatible with the TFEU, e.g. as environmental or employment aid and aid to small and medium-sized enterprises. 463 This reasoning follows from the general principles for transparency and cumulation. If a Member State plans to let the undertaking keep the overcompensation thus granting extra aid, the provisions regarding prior notification pursuant Article 108(3) TFEU must be observed. Such aid will rarely meet the conditions of an exemption because of Articles 5 and 8 GBER. More difficult is the examination of overcompensation regarding benefits in kind. The potential economic advantage, for example by a gratuitous transfer of land can be defined as the sum of revenues from the commercial use of the land and its resale value. The benefit associated with the resale value of land arises, however, de facto only in case of sale. If the beneficiaries cannot further transfer their assigned land, or if they must use the payments for the SGEI or have to repay it to the State, and the obligations are inextricably linked with the land, then the advantage is limited to the proceeds from the exercise of economic activities on the land. To determine whether there is overcompensation according to the SGEI framework, the Commission does not base the land’s value on its potential resale value, rather the revenue achievable through its use. 464 Since the amount of recoverable revenue is difficult to predict ex ante, it requires therefore particularly flexibility and the use of a previously defined ex-post correction mechanism. 459

Commission decision of 22 November 2006, C 24/2005, OJ 2007 No. L 95/25, mn. 113, 114 – LNE. GC Case T-613/97 UFEX v Commission [2006] ECR II-1531, mn. 137. 461 Community Guidelines on State Aid 2005, mn. 21. 462 Cf. SGEI Framework, mn. 45, 46; more expressively in Community Guidelines on State Aid 2005, mn. 22. 463 Cf. Community Guidelines on State Aid 2005, mn. 23. 464 Commission decision of 2 July 2009, State Aid NN 8/2009, mn. 79 et seq. – Nature conservation areas (Germany). 460

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While taking outside capital into account, a indirect advantage of the investor should be avoided. Therefore, high borrowing interest not in accordance with normal market conditions must not be taken into account. Rather, these should be examined for their appropriateness to prevent an advantage granted to the capital giving third-party entities or, – in case of group loans – to avoid an advantage granted to the undertakings associated with the entrusted undertaking (for more details see para. 161).

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ff) No obligation to tender. A tendering procedure to award the service of general economic interest is not required by Article 106(2) TFEU in general. 465 However, an obligation to tender, according to the case law of the ECJ, often follows from primary and secondary law on procurement principles, insofar as these are not set aside by Article 106(2) TFEU (see para. 130 et seq.).

6. No effects on the development of trade contrary to the Union’s interest (Article 106(2) sentence 2 TFEU) a) Overview. The assessment of whether aid leads to adverse effects on trade to the extent that it is contrary to the interests of the Union occurs regularly with a short reference to internal market compatibility and plays virtually no part 466 due to the high importance accorded to the test of proportionality of which it is part. 467 The Commission must define what is contrary to Union’s interests as well as demonstrate what hinders trade in the context of proceedings due to treaty infringement. 468 Article 106(2) sentence 2 TFEU contains stricter requirements regarding the intensity of distortion than either the general interstate clause in Article 101(1) and (2) TFEU or the fundamental freedoms do. However, regarding the judicial review of the compatibility of State aid with the internal market in the light of the current SGEI Framework, the condition laid down in sentence 2 of Article 106(2) TFEU is of greater importance. 125 In some exceptional circumstances, serious competition distortions in the internal market could remain unaddressed and the aid could affect trade to such an extent as would be contrary to the interest of the Union even if the conditions of the SGEI Framework are fulfilled. In such a case, the Commission wants to examine whether such distortions can be mitigated by requiring conditions or requesting commitments from the Member State.469 The Commission addresses in particular aid that has a significant negative effect on other Member States and the functioning of the internal market, e. g. denying undertakings in important sectors of the economy the possibility to achieve the scale of operations necessary to operate efficiently. 470 In that regard, the Commission links the assessment of State aid to the assessment of the entrustment act, e. g. regarding its scope and duration, to the public procurement rules, to the control of public monopolies according to Article 106(1) TFEU and to control of infrastructures to ensure competition. 126 The extensive assessment, which is intended in the SGEI Framework by the Commission, has a slightly different point of reference than the test as to whether aid as such is 124

465 GC Case T-17/02 Olsen v Commission [2005] ECR II-2031, mn. 239; GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 145. 466 Mu ¨ nchKommEUWettbR/Gundel Article 86 EC mn. 99 et seq.; Loewenheim/Meessen/Riesenkampff/ Ehricke Article 86 EC mn. 125; cf. the examination provided by Koenig/Ku¨hling ZHR 166(2002), 656, 674 et seq. 467 Cf. GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 306–309; Weiß EuR 2003, 165, 188. 468 ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 113. 469 SGEI Framework mn. 51–53. 470 SGEI Framework mn. 54.

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justified according to Article 106(2) TFEU. Entrustment and compensation can have different competitive effects; thus, may be evaluated separately. Nevertheless, a joint examination under Article 106(2) TFEU is justified as far as the compensation measure and entrustment act are linked. Indeed, Article 106(2) TFEU excludes only compensations granted to an undertaking, which is entrusted with the obligation to provide a certain SGEI. Furthermore, the competition distortion effects due to an entrustment may be increased through additional compensation measures. State aid, which contravene the general principles of EU law, such as the principle of equal treatment, cannot be declared by the Commission to be compatible with the internal market. 471 Yet, the Commission is not required to adopt a definitive position on the compat- 127 ibility of a measure with other provisions of Union law distinct from those coming under Articles 107 and 108 TFEU.472 Such an obligation of the Commission “would run counter to, first, the procedural rules and guarantees – which in part differ significantly and imply distinct legal consequences – specific to the procedures specially established for control of the application of those provisions and, second, the principle of autonomy of administrative procedures and remedies.”473 Furthermore, notwithstanding the discretion granted to the Commission in State aid cases, it cannot authorize Member States to deviate from provisions of Union law other than those which relate to the application of Article 107(1)TFEU. Therefore, the Commission cannot adopt a definitive position in a procedure relating to aid as to compliance with other provisions of Union law where such compliance must be controlled under a different procedural regime. 474 In addition, the application of Article 106(2) TFEU does not stipulate such a duty on part of the Commission. The criterion of an effect on trade to such an extent as would be contrary to the interests of the Union does not mean that the Commission is under an obligation to ascertain, definitively and comprehensively, whether the notified state measures infringe other provisions of Community law. Otherwise Article 106(2) TFEU would be deprived of any practical effect since the derogation could never be effective if its application were at the same required time to ensure full compliance with the rules from which it is supposed to derogate in general.475 However, the Commission is required to make an assessment by reference to the relevant provisions which are not covered by the law on aid only where certain aspects of the aid in issue are so closely linked to its object that any failure on their part to comply with those provisions would necessarily affect the compatibility of the aid with the internal market. 476 This follows from the principle developed by the ECJ, according to which State aid procedures under Article 108 TFEU should never lead to a result that is contrary to other specific provisions of the Treaties.477 According to this jurisprudence, in individual cases the modalities of aid may closely be tied to the entrustment, particularly if monopoly rights were granted simultaneously; hence, an examination of other Union provisions becomes necessary. Nevertheless, the Commission is not prevented in other instances from carrying out an examination of this kind. If an entrustment impairs the effective im471 ECJ Case C-390/06 Nuova Agricast [2008] ECR I-2577, paragraph 51).; GC Case T-137/10 CBI v Commission, mn. 95. 472 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 313 et seqq. 473 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 313. 474 ECJ Cases C-134/91 and C-135/91 Kerafina [1992] ECR I-5699, mn. 20; GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 315. 475 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 318. 476 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 314. 477 See ECJ Case C-204/97 Portugal v Commission [2001] ECR I-3175, mn. 41; ECJ Case C-156/98 Germany v Commission [2000] ECR I-6857, mn. 78; ECJ Case C-225/91 Matra [1993] ECR I-3203, mn. 41; ECJ Case 73/79 Commission v Italy [1980] ECR 1533, mn. 11.

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plementation and enforcement of EU legal provisions that ensure the proper functioning of the internal market and lead to distortions of competition, then the Commission examines whether the public service could have been equally well provided in a way that distorts competition less, e. g., by enforcing sector-specific EU legal provisions. 478 b) Scope and duration of entrustment. According to the SGEI Framework, distortions of competition may arise where the entrustment has a duration, which cannot be justified by reference to objective criteria such as the need to amortize non-transferable fixed assets. Furthermore, the scope of entrustment may also potentially lead to distortions of competition, e. g. where several tasks are bundled which are typically subject to separate entrustments and an allocation would mean no loss of social benefit and no additional costs in terms of efficiency and effectiveness in the provision of the services. In such a case, it is to be examined whether the same public service could be provided equally well in a less distortive manner, for instance by way of an entrustment of reduced duration or scope or through separate entrustments. 479 The ECJ has derived certain limitations on the duration and scope of service concessions from the fundamental freedoms, which are directly applicable in cases of entrustment through such a concession. Furthermore, the assessment of the effects on competition can be drawn on the case law regarding the evaluation of long-term contracts under Article 101 and 102 TFEU.480 Even though that case law could not readily be transferred without hesitation, given the particular nature of entrustments, it provides applicable tried and tested criteria for an analysis of the effects on competition. 129 A contract or any other legal act that grants exclusive rights is liable to impede or even prohibit the provision of those services by undertakings in other Member States; hence, it constitutes a restriction on freedom to provide services.481 Whilst a limitation of free movement of services can be justified by non-discriminatory overriding reasons in the public interest, the national measure in question must, however, be suitable for securing the attainment of the objective which it pursues and must not go beyond what is necessary in order to attain it.482 That proportionality test determines the maximum permissible duration of a concession. Within the scope of the Directive 2014/23/EU on the award of concession contracts any duration greater than five years shall not exceed the period in which the concessionaire could reasonably be expected to recoup the investment made for operating the works and services together with a return on invested capital under normal operating conditions, taking into account specific contractual objectives undertaken by the concessionaire in order to deliver requirements relating to, for example, quality or price for users.483 Thus, the permissible duration of a concession is to be determined by the provisions of procurement law and the fundamental freedoms.484 In this regard, both the Commission485 and the ECJ486 justifiably regard concessions of prolonged duration as 128

478

SGEI Framework mn. 59. SGEI Framework mn. 55. 480 ECJ Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461, 539 et seq., mn. 89 et seq.; ECJ Case C-61/86 Akzo v Commission [1991] ECR I-3359, 3473, mn. 149; ECJ Case C-393/92 Almelo [1994] ECR I-1477, mn. 44; GC Case T-151/01 Der Gru¨ne Punkt [2007] ECR II-1607, mn. 122; GC Case T-7/93 Langnese-Iglo v Commission [1995] ECR II-1533, mn. 106; Markert, EuZW 2000, 427. 481 ECJ Case C-323/03 Commission v Spain [2006] ECR I-2161, mn. 44. 482 ECJ Case C-323/03 Commission v Spain [2006] ECR I-2161, mn. 45. 483 Article 18 of the Directive 2007/18/EC. 484 Different opinion Siegel, ZfBR 2006, 554 et seq. and Knauff, NZBau 2006, 334 et seq. According to them, in both Article 9(7) of the Directive 2004/18/EC and Section § 3(3) sentence 3 VgV (German Tender Regulation) permanent contracts are permitted regarding the calculation of the value of the tender. 485 See the Green paper on public-private partnerships COM(2004) 327, mn. 46. 486 ECJ Case C-454/06 pressetext [2008] ECR I-4401, mn. 73. 479

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dubious in relation to competition. In a case concerning a Spanish administrative concession lasting 20 years and with the option of being prolonged by a further 10 years that granted a single undertaking with the exclusive right to offer particular maritime transport services for the carriage of passengers, the ECJ considered the obstruction of market entry of other undertakings during the period of concession as a direct infringement of the freedom of services. Such an infringement may only be justified in exceptional circumstances, if there are compelling reasons of public interest, which require such a prolonged duration. However, might distort competition only to the duration of a concession as far as it is necessary to ensure both the amortization of an investment and an appropriate return on the invested capital.487 The Member States carry the burden of proof in this regard. The same recitals are applicable to other forms of entrustment. c) Violation of primary and secondary legislation on procurement principles. A 130 serious distortion of competition can occur in particular if an undertaking has been entrusted with the task of performing a SGEI without a competitive selection procedure in a non-reserved market where very similar services are already being provided or can be expected to be provided in the near future in the absence of the SGEI.488 Assigning an undertaking to perform a particular service may be subject to procurement law. In the past, the allocation of service concessions was exempted from the secondary European procurement law.489 Nevertheless, the ECJ developed an obligation to perform a competitive selection procedure similar to the one based on the Directives on the coordination of procedures for the award of public contracts. That obligation follows from the basic rules of the Treaties in general and, in particular, the prohibition of discrimination on the grounds of nationality (Article 18 TFEU).490 Under the new Directive 2014/23/EU on the award of concession contracts which has to be implemented by the Member States by 18 April 2016 there is only little room for the direct application of the primary law. That Directive establishes rules on the procedures for procurement by contracting authorities and contracting entities by means of a concession, whose value is estimated to be not less than the threshold laid down in Article 8 of the Directive. Until the implementation of the Directive as well as outside its scope the award of a concession still has to comply directly with Treaty provisions specifically applicable to public service concessions, including inter alia Article 49 TFEU (freedom of establishment) and Article 56 TFEU (freedom to provide services) which, according to the ECJ’s case law, are a specific expression of the principle of equal treatment.491 The same can be said for the prohibition of discrimination on the grounds of nationality.492 The principle of equal treatment requires equality of opportunity to be accorded to all tenderers when 487 ECJ Case C-323/03 Commission v Spain [2006] ECR I-2161, mn. 44 et seq.; EU-Commission, Communication on Concessions, OJ 2000 Nr. C 121/2, 8. Farther reaching is the case law of the ECJ which became outdated, ECJ Case C-76/97 To¨gel [1998] ECR I-5357, mn. 54; This judgment presented the view of the ECJ that the public entity was not under an obligation to fix the duration of the contract which has been concluded for an unlimited duration before the directives came into force. 488 SGEI Framework mn. 56. 489 Cf. Article 17 of the Directive 2004/18/EC; Sections 99, 100 GWB (the German General Competition Act); ECJ Case C-324/98 Telaustria and Telefonadress [2000] ECR 2000, I-10745, mn. 57. The Commission has the intention to fill this gap by a piece of legislation (Communication of the Commission to the European Parliament et al. on public-private partnerships, COM(2005) 569, p. 9 et seq.). 490 Well-settled case law: cf. ECJ Case C-91/08 Wall [2010] ECR I-2815, mn. 33 –; cf. already ECJ Case C-324/98 Telaustria and Telefonadress [2000] ECR I-10745, mn. 60; ECJ Case C-231/03 Coname [2005] ECR I-7287, mn. 16 et seq. 491 Cf. ECJ Case 3/88 Commission v Italy [1989] ECR 4035, mn. 8; ECJ Case 22/80 Boussac Saint-Fre `res [1980] ECR 3427. 492 Cf. ECJ Case 810/79 U ¨ berscha¨r [1980] ECR 2747, mn. 16.

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131–132

Services of General Economic Interest (SGEI)

formulating their tenders, regardless of their nationality. 493 This principle can be applied to public service concessions, even if there is no discrimination on the grounds of nationality. The principle of equal treatment and the prohibition of discrimination on grounds of nationality render transparency a mandatory requirement, to enable the public body, which has been awarded these concessions to ascertain whether any provision has been infringed.494 For this purpose, a sufficient degree of publicity is to be guaranteed for the benefit of any potential tenderers and which opens up the service concession to competition and enables an examination of whether the procurement procedures have been carried out impartially. 495 With regards to the principles of equal treatment and transparency, the Member States possess a certain discretion in formulating the measures which contracting authorities have to observe as part of every procedure to award a contract, since every Member State itself can best judge, in light of its particular historical, legal, economic or social background, which situations that benefit certain types of conduct may lead to compliance problems with the above mentioned principles.496 131 It remains necessary to differentiate between service concessions and service contracts. The concept of service concessions has its roots in EU law and was substantiated by the ECJ with the particular objective of narrowing the scope of the procurement law guidelines.497 Whether a contract qualifies as a public service contract which is subject to a compulsory tendering procedure or as service concession which is not subject to the formalities of procurement law is therefore not to determined according to the law of the individual Member States; rather it is to be determined exclusively according to Union law.498 According to the ECJ’s case law service concessions are contracts, which only differ from public service contracts as far as the consideration provided for the performance of the relevant services consists solely of the right to use this service or consists of such a right in addition to payment of a certain price. As such, it is a decisive factor whether the service in question is remunerated by a third party using this service, irrespective of whether the economic risk associated with such remuneration has been reduced by legislative measures.499 However, where the economic risk is borne by the public sector alone, e. g. if a Member State compensates all costs incurred by the performance of a SGEI, the entrustment act has to be qualified as a service contract due to lack of economic risk. 500 In this case, a public procurement procedure based on the secondary law is mandatory. Whether any residual risk, especially regarding flat rates of compensation, is sufficient to enable the acceptance of a concession, is to be determined on a case-by-case basis. 132 A complete absence of any kind of invitation to tender in the case of awarding a public service concession is incompatible with both the requirements of Article 49 TFEU and Article 56 TFEU, as well as with the principles of equal treatment, nondiscrimination and transparency. In theory, the absence of any competitive selection procedure could be justified by Article 106(2) TFEU. This question has to be distin493

Cf. ECJ Case C-87/94 Commission v Belgium [1996] ECR I-2043, mn. 33, 54. ECJ Case C-458/03 Parking Brixen [2005] ECR I-8585, mn. 46 et seq.; BGH WuW/E DE-R 1681, 1693 – DB Regio/u¨stra. 495 Cf. ECJ Case C-324/98 Telaustria and Telefonadress [2000] ECR I-10745, mn. 61 et seq.; ECJ Case C-324/07 Coditel Brabant [2008] ECR I-8457, mn. 25. 496 ECJ Case C-376/08 Serrantoni [2009] ECR I-12169, mn. 31 et seq.; ECJ Case C-213/07 Michaniki [2008] ECR I-9999, mn. 44, 55 et seq. 497 For more details see Jennert, NZBau 2005, 131 et seq. 498 ECJ Case C-382/05 Commission v Italy [2007] ECR I-6657, mn. 30 et seq. 499 ECJ Case C-206/08 WAZV Gotha v Eurawasser [2009] ECR I-8377, mn. 71–78; ECJ Case C-458/03 Parking Brixen [2005] ECR I-8585, mn. 40; ECJ Case C-324/98 Telaustria and Telefonadress [2000] ECR I-10745, mn. 48 et. seq.; see Article 5 No. 1 Directive 2014/23/EU. 500 ECJ Case C-206/08 WAZV Gotha v Eurawasser [2009] ECR I-8377, mn. 68. 494

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guished from the justification of the compensation measure. However, a justification pursuant Article 106(2) TFEU is only to be considered, if the application of the fundamental freedoms or competition rules, which include Article 106(1) TFEU, is incompatible with providing the relevant service in the public interest. 501 Because a tendering procedure neither contradicts the public task nor impedes its subsequent implementation, a justification of the infringement of the fundamental freedoms, in their function as primary law, or of Article 106(1) TFEU due to the award of concessions is only to be considered in exceptional circumstances. Therefore, the requirements applicable to the award of concessions are essentially the same as those applicable to procurement contracts in accordance with procurement Directives that in turn represent the principles of primary Union law.502 The transparency obligation under primary Union law is engaged once an undertaking, based in a Member State other than the one in which the relevant service concession is granted, can be deemed interested in the concession. 503 According to the ECJ, the fact that violating this transparency obligation could at least potentially constitute discrimination against undertakings from other Member States is sufficient.504 In review proceedings, it is therefore not necessary for the claimant to show an undertaking has actually been discriminated against. Even if a Member State grants a concession to a legal entity governed by private law, 133 legally distinct from the public body itself, an invitation to tender will no longer be necessary, if the relevant public body is able to control that legal person in the same way that it is able to control its own office and the legal person carries out its activities mainly for the benefit of that State institution which holds most of the legal person’s shares (so-called ‘in-house-business’).505 This does not only apply to public contracts for (the supply of) goods and services as well as to public work contracts506, but also – due to being directly derived from primary Union law – to the award of concessions. 507 Whether a public body is able to exercise the same control it would over its own office is to be determined according to the facts of the case.508 An in-house-privilege will only be possible in company forms which are able to ensure that no private individual could directly or indirectly benefit from the concession award. Should a private individual hold shares in the undertaking awarded the concession, the in-house-privilege is not be engaged from the outset.509 A further requirement is that the person awarded the concession exercises its activities mainly for the benefit of the client. 510 501 ECJ Case C-41/90 Ho ¨ fner and Elser [1991] ECR I-1979, mn. 24; ECJ Case 155/73 Sacchi [1974] ECR 409, mn. 15. 502 ECJ Case C-538/07 Assitur [2009] ECR I-4219, mn. 25; ECJ Case C-412/04 Commission v Italy [2008] ECR I-619, mn. 2; cf. Knauff, EuZW 2005, 731 et seq.; Jennert, NZBau 2005, 623, 625; Endler, NZBau 2002, 125, 127. 503 Cf. ECJ Case C-231/03 Coname [2005] ECR I- 7287, mn. 17; cf. also ECJ Case C-507/03 Commission v Ireland [2007] ECR I-9777, mn. 29; ECJ Case C-412/04 Commission v Italy [2008] ECR I-619, mn. 66. 504 ECJ Case C-91/08 Wall [2010] ECR I-2815, mn. 35. 505 Cf. ECJ Case C-107/98 Teckal [1999] ECR I-8121, mn. 50; ECJ Case C-29/04 Commission v Austria [2005] ECR I-9705, mn. 34; ECJ Case C-26/03 City of Halle and RPL Lochau [2005] ECR I-1, mn. 49; BGH, VergabeR 2001, 286; OLG Du¨sseldorf, WuW/E Verg 1005; BayObLG, NZBau 2002, 397; OLG Brandenburg, NZBau 2003, 229 = VergabeR 2003, 168; OLG Naumburg, NZBau 2004, 62; Faber, DVBl. 2001, 28; Dreher, NZBau 2001, 360; Mu¨ller-Kabisch/Manka, VersorgW 2005, 149 et seq. 506 Cf. ECJ Case C-458/03 Parking Brixen [2005] ECR I-8585, mn. 59. 507 ECJ Case C-458/03 Parking Brixen [2005] ECR I-8585, mn. 61; ECJ Case C-324/07 Coditel Brabant [2008] ECR I-8457, mn. 26. 508 ECJ Case C-29/04 Commission v Austria [2005] ECR I-9705, mn. 38 et seq. 509 For more details see Sa ¨ cker/Wolf, in: Mu¨nchKommBeihVgR, § 97 GWB mn. 57 et seq. with further references. 510 Cf. ECJ Case C-340/04 Carbotermo [2006] ECR I-4137, mn. 59 et seq.; ECJ Case C-458/03 Parking Brixen [2005] ECR I-8585, mn. 62.

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In relation to public undertakings, Member States are not allowed, under Article 106(1) TFEU, to adopt or retain measures, which conflict with the Treaties – especially any which may conflict with Article 18 TFEU, which is a cornerstone of Union law511 – as is the case with a direct award of concessions which does not fulfil the in-house-criteria.512 Article 106(1) TFEU strengthens the fundamental freedoms because Member States have an incentive to impermissibly privilege their own public undertakings. A direct award of concession, which dispenses of the need for a transparent competitive procedure thereby constitutes a direct breach of Article 106(1) TFEU, 513 if a public undertaking is privileged by such an award. For the purposes of Article 106(1) TFEU, a public undertaking is defined as any undertaking which public authorities are able to influence directly or indirectly due to ownership, financial interests, statutes and other provisions on the undertaking’s activity.514 If the relevant public authority, upon entering into the contract of concession, is able to exert controlling influence on the undertaking’s economic activity as a partner, then that undertaking is also to be regarded as a public undertaking.515 Should further contracts of concession be concluded with a public undertaking which has already benefited from a concession contract and which is not controlled by public authorities without any prior competitive tendering procedure, such conduct is also covered by Article 106(1) TFEU. The undertaking already benefited by a previously awarded concession is also granted special and exclusive rights for the purposes of Article 106(1) TFEU. According to the ECJ’s case law, directly granting a concession to an undertaking for the purposes of Article 106(1) TFEU constitutes an economic advantage.516 Granting such an economic advantage leads to discrimination of those economic actors based in a particular Member State that would like to offer goods or services to customers based in other Member States and whose interests are to be protected by removing any obstacles to the free movement of goods and services through coordinating the public procurement procedures at Union level.517 Thus, directly granting a concession causes the particular risk of a breach of Article 18 TFEU 518 upon which the ECJ has mainly based its primary law requirement of a transparent award of concessions.519 To this extent, public bodies are under an obligation to observe the basic rules of the Treaties in general and, in particular, the prohibition of discrimination on grounds of 511 The ECJ also calls Article 12 TEC a principle of Community law, cf. ECJ Case 175/78 Saunders [1979] ECR 1129, mn. 8 et seq.; ECJ Case 8/77 Sagulo [1977] ECR 1495, mn. 11; ECJ Case 1/78 Kenny [1978] ECR 1489, mn. 8 et seq. The ECJ also calls Article 12 TEC a principle of Community law, cf. ECJ Case 175/78 Saunders [1979] ECR 1129, mn. 8 et seq.; ECJ Case 8/77 Sagulo [1977] ECR 1495, mn. 11; ECJ Case 1/78 Kenny [1978] ECR 1489, mn. 8 et seq. 512 Expressively ECJ Case C-220/06 Asociacio ´ n Profesional de Empresas de Reparto y Manipulado de Correspondencia/Administracio´n General del Estado [2007] ECR I-1217, mn. 77; ditto Jung, in: Calliess/ Ruffert, EGV/EGV-Kommentar, 3rd edition. 2007, Article 86 EGV mn. 22. 513 Previously Article 86 TEC and 90 TEC. 514 Cf. Article 2(1)(b) of the Directive 2000/52/EC (Transparency Directive); cf. Gandel, in: Mu ¨ nchKommEUWettbR, Article 86 EG mn. 40 et seq. 515 Cf. also ECJ Case 118/85 Commission v Italy [1987] ECR 2599, mn. 13. 516 ECJ Case C-29/04 Commission v Austria [2005] ECR I-9705, mn. 48; ECJ Case C-26/03 City of Halle and RPL Lochau [2005] ECR I-1, mn. 51. 517 ECJ Case C-380/98 University of Cambridge [2000] ECR I-8035, mn. 16; ECJ Case C-237/99 Commission v France [2001] ECR I-939, mn. 41; ECJ Case C-470/99 Universale-Bau [2002] ECR I11617, mn. 51. 518 ECJ Cases C-20/01 and C-28/01 Commission v Germany [2003] ECR I-3609, mn. 63; ECJ Case C220/06 Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia/Administracio´ n General del Estado [2007] ECR I-1217, mn. 77. 519 Cf. Endler, NZBau 2002, 125, 126 et seq. Previously, the Communication of the Commission on the interpretation of concessions in community law, OJ EC 2000 Nr. C 121/2, 3.

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nationality (Article 18 TFEU),520 as well as Article 49 TFEU (freedom of establishment) and Article 56 TFEU (freedom to provide services) – provisions which, following the ECJ’s case law521, are a specific expression of the principle of equal treatment, 522 as is Article 18 TFEU.523 Consequently, a non-transparent award of a concession, which is incompatible with both Article 18 TFEU and the fundamental freedoms and that is granted to a public undertaking or to one upon which special rights have been conferred, is also a breach of Article 106(1) TFEU. d) State monopolies. Serious competition distortions may follow where the entrust- 135 ment of the service obligation is connected with special or exclusive rights. In this respect, the Commission has deemed a review pursuant to Article 106(1) TFEU possible.524 The granting of a monopoly right may breach Articles 106(1) and 102 TFEU. According to well-established case-law, however, the mere creation of a dominant position through the grant of special or exclusive rights within the meaning of Article 106(1) TFEU is not in itself incompatible with Article 102 TFEU. However, a Member State will be in breach of the prohibitions laid down by those two provisions if the undertaking in question, merely by exercising the exclusive rights conferred upon it, is led to abuse its dominant position or where such rights are liable to create a situation in which that undertaking is led to commit such abuses.525 Such an abuse, contrary to Article 106(1) TFEU, is (inter alia) present if a Member State has granted an exclusive right to carry out certain activities whilst the undertaking is evidently incapable of satisfying the demand on the market for these services. 526 In this context, the Commission also examines whether the distortion of competition is a result of the fact that the exclusive right entails advantages that could not be properly assessed, quantified or apprehended according to the methodologies to calculate the net costs of the SGEI laid down in the SGEI Framework, e. g. an artificial partitioning of neighbouring markets. 527 e) Infrastructure facilities. Just as a legal position acquired through a right granted by 136 the State can lead to market monopolization, so can the ownership of infrastructure facilities. This is especially applicable to those institutions, which fulfil the requirements of an essential facility, particularly in the case of natural monopolies. A necessary connection to the State aid procedure is given, if the aid enables the recipient to finance the creation or use of an infrastructure that is not replicable and enables it to foreclose the market where the SGEI is provided or related relevant markets. In such cases, the Commission has considered it suitable to grant competitors fair and non-discriminating access to the respective infrastructure under appropriate conditions. 528 The same obligation may itself be derived from Article 102 TFEU. The Commission’s approach does however have the 520 Cf. ECJ Case C-324/98 Telaustria and Telefonadress [2000] ECR I-10745, mn. 60; ECJ Case C-231/ 03 Coname [2005] ECR I-7287, mn. 16 et seq. 521 Cf. ECJ Case 3/88 Commission v Italy [1989] ECR 4035, mn. 8; ECJ Case 22/80 Boussac Saint-Fre `res [1980] ECR 3427. 522 In this respect, the Commission has enacted a Communication on the interpretation regarding the Community law, which applies to the tendering procedures, which are not or only partly covered by the relevant directives. (OJ EU 2006 No. C 179/2). 523 Cf. ECJ Case 810/79 U ¨ berscha¨r [1980] ECR 2747, mn. 16. 524 SGEI Framework mn. 57. 525 ECJ Case C-437/09 AG2R [2011] ECR I-973, mn. 68; ECJ Case C-41/90 Ho ¨ fner and Elser v Macrotron [1991] ECR I-1979, mn. 29; ECJ Case C-67/96 Albany [1999] ECR I-5751, mn. 93; ECJ Case 311/84 CBEM [1985] ECR 3261, mn. 17. 526 ECJ Case C-437/09 AG2R [2011] ECR I-973, mn. 69; ECJ Case C-41/90 Ho ¨ fner and Elser v Macrotron [1991] ECR I-1979, mn. 31; ECJ Case C-67/96 Albany [1999] ECR I-5751, mn. 95. 527 SGEI Framework mn. 57. 528 SGEI Framework mn. 58.

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advantage of avoiding proceedings under Regulation (EC) No. 1/2003. Instead, the Commission can use State aid measures to guarantee market access for third parties.

7. Further requirements of the SGEI framework The SGEI framework does not only set out stricter requirements for the individual terms of Article 106(2) TFEU to which the Commission has bound its discretionary power. Furthermore, it sets out some general requirements for Member States, which shall enable the Commission to monitor compliance with the SGEI framework’s conditions. Should a Member State not fulfil these requirements concerning a particular SGEI, the fact that the Commission has bound itself will only be relevant to a limited extent. However, as far as the conditions of the SGEI framework adhere to the limitations laid down by Union law, any State aid complying with these conditions may be covered by an exemption under Article 106(2) TFEU. The Union framework does not possibly have any restrictive effect. Therefore, the formal requirements are only to be regarded as a manifestation of the Member States’ obligation to cooperate with the Commission in accordance with the principle of mutual loyalty under Article 4(3) TEU529 and of the burden of proof, which falls upon the Member States pursuant Article 106(2) TFEU (see para 141 et seq.).530 If the conditions of Article 106(2) TFEU are met, an exemption has to be granted even if the conditions of the SGEI Framework are not met. 138 The Commission requires a high degree of transparency to facilitate its assessment and monitoring of State aid. As a result, Member States are under an obligation to publish the following types of information online or in another suitable manner for all compensatory payments falling within the scope of such a communication: 531 – the results of a public consultation or of another adequate means of assessing the demand for a public service;532 – subject-matter and duration of the duties for the performance of public services; – the relevant undertaking and, if necessary, the relevant area; – the annual amount of State aid to be granted to the relevant undertaking. 139 The Member States have to submit a report to the Commission every two years on their compliance with this communication. The first report had to be submitted by 30 th June 2014. These reports are to consist of an outline of the application of the relevant communication to the different services and the following information: 533 – a description of how the principles of this communication have been applied to the services within their area, including in-house activities; – the total amount of State aid granted to the undertakings which fall within the scope of this communication, broken down according to economic sector of the beneficiary; – information as to whether the application of the principles of this communication has led to any difficulties for certain types of services or has given rise to complaints by third parties; and 137

529 Cf. ECJ Case C-457/00 Belgium v Commission [2003] ECR I-6931, mn. 99; ECJ Case C-400/99 Italy v Commission [2005] ECR I-3657, mn. 48; GC Case T-354/99 Kuwait Petroleum (Nederland) v Commission [2006] ECR II-1475, mn. 67. 530 ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 94; GC Case T-157/01 Danske Busvognmænd v Commission [2004] ECR II-917, mn. 96; GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 183. 531 SGEI Framework mn. 60. 532 The necessity to delineate the requirements has been dropped. Its results do not have to be published anymore, if the aid meets the conditions set by Article 2(1) SGEI Decision. (SGEI Framework mn. 61.). 533 SGEI Framework mn. 62.

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– other information which has been requested by the Commission on the application of the principles of this communication and which is to be explained in more detail before the deadline for the report. Pursuant Article 21 of Regulation (EC) No. 659/1999 and Article 5–7 of Regulation 140 (EC) No. 794/2004, the Member States have to submit annual reports to the Commission on the grant of State aid, due to the State aid schemes, which have been awarded as a consequence of a Commission decision based on the SGEI framework. These reports will be published on the Commission’s website.534 Should a Member State not comply with its reporting obligation despite a corresponding written reminder, the Commission is able to act, in relation to State aid scheme, under Article 21 (2) and Article 18 of the Regulation (EC) No 659/1999 by suggesting appropriate measures, the non-compliance of which can once initiate a formal investigation procedure under Article 19(2) and Article 4(4) of the Regulation (EC) No 659/1999.

IV. Principles of procedure (burden of proof and intensity of examination) The Member State must, in accordance with the loyal co-operation obligations 141 pursuant Article 4(3) TEU, work with the Commission by providing information that will allow it to assess whether the State’s measure constitutes aid or not. 535 A Member State must show that the conditions for the application of Article 106(2) of the TFEU are met.536 Yet, it has a wide discretion as to what it regards as a service of general economic interest (for details see para. 71 et seq). If it relies on the existence and the need to protect a public service role, the Member State has to make sure that the service meets the minimum standards developed by the courts which apply to all public service tasks in accordance with the TFEU. Furthermore, the Member State has to prove that these minimum requirements are met, including in particular the existence of a State’s measure which transfers a task of general economic interest to the undertakings concerned, as well as the universal and compulsory nature of the task. In addition, the Member State must indicate the reasons as to why it considers that the service in question deserves to be classified as a service of general economic interest due to its special nature and why the service can be distinguished from other economic activities.537 Without such information, an assessment by the Union’s institutions, both in terms of the relevance of the Altmark criteria, as well as Article 106(2) TFEU and whether the Member State, in the exercise of its discretion, has made a manifest error, will not be possible.538 The Member State must also prove that the exemption is necessary within the scope of what is asserted. However, the Member State does not have to prove positively that no other conceivable measure, which by definition would be hypothetical, could enable those tasks to be performed under the same or even better 534

SGEI Framework mn. 63 et seq. Cf. regarding the obligation of cooperation ECJ Case C-457/00 Belgium v Commission [2003] ECR I6931, mn. 99; ECJ Case C-400/99 Italy v Commission [2005] ECR I-3657, mn. 48; GC Case T-354/99 Kuwait Petroleum (Nederland) v Commission [2006] ECR II-1475, mn. 67. 536 ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 94; GC Case T-157/01 Danske Busvognmænd v Commission [2004] ECR II-917, mn. 96; GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 183. 537 Cf. ECJ Case C-179/90 Merci convenzionali porto di Genova/Siderurgica Gabrielli [1991] ECR I5889, mn. 27; ECJ Cases C-34/01 to C-38/01 Enirisorse/Ministero delle Finanze [2003] ECR I-14243, mn. 33 et seq. 538 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 172. 535

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conditions. That question is up to the Commission.539 It is also up to the Commission, within the context of infringement proceedings, to define the interests of the Union, according to which the development of trade pursuant Article 106(2) TFEU is to be measured.540 142 The Commission shall, in the interest of the proper application of State aid rules, complete a careful and impartial review.541 This obligation corresponds to the right of good administration, which is part of the general principles of law common to the constitutional traditions of the Member States.542 Thus, the Commission must examine all facts presented by the Member States and consider them carefully. 543 In order to comply with this obligation, it has to consider the terms of the payment and the functioning of the calculation and supervision systems in case of payments granted to an undertaking entrusted with services of general interest. It cannot simply rely upon that the facts have not been presented in detail by the Member State, if it has the necessary information or if it could easily be obtained. If the Member State has failed to show that all requirements have been met, or if it has not observed them, this may constitute a manifest error of assessment, which the Commission has to challenge in order not to commit an apparent error itself.544 Otherwise, there would be a substantial lack of reasoning.545 Both, the assessment of the Altmark criteria as well as the application of Article 106(2) TFEU can be determined after a preliminary examination of State aid, if the Member State provides the necessary information about the costs and payment modalities in time.546

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This Decision sets out the conditions under which State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest is compatible with the internal market and exempt from the requirement of notification laid down in Article 108(3) of the Treaty.

According to Article 106(3) TFEU, the Commission has the power to determine the content and scope of the exemption pursuant Article 106(2) TFEU, and if necessary to adopt rules, to ensure the application of the provision. The Commission exercised its power through the decision 2012/21/EU (SGEI Decision) which defines under which conditions compensation payments granted to undertakings entrusted with the operation of SGEI are compatible with Article 106(2) TFEU, and – furthermore – are exempt from the requirement of notification laid down in Article 108(3) TFEU. 547 The Decision 539

ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 101 et seq. ECJ Case C-159/94 Commission v France [1997] ECR I-5815, mn. 113. 541 Cf. ECJ Case C-367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, mn. 60; GC Case T-54/99 max.mobil v Commission [2002] ECR II-313, mn. 49 (with regards to this not contested by the ECJ Case C-141/02 P Commission/max.mobil [2005] ECR I-1283); GC Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003] ECR II-435, mn. 167. 542 GC Cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale and Land NordrheinWestfalen v Commission [2003] ECR II-435, mn. 167. 543 GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 183. 544 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 172. 545 Cf. GC Cases T-309/04 et al. TV 2/Denmark v Commission [2008] ECR II-2935, mn. 201 et seq. 546 GC Case T-289/03 BUPA v Commission [2008] ECR II-81, mn. 327–333. 547 Recital 7 SGEI Decision. 540

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replaces the former Decision 2005/842/EC from 2005 (see Article 11). 548 Comparing the different language versions, the German translation sometimes sounds ambiguous. Due to the need for a uniform interpretation of EU regulations, the text of a provision must not to be considered in isolation but must be interpreted and applied in the light of the versions existing in the other official languages.549 Nevertheless, the English and the French versions should be considered in particular. The SGEI Decision is applicable only if the State measure is covered by Article 107(1) 144 TFEU, i. e., constitutes State aid pursuant Article 93, 107 and 108 TFEU and the four Altmark conditions are not met.550 The Commission’s view on the applicable principles on the application of the SGEI Decision follow from the preceding recitals of the SGEI Decision and from a published staff working paper, which addresses frequently asked questions regarding both the SGEI Decision and the SGEI Framework.551 There are only few decisions regarding the application of the SGEI Decision due to its direct applicability.552 Article 2 Scope

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1. This Decision applies to State aid in the form of public service compensation, granted to undertakings entrusted with the operation of services of general economic interest as referred to in Article 106(2) of the Treaty, which falls within one of the following categories: (a) compensation not exceeding an annual amount of EUR 15 million for the provision of services of general economic interest in areas other than transport and transport infrastructure; where the amount of compensation varies over the duration of the entrustment, the annual amount shall be calculated as average of the annual amounts of compensation expected to be made over the entrustment period; (b) compensation for the provision of services of general economic interest by hospitals providing medical care, including, where applicable, emergency services; the pursuit of ancillary activities directly related to the main activities, notably in the field of research, does not, however, prevent the application of this paragraph; (c) compensation for the provision of services of general economic interest meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups; (d) compensation for the provision of services of general economic interest as regards air or maritime links to islands on which the average annual traffic during the 2 financial years preceding that in which the service of general economic interest was assigned does not exceed 300 000 passengers; (e) compensation for the provision of services of general economic interest as regards airports and ports for which the average annual traffic during the 2 financial years preceding that in which the service of general economic interest was assigned does not exceed 200 000 passengers, in the case of airports, and 300 000 passengers, in the case of ports. 2. This Decision only applies where the period for which the undertaking is entrusted with the operation of the service of general economic interest does not exceed 10 years. Where the period of entrustment exceeds 10 years, this Decision only applies to the extent that a significant investment 548 See the Guidelines issued by the Ministry for Economic Affairs and Energy of the State of North Rhine-Westphalia. “EG-Beihilfenkonforme Finanzierung von kommunalen Leistungen der Daseinsvorsorge” (Financing a local services of public interest in line with the EC-State Aid regime) of May 2008(in the following: Guidelines NRW); cf. also “Handreichung zum Monti-Paket” (Handout regarding the Monti-Package), supported by the Working Group III of the German Conference of the Ministers of the Internal Affairs on 19 July 2006(in the following handout WG III). 549 ECJ Case 29/69 Stauder [1969] ECR 419, mn. 3; ECJ Case C-296/95 EMU Tabac et al. [1998] ECR I1605, mn. 36; ECJ Case C-174/05 Zuid-Hollandse Milieufederatie und Natuur en Milieu [2006] ECR I-2443, mn. 20; regarding Article 20 of the Directive 2003/54/EC, ECJ Case C-239/07 Sabatauskas [2008] ECR I7523, mn. 38; for more details see Sa¨cker, in: Mu¨nchKommBGB, 5th edition, volume 1, 2006, mn. 137 et seq. 550 Recital 5; GC Case T-231/06 NOS v Commission [2010] ECR II-5993, mn. 154. 551 Staff working paper of 20 November 2007, SEC(2007)1516 final (in the following: working paper SPEI). 552 Cf. Commission decision of 2 July 2009, State Aid NN 8/2009, mn. 69–72 – Nature conservation areas (Germany); EFTA-Surveillance Authority decision of 3 May 2007, No. 155/07/KOL, OJ 2008 No. L 249/35–46 – Norwegian Act on compensation for value added tax (VAT) (Norway).

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is required from the service provider that needs to be amortised over a longer period in accordance with generally accepted accounting principles. 3. If during the duration of the entrustment the conditions for the application of this Decision cease to be met, the aid shall be notified in accordance with Article 108(3) of the Treaty. 4. In the field of air and maritime transport, this Decision only applies to State aid in the form of public service compensation, granted to undertakings entrusted with the operation of services of general economic interest as referred to in Article 106(2) of the Treaty, which complies with Regulation (EC) No 1008/2008 and, respectively, Regulation (EEC) No 3577/92 where applicable. 5. This Decision does not apply to State aid in the form of public service compensation granted to undertakings in the field of land transport.

Article 2 defines the scope of the decision and for that establishes a horizontal general requirement on the one hand and some sectoral provisions on the other hand.553 Special rules apply for compensation in the field of hospitals, of particular social needs, air and sea links to islands, airports and ports and air and maritime transport. The decision does not apply on State aid in the field of land transport at all. On the other hand, unlike the SGEI Framework, the SGEI Decision covers the broadcasting sector. 554 Outside the scope of the sectoral provisions laid down in Article 2(1) (b-a) and Article 2(4–5) the compensation must not exceed an annual amount of EUR 15 million (para 1 lit. a). The decision assumes that limited amounts of compensation do not affect the development of trade and competition to such an extent as would be contrary to the interests of the European Union.555 However, the permissible amount of the annual compensation to which the SGEI Decision is applicable was reduced from EUR 30 million to EUR 15 million. On the other hand, unlike the exemption decision from 2005, it is no longer required that the recipient of the compensation is a low revenue undertaking.556 The annual amount shall be calculated as average of the annual amounts of compensation expected to be made over the entrustment period. Whereas the 2005 SGEI Decision also provided for the alternative to take into account the average compensation over a five-year period, this is no longer stipulated by the current Decision. 146 The period for which the undertaking is entrusted with the operation of the SGEI must not exceed 10 years. This threshold grounds on the idea, that the extent to which a specific compensation measure affects trade and competition, does not only depend on the average amount of annual compensation and the industry concerned, but on the duration of the entrustment as well.557 The decision is applicable on entrustments longer than 10 years only as far as a significant investment is required from the service provider that needs to be amortised over a longer period in accordance with generally accepted accounting principles. That provision shifts the reference point of the legal analysis. Entrustment act and compensation are different State measures. An entrustment without compensation constitutes only under particular conditions aid at all. The provision is therefore comparable to examination pursuant Article 106(2) sentence 2 TFEU according to which the Commission additionally reviews the whole measures’ compat553 The decision also applies to existing sector-specific principles of application developed by the Commission: cf. regarding the agricultural sector: Community Guidelines for State Aid in the agriculture and forestry sector 2007 to 2013, OJ 2006 No. C 319/1 mn. 149; cf. regarding liability obligations and guarantees: Communication of the Commission on the application of Article 87 and 88 TEC on State Aid in form of guarantees, OJ 2008 No. C 155/10, 14 specially footnote. 8. 554 Cf. Communication on broadcasting, OJ 2009 No. C 257/1 mn. 19. 555 Recital 9 SGEI Decision. 556 Article 2(2)(a) SGEI Decision 2005 provided for a turn-over limit of less than EUR 100 million (including all activities) in total before taxes for the two previous years before the SGEI was carried out. Thereby, activities were taken into account which were not linked to a SGEI and which will not count towards the calculation of compensation payments pursuant Article 5(2) (b) SGEI Decision 2005 and which will have to be separated by means of separate accounts pursuant Article 5(5) SGEI Decision 2005. 557 Recital 12 SGEI Decision.

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ibility with Article 106(2) TFEU based on the SGEI Framework. Article 2(2) sentence 2 sets out several condition that must be met: 1) the investment has to be significant; 2) the investment must be required by the service provider; 3) the investment needs to be amortized over a longer period. Taking into account the objectives and scheme of the SGEI Decision, an investment is required only, if the SGEI could not be provided in accordance with the requirements of the act of entrustment. To determine, if an investment is significant, absolute numbers should not be used, since, depending on the undertaking’s size and sector and activities concerned, completely different economic condition are present. Nevertheless, this condition could be useful to avoid crosssubsidization, in particular if the investment affects shared facilities, which may be used for economic services other than the SGEI. Investments in facilities, which are used predominantly for other activities, are not significant with regard to the provision of the SGEI. Finally, generally accepted accounting principles are the same mentioned for the application of Article 106(2) TFEU. Regarding hospitals558 and services for a social purpose such as the social housing 147 scheme559, Article 2(1)(b) and (c) takes into account the fact that the distortion of competition in these sectors is not necessarily directly related to the amount of compensation. Due to the fact that social services may require an amount of aid beyond the threshold in this decision to compensate for the public service costs and the general interest in nevertheless benefiting these social services, 560 aid in these sectors is therefore generally exempt from the notification, even if the compensation exceeds the amount of EUR 15 million.561 Regarding the legislative purpose of Article 2(1)(b) SGEI Decision, compensations granted to hospitals are only exempted if they are granted for the provision of medical services, emergency services and for ancillary services which are directly related to the main activities. According to the Commission, ancillary services include those in the field of research.562 This is problematic, however, regarding services like ambulatory care provided in medical care centers in competition to free doctors and medically unnecessary cosmetic surgery.563 An undertaking is active in the field of social housing, if it provides social housing for disadvantaged citizens or socially less advantaged groups, who due to solvency constraints are unable to obtain housing at market conditions.564 Regarding compensation payments for air or maritime links to islands and for air- 148 ports and maritime ports, the Commission considers the average passenger traffic during the two financial years preceding the entrustment to be more reliable than the amount of the compensation from an economic point, as this more accurately reflects 558 Cf. the first Report of the Federal Republic of Germany with regards to the “Altmark-Package’ of the European Commission, p. 10 et seq; Koenig/Paul EuZW 2009, 844 and EuZW 2008, 359. 559 Cf. the first Report of the Federal Republic of Germany with regards to the “Altmark-Package’ of the European Commission, p. 16 et seq; Keßler/Dahlke EuZW 2007, 103 and EuZW 2008, 68; Bartosch EuZW 2007, 559. 560 Recital 11 SGEI Decision. 561 This is especially relevant for capital expenditure grants for planned hospitals (cf. section 8 KHG – German Act on Hospitals) and the deficit compensation (which is not part of the dual system of financing hospitals) with regards to public hospitals. See Koenig/Vorbeck ZEuS 2008, 207; Kibele KH 2007, 1094. 562 Recital 11 SGEI Decision. 563 Cf. Koenig/Paul EuZW 2009, 844, 845; cf. also German Cartel Office decision of 10 March 2005 – B10 –123/04, mn. 76 – Rho¨n-Klinikum/Kreiskrankenha¨user Bad Neustadt (not published in its entirety in WuW/E DE-V 1087); Explanation regarding Section 2(2) of the sample for an entrustment act of the Betrauungsakt of the Association of Counties in the State of Baden-Wu¨rttemberg (order of the President of the German Association of Counties of 24 October 2007, p. 10). 564 Recital 11 SGEI Decision.

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the economic reality of these activities and their character of SGEI. 565 The threshold for air or maritime transport to islands is the average annual traffic of 300 000 passengers as it was already stipulated by the 2005 exemption decision. Because of the close relationship between the SGEI in the field of maritime transport and the procedures for the selection of undertakings entrusted with those services, the Commission also applies the threshold of 300 000 passengers to Section 5.7 of the on the interpretation of Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage).566 The threshold for airports has been reduced through the revision to a yearly average of 200 000 passengers (previously 1 000 000), while the limit was maintained for seaports at a level of 300 000 passengers. Regarding the repealed SGEI Decision 2005 the Commission understood these provisions as an alternative to the general threshold based on the amount of the compensation567 and therefore applied the most advantageous one.568 Consequently, for example, an airport with a higher annual passenger traffic was still covered by the Decision if the compensation did not exceed the maximum amount; on the other hand, an exceeding compensation to an airport with e. g. 100 000 passengers was covered by the decision. Such reasoning is no longer reflected in the current Decision. Rather, Article 2(1)(a) explicitly excludes the sectors of transport and transport infrastructure from the general threshold of EUR 15 million.569 149 Unlike land transport, the maritime and air transport sectors are subject to Article 106(2) of the Treaty. Certain rules applicable to public service compensation in the air and maritime transport sectors are to be found in Regulation (EC) No 1008/2008 on common rules for the operation of air services in the Community570 and in Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage). 571 However, since those Regulations neither do refer to the compatibility of State aid elements nor do they provide an exemption from the obligation to notify pursuant to Article 108(3) TFEU there is no reason not to apply the SGEI Decision to compensation in the areas of air and maritime transport. Nevertheless, according to Article 2(4), 572 to meet the value choices by the sector specific law, the provisions of Regulation (EC) No 1008/2008 and Regulation (EEC) No 3577/92 must be met in addition to the conditions laid down in the SGEI Decision.573 150 Compensation for the provision of land-based transportation services does not fall within the scope of the SGEI Decision (Article 2(5)).574 The reason for this is that Article 93 TFEU regulates compensations in the land-based transportation sector and prevails over Article 106(2) TFEU which is the general provision and must give way to the lex specialis.575 According to the ‘Altmark’ judgment, if compensation payments are 565

Recital 25 SGEI Decision. COM(2014) 232 final (24 April 2014). 567 Recital 19 SGEI Decision 2005. 568 Commission, staff working document SPEI, No. 3.5. 569 By the way, due to the terms, objectives and general scheme this interpretation should have led to a limitation of the scope of the previous provision, if one considers that it is the number of passengers which is relevant for the internal market and thus for the potential of a State measure to distort competition. Cf. ECJ Case C-18/93 Corsica Ferries Italia [1994] ECR I-1783, mn. 41. 570 OJ L 293, 31.10.2008, p. 3. 571 OJ L 364, 12.12.1992, p. 7. 572 Ditto Article 2(2) sentence 1 SGEI Decision 2005. 573 Recital 24 SGEI Decision. The SGEI Decision 2005 did not refer to the Regulation (EC) 1008/2008 but to the repealed Regulation (EEA) No. 2408/92. However, this reference already had to be understood as a reference to Regulation (EC) 1008/2008 according to Article 27 sentence 2 of the Regulation 1008/2008. 574 Article 2(2) sentence 2 SGEI Decision 2005 provided for the same. 575 Cf. recital 23 SGEI Decision. 566

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not in line with Article 93 TFEU, they may be declared neither as being compatible with EU Treaties based on Article 106(2) TFEU nor based on any other provision of the Treaties. The Regulation (EC) No. 1370/2007 regarding public passenger transport services by rail and road which replaced Regulation (EEC) No 1191/69 and Regulation (EEC) No 1107/70 provides further details and specifies general conditions under which public service obligations are to be performed in this area and under which compensation is allowed. Therefore, Article 9 of Regulation (EC) No. 1370/2007 exempts certain compensation from the notification requirement of Article 108(3) TFEU. Pursuant Article 2(3) TFEU the aid must be notified, in accordance to Article 108(3) 151 TFEU, as soon as the conditions of the decision are no longer met. Insofar existing aid is subject to permanent monitoring pursuant Article 108(1) TFEU. A subsequent notification is especially necessary if the Member State considers additional direct or indirect support measures necessary so that the threshold pursuant Article 2(1) would be exceeded. In addition, increases in revenue and efficiency along with pre-determined compensation payments may lead to a profit beyond an appropriate level. However, in these cases the compliance with the requirements pursuant Article 6 is questionable, unless a predictable over-compensation was not prevented by suitable measures in the entrustment act. Article 3 Compatibility and exemption from notification

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State aid in the form of public service compensation that meets the conditions laid down in this Decision shall be compatible with the internal market and shall be exempt from the prior notification obligation provided for in Article 108(3) of the Treaty provided that it also complies with the requirements flowing from the Treaty or from sectoral Union legislation.

Article 3 SGEI Decision clarifies that the exemption is only significant if a measure constitutes aid. As long as the compensation amount does not exceed the costs of the services, and does not exceed the thresholds set out in Article 2 SGEI Decision, the Commission believes that the development of trade is not affected to an extent contrary to the Union’s interests and that State aid pursuant Article 106(2) TFEU is compatible with the internal market.576 On the other hand, the exemption from the requirement of prior notification shall not prevent Member States from notifying the aid at all. A notification procedure is advisable to achieve legal certainty. The Commission will examine not only whether the notified measure complies with the principles of the SGEI Framework,577 but also on its own initiative, with the requirements of the decision.578 The prevailing nature of sectoral Union legislation acts reflects the case law according to 153 which a Member State may not rely on Article 106(2) TFEU directly if the measures in question are subject to specific secondary legislation.579 The ECJ sees an application of secondary legislation as a priority, as in the area of fundamental freedoms,580 which are, however, interpreted in light of primary law.581 Thus, Article 106(2) TFEU does not directly apply to regulated sectors, which are subject to specific Directives or Regulations that implement Article 106(2) TFEU for certain activities. For instance, in the energy sector Article 106(2) TFEU does not exempt from the principle of network access due to the special legal provisions applicable to it pursuant Article 3(14) of Directive 2009/72/EG. 576

Recital 9 SGEI Decision. This was provided for by recital 21 SGEI Decision 2005. Recital 26 SGEI Decision. 579 ECJ Case C-220/06 Correos [2007] ECR I-12 175, mn. 80–83; see ECJ Case C-421/04 Matratzen Concord v Hukla [2006] ECR I-2303, mn. 20. 580 Cf. ECJ Case C-280/00 Altmark Trans [2003] ECR I-7747, mn. 105–107. 581 ECJ Case C-315/92 Clinique [1994] ECR I-317, mn. 12. 577 578

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Article 3 requires, explicitly, that the compensation measures comply with all relevant provisions of the TFEU. In accordance with the SGEI Framework, the Commission refers to the competition rules of Articles 101 and 102 TFEU and the provisions in the field of public procurement.582 Article 3 only mentions compliance with the provisions of the TFEU regarding the compensation measure but not the entrustment act. That is different from the SGEI Framework, according to which the Commission does not only assess the distorting effect of the compensation measure but also of the entrustment act when examining the measure pursuant Article 106(2) TFEU (see para. 124 et seq.). Nevertheless, in case that both, the compensation measure and the entrustment act are inseparably connected to each other, an examination pursuant Article 106(2) TFEU is required. Otherwise, the exemption would breach higher-ranking primary law. Article 4 Entrustment

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Operation of the service of general economic interest shall be entrusted to the undertaking concerned by way of one or more acts, the form of which may be determined by each Member State. The act or acts shall include, in particular: (a) the content and duration of the public service obligations; (b) the undertaking and, where applicable, the territory concerned; (c) the nature of any exclusive or special rights assigned to the undertaking by the granting authority; (d) a description of the compensation mechanism and the parameters for calculating, controlling and reviewing the compensation; (e) the arrangements for avoiding and recovering any overcompensation; and (f) a reference to this Decision.

Due to the objective of the SGEI Decision to ensure the application of Article 106 TFEU (see Article 106(3) TFEU), the decision has to follow the conditions laid down in Article 106(2) TFEU. Thus, the decision mandatory requires the existence of a legal act of entrustment, by which the special task is transferred to the undertaking. 583 This requirement is made operational in Article 4 in light of the ECJ’s relevant case law. 584 Apart from the conditions of the Decision, the Member States can determine the form of the ‘act of entrustment’. The decisive element for qualifying a service – be it imposed by a Member State or agreed in a contract – as a public service obligation must be its substance, not the form in which it originates.585 Thus, the kind of administrative or legal act may vary between Member States.586 A provision of the shareholders’ agreement of public undertakings regularly lacks the compulsory element, whereas a business plan may be sufficient for public undertakings. 587 A mere governmental approval is also not sufficient to prove an entrustment act. The entrustment with the SGEI must be enacted at the latest together with the first compensation measure to make sure that any compensatory benefit complies with the procedures and requirements specified in the entrustment act. 588 Therefore, the 582

Recital 28, 29, 30 SGEI Decision. Recital 13 SGEI Decision. (English ‘shall be entrusted’, Spanish: ‘debera´ atribuirse’ vague are both the German version and the French version: ‘est confie´e’. 584 Cf. also Recital 14 SGEI Decision. 585 Expressively by referring to Article 4 SGEI Decision 2005 Commission decision of 26 November 2008, OJ 2009 No. L 306/26 mn. 111 footnote 22 – Postbus; Commission decision of 26 November 2008, OJ 2009 No. L 97/14 mn. 103 footnote 15 – Czech Republic concerning public service compensation for southern moravia bus companies. 586 Recital 14 SGEI Decision. 587 Cf. Guidelines NRW 3.3.1. 588 Ditto guidelines NRW 3.1. Cf. the principles for administrative regulations pertaining to section 44 of the Federal Budget Code (BHO), announced by a circular letter of the Federal Ministry of Finance of 20 September 1983 – II A 3 – H 1361–16/83(MinBlFin. 1983, p. 217), amended by a circular letter of the 583

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entrustment act has to specify the precise nature, the scope and duration of the public service obligations, as well as the name of the undertaking commissioned. Article 4 requires a sufficient degree of transparency in accordance with the first two Altmark criteria, since the calculation and verification of the amount of compensation is only acceptable if the public service obligations, imposed on the undertaking, and the State’s obligations are precisely defined in a formal act by the competent authorities of each Member State. On the other hand, the SGEI Decision does not ask for a detailed calculation of all individual costs to be provided in advance, when this is not possible at the time the undertaking starts providing an SGEI. Thus, the Decision only requires the act of entrustment to include the basis for the future calculation of compensation, e. g. that compensation will be determined on the basis of a price per day, per meal, per care category, based on an estimation of the number of potential users, etc. 589 Clarity is necessary in terms of the basis for the calculation of future compensation, from which the funding agency will reimburse the undertaking. In contrast to the previous Decision, Article 4 lit. f requires a reference to this Decision in the act. With respect to all other relevant issues, reference to the remarks on Article 106(2) TFEU (para. 84 et seq.) can be made here. Article 5 Compensation

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1. The amount of compensation shall not exceed what is necessary to cover the net cost incurred in discharging the public service obligations, including a reasonable profit. 2. The net cost may be calculated as the difference between costs as defined in paragraph 3 and revenues as defined in paragraph 4. Alternatively, it may be calculated as the difference between the net cost for the undertaking of operating with the public service obligation and the net cost or profit of the same undertaking operating without the public service obligation. 3. The costs to be taken into consideration shall comprise all the costs incurred in operating the service of general economic interest. They shall be calculated on the basis of generally accepted cost accounting principles, as follows: (a) where the activities of the undertaking in question are confined to the service of general economic interest, all its costs may be taken into consideration; (b) where the undertaking also carries out activities falling outside the scope of the service of general economic interest, only the costs related to the service of general economic interest shall be taken into consideration; (c) the costs allocated to the service of general economic interest may cover all the direct costs incurred in operating the service of general economic interest and an appropriate contribution to costs common to both the service of general economic interest and other activities; (d) the costs linked with investments, notably concerning infrastructure, may be taken into account when necessary for the operation of the service of general economic interest. 4. The revenue to be taken into consideration shall include at least the entire revenue earned from the service of general economic interest, regardless of whether the revenue is classified as State aid within the meaning of Article 107 of the Treaty. If the undertaking in question holds special or exclusive rights linked to activities, other than the service of general economic interest for which the aid is granted, that generate profits in excess of the reasonable profit, or benefits from other advantages granted by the State, these shall be included in its revenue, irrespective of their classification for the purposes of Article 107 of the Treaty. The Member State concerned may decide that the profits accruing from other activities outside the scope of the service of general economic interest in question are to be assigned in whole or in part to the financing of the service of general economic interest. 5. For the purposes of this Decision, ‘reasonable profit’ means the rate of return on capital that would be required by a typical undertaking considering whether or not to provide the service of Federal Ministry of Finance of 16 September 1996 – II A 3 – H 1361–7/96(GMBl. 1996, p. 823). The financing of a deficit is characterised by the fact that the grant to compensate the deficit will be approved and that the deficit will remain as far as the recipient is not able to compensate the expenditure by means of its own or borrowed moneys. The approval must be limited. (No. 2.2.2 VV of Section 44 LHO – German Land Budget Regulation). 589 Staff working document of 29 April 2013, SWD(2013) 53 final/2, mn. 116 (3.4.2.2.).

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general economic interest for the whole period of entrustment, taking into account the level of risk. The ‘rate of return on capital’ means the internal rate of return that the undertaking makes on its invested capital over the duration of the period of entrustment. The level of risk depends on the sector concerned, the type of service and the characteristics of the compensation. 6. In determining what constitutes a reasonable profit, Member States may introduce incentive criteria relating, in particular, to the quality of service provided and gains in productive efficiency. Efficiency gains shall not reduce the quality of the service provided. Any rewards linked to productive efficiency gains shall be set at a level such as to allow balanced sharing of those gains between the undertaking and the Member State and/or the users. 7. For the purposes of this Decision, a rate of return on capital that does not exceed the relevant swap rate plus a premium of 100 basis points shall be regarded as reasonable in any event. The relevant swap rate shall be the swap rate the maturity and currency of which correspond to the duration and currency of the entrustment act. Where the provision of the service of general economic interest is not connected with a substantial commercial or contractual risk, in particular when the net cost incurred in providing the service of general economic interest is essentially compensated ex post in full, the reasonable profit may not exceed the relevant swap rate plus a premium of 100 basis points. 8. Where, by reasons of specific circumstances, it is not appropriate to use the rate of return on capital, Member States may rely on profit level indicators other than the rate of return on capital to determine what the reasonable profit should be, such as the average return on equity, return on capital employed, return on assets or return on sales. The ‘return’ means the earnings before interests and taxes in that year. The average return is computed using the discount factor over the life of the contract as specified by the Communication from the Commission on the revision of the method for setting the reference and discount rates (9). Whatever indicator is chosen, the Member State shall be able to provide the Commission upon request with evidence that the profit does not exceed what would be required by a typical undertaking considering whether or not to provide the service, for instance by providing references to returns achieved on similar types of contracts awarded under competitive conditions. 9. Where an undertaking carries out activities falling both inside and outside the scope of the service of general economic interest, the internal accounts shall show separately the costs and receipts associated with the service of general economic interest and those of other services, as well as the parameters for allocating costs and revenues. The costs linked to any activities outside the scope of the service of general economic interest shall cover all the direct costs, an appropriate contribution to the common costs and an adequate return on capital. No compensation shall be granted in respect of those costs. 10. Member States shall require the undertaking concerned to repay any overcompensation received.

1. Overview In order to avoid unjustified competitive distortions, both Article 5(1) SGEI Decision and Article 106(2) TFEU do not exempt any compensation exceeding the amount necessary for the provision of the SGEI in consideration of thereby collected revenues as well as a reasonable profit. The ECJ and the Commission assume that all net costs arising for the undertaking can be compensated. 590 In any case a compensation which covers more than only the undertaking’s incurred costs is not necessary for the operation of the SGEI pursuant Article 106(2) TFEU, and may consequently also constitute incompatible State aid that should be repaid. The amount of costs to be recognized is determined by Article 5(2) SGEI Decision. What kind of costs are eligible for consideration and how they are calculated is laid down in Article 5(3) SGEI Decision in accordance with the jurisprudence regarding Article 106(2) TFEU and the SGEI framework. Article 5(4) SGEI Decision regulates which of the undertaking’s revenue is to be considered to determine the necessary amount of compensation payments. Article 5(5)–(8) SGEI Decision defines the concept of reasonable profit. Article 5(9) SGEI Decision requires an accounting unbundling of undertakings practi-

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cing other activities besides the SGEI. Article 5(10) SGEI Decision repeats an obligation already laid down in Article 6(2) SGEI Decision.

2. Calculation of costs Article 5(3) SGEI Decision lists the eligible kinds of cost while Article 5(2) SGEI 157 Decision contains stipulations regarding the amounts of cost. As is the case law regarding Article 106(2) TFEU591, Article 5(3) sentence 2 SGEI Decision requires a cost calculation based on generally accepted guidelines. Article 5(9) sentence 1 SGEI Decision requires the methods employed to be determined in advance. The eligible net costs are determined according to the cost allocation method from the difference between the costs accounted for by the SGEI (para. 3) and the revenues (para. 4), pursuant Article 5(2) SGEI Decision. Alternatively, the costs can be calculated based on the net avoided cost method as the difference between the net cost incurred by the service provider from the fulfillment of public welfare duties and the net cost or profits of the same service provider without such an obligation. Due to its higher accuracy the latter method is considered as the method of preference in the SGEI framework (see para. 97 et seq.).592 However, Article 5(2) SGEI Decision juxtaposes both methods on equal footing. Both are generally capable of integrating the cost efficiency principle and the standard of cost of efficient service provision (see below para. 174 et seq.). The provisions in Article 5(3) sentence 3(a) and (b) SGEI Decision concerning eligible kinds of cost merely reflect self-evidences. Article 5(3) sentence 2(c) SGEI Decision adopts the requirements developed by jurisprudence regarding Article 106(2) TFEU. According to Article 5(3) sentence 2(d) SGEI Decision investments can be taken 158 into account in case they are necessary for the functioning of the SGEI. A typical case shows investments in infrastructure. Only investments that improve the SGEI’s quality and quantity are eligible SGEI (para. 159). In addition to replacement investments, expansionary investments are conceivable that increase the capacity of existing infrastructure. Furthermore, restructuring investments, which the undertaking carries out in order to adjust the infrastructure to altered de facto or de jure circumstances, can be taken into account. Regarding the concrete form of grants for the purpose of investment, the Member States are entitled to discretion. 593 Thus, they can for example not only award project-related grants, but also take the investment risk into consideration for the regular amount of compensation, for instance, the permissible “reasonable return”, pursuant Article 5(5) – (8) SGEI Decision as a general investment risk. However, the multiple inclusion of the same investment risk is to be avoided. Projectrelated grants are therefore inadmissible insofar as the commissioned undertaking already charges an investment surcharge to service users as part of their required usage payments, which are to be taken into consideration on the revenue side according to Article 5(4) sentence 1 SGEI Decision. The SGEI Decision is based on the consideration that offering services as required by 159 public interest is one of the obligations of an undertaking commissioned through a SGEI. This includes their preservation and the adjustment to circumstantial changes, as far as this is required, in order to ensure the quality of the service according to the assignment. This obligation is met by the undertaking through investments in the necessary equipment. Yet, in order to ensure in the long term the ability to invest as necessary, considering rising expenses due to inflation, adequate financial resources 591

Commission decision of 22 November 2006, C24/2005, OJ 2007 No. L 95/25, mn. 110, 114 – LNE. SGEI Framework, mn. 27. 593 Cf. above, mn. 850. 592

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need to be available. Therefore, the investment obligation is often already taken into consideration in the amount of fees the undertakings charge to SGEI users. The costs arising from investments are deducted over a time frame aligned based on the investment’s expected useful life and are portionally included into the fees as cost elements. In order to build reserves for future investments, additional factors are incorporated into the fees. To this end, an “imputed depreciation”, including the de facto acquisition costs increased by additional fees, is added to the depreciation. 594 Alternatively, the interest demand, resulting from the monetary value after profit taxes, is estimated in the service charges in addition to an adequate distributable return. 595 The consideration of depreciation and infrastructure costs of the equipment subject to its amount of use was approved by the Commission as a widely accepted method in analytic accounting.596 It is decisive that the duration of depreciation also influences the amount of the annual costs affecting the amount of payments. As the depreciation facilitates new investments it must be ensured that after the expiration of the depreciation time a financing possibility exists. Only by doing so, may the shifting of accumulating appropriated capital formation through fees be approved, due to the fact that the undertaking establishes the fees based on the costs of a business management like an efficient, structurally comparable undertaking. 597 However, if the investment risk is already taken into consideration in the fees, these are to be accounted for on the revenue side pursuant Article 5(4) SGEI Decision. In such cases investment-driven surcharges are no longer necessary. 160 Furthermore, reasonable provisions shall ensure that such indirect investment payments are not put to inappropriate use, especially not for activities outside of the SGEI. The accumulation of investment capital does, however, not automatically lead to an accumulation of unnecessary payments, since investment bound payments are part of the required costs according to Article 5 SGEI Decision. Therefore, unused investment capital must not necessarily be reclaimed pursuant Article 6 SGEI Decision (see para. 176), however, only under the assumption that the typical investment risk and the predicted investment amount are reflected by the unused investment capital. Payments higher than this amount are no longer necessary according to Article 5 SGEI Decision and lead to overcompensation. If the investment need is lower than anticipated, overcompensation can be assumed from the point that this circumstance is noticed and is to be offset. This control and offset mechanism must already be laid out in the compensation provisions pursuant Article 6 SGEI Decision. 161 Pursuant Article 5(5) SGEI Decision the rate of return on capital is accepted only insofar its adequacy is proven. Certainly, this provision covers equity capital. But undertakings, including public enterprises, are regularly dependent on outside capital as well. An overly high equity share is even an indicator for anticompetitive excessive profits. 598 The interest charges for outside capital (borrowing costs) is taken into consideration as an expense factor. The refund of all costs regardless of their reasonableness under the total cost approach therefore provides incentives for outside capital providers to set the interest unusually high for standard market conditions. In case of unconditional compensation, the borrowing undertaking commissioned with the SGEI has no incentive to exploit its 594 Concept of regulatory current cost accounting: The equity-financed assets are valued at reinstatement values. Any price increase of assets are thus primarily registered through imputed depreciation. 595 Concept of real capital maintenance: The inflationary adjustment is achieved not through depreciation, but through interest. This ensures that throughout the useful life of the equipment, the same real amount is available at the end of the useful life as initially invested. 596 Commission decision of 22/11/2006, COM(2006) 5477, OJ 2007 N. L 95/25 mn. 101 – LNE. 597 For details see Sa ¨ cker/Meinzenbach RdE 2009, 1 et seq. 598 BGH, order of 14/08/2008, KVR 42/07, WuW/E DE-R 2395 – Rheinhessische Energie.

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negotiating range, as opposed to a regular competing undertaking. If the permissible return on borrowed capital were reduced to a reasonable level, then at least the preferential treatment of third party undertakings, i. e. regional banks and other investors, would be prevented.599 Thus, it is important to minimize the risk of obscured indirect subsidies for third party undertakings. Even higher is however the risk of preferential treatment for other business activities if intercompany loans are granted. As such, there is a need to restrict the acceptable amount and rate of intercompany loans based on the standard of adequacy. Therefore, the amount of interest on borrowed capital allowed should not be able to exceed the amount the undertaking could have obtained on the capital market by issuing long term fixed-interest bonds, such as bearer bonds. For the risk assessment of a fictitious creditor, the kind of emission and the estimated creditworthiness of the issuer are key factors. The fictitious creditor will thereby assume the interest rate obtainable at the date of investment for a long-term, insolvency-proof bond, as offered by the public authorities; and in case of an investment in another issue debtor, the creditor will demand a certain risk premium for the acceptance of a default risk. 600

3. Revenues to be balanced Article 5(4) sentence 1 SGEI Decision reflects the implicitness that as far as the costs 162 of the SGEI are borne by the SGEI users through fee payments there is no need for compensation measures by the State. Article 5(4) sentence 2 SGEI Decision on the one hand picks up the case in which an undertaking provides another SGEI based on special or absolute rights. All profits generated by providing said service which exceed the reasonable level, are to be considered revenues to finance the reviewed SGEI, irrespective of whether cross-financing is actually carried out or not. This provision is criticized as an “obligation of cross-subsidy’.601 Likewise the Advocate General La Pergola demanded in his opinion in the Deutsche Post case602 that for an exception based on Article 106(2) TFEU it ought to be verified that the unprofitable areas of the SGEI cannot be supported through the provision of other reserved services. He argued that for fulfilment of the obligation of public welfare under financially balanced conditions, cross-subsidies between profitable and unprofitable activities within the reserved serviced are possible and necessary. However, the ECJ did not take up this line of argument.603 Nevertheless, the second sentence of Article 5(4) SGEI Decision does not contain an obligation. Rather, the exemption of the SGEI Decision only comes into effect when the compensation payment does not exceed the subsequent cost difference and as long as this does not anticipate an examination pursuant Article 106(2) TFEU in conjunction with the SGEI framework or an exemption. This provision reduces the risk of excessive distortions of competition by reserving critical cases for closer analysis by the Commission in individual decision proceedings.604 599

Cf. also Section 5(2) StromNEV (the German Electricity Charges Ordinance). Cf. BGH, decision of 14/08/2008, KVR 42/07, WuW/E DE-R 2395 – Rheinhessische Energie regarding section 5(2) sentence 2 StromNEV (the German Electricity Charges Ordinance). 601 See Czerny, Die beihilfenrechtliche Beurteilung der staatlichen Finanzierung im allgemeinen wirtschaftlichen Interesse, 2009, p. 240 with further references; generally rejecting an obligation to crosssubsidise also see Frenz HdB EuR Bd. II Europa¨isches Kartellrecht, Chapter 11 mn. 2055; for the admissibility, but against an obligation Grave EuZW 2001, 709, 711; in favour of such an obligation see Bartosch NJW 2000, 2251, 2252 et seq. 602 La Pergola, opinions from 1 June 1999, Joined Cases C-147 and 148/97, mn. 30 – Deutsche Post/ GZS. 603 For a critical commentary see Bartosch NJW 2000, 2251, 2252 et seq., also see Grave EuZW 2001, 709, 710 et seq. 604 See also Recital 17 SGEI Decision. 600

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If an undertaking has been granted other advantages by the state in accordance with Article 5(4) sentence 2, 2nd halfsentence, these need to be taken into consideration on the revenue side as well, independent of their evaluation pursuant Article 107 TFEU. Insofar as a unit affiliated with the public authorities operates as an investor, in case of an overly low return after the private-investor-test, this payment is to be considered State aid itself. It should be noted that in case that the public authorities also act as investors, the investment as such does not represent State aid if the aid-relevant compensation payments to the undertaking promise a reasonable return.605 According to the wording, all advantages are covered. This includes compensation payments for another SGEI, with which the undertaking was commissioned and which did not fulfil the Altmark criteria. Due to the broad concept of undertaking, nearly any advantage granted to the entrusted undertaking itself or to affiliated ones have to be taken into account. Moreover, it does not matter whether the State aid is permissible or not. This provision includes payments for other activities without differentiating whether these are at risk of being used for the SGEI. This provision considers the fact that the risk of concealment of the amounts paid, of crosssubsidies and of distorted competition rises with every new payment; therefore, in case of doubt, the Commission decides in accordance with the SGEI Framework considering the specific circumstances of the case. 164 A tax benefit resulting for instance from the non-profit status of an organization can be either qualified as revenue or as a reduction in costs. Irrespective of its nature, it has to be taken into consideration when the amount of compensation payments necessary for providing a SGEI is determined.606 If the tax benefit consists of a cost reduction, no compensation payment can be made for the amount corresponding to the reduction. If the tax benefit is classified as revenue for the service provider, it is to be deducted from the compensation payment to be granted.607 Payments, conducted in connection with a profit and loss payment agreement within a public holding, count as profit according to Article 5(4) SGEI Decision; hence, they reduce the net extra costs for the compensation payment.608 165 Article 5(4) sentence 3 SGEI Decision leaves it to the authority of the Member States to make any compensation payments dependent on a prior compensation of corporate costs by use of other corporate profits from other activities. For Member States making use of this provision, sufficient flexibility of the compensation system needs to be ensured in order to absorb any cross-flows in the absence of economic success. A lack of such a mechanism is an indication of a lacking necessity of the payments. Unfortunately, this connection provides incentives to not use this provision, though it in principle is desirable on welfare grounds. 163

4. Reasonable profit 166

Article 5(5) – (8) SGEI Decision details what is to be understood under a reasonable profit according to Article 5(1). The definition in Article 5(5) corresponds to the one given by the Commission in its Communication on the application of the Altmark criteria609 as well as in the SGEI framework concerning the application of Article 106(2)

605

Cf. below Financial Transfers mn. 1 et seq. For a critical evaluation see the report of the Federal Republic of Germany regarding the “Altmark package” of the European Commission, p. 25 et seq. 607 Working paper from 20/11/2007, SEK(2007)1516 final, 6.8. 608 Working paper from 20/11/2007, SEK(2007)1516 final, 6.9. 609 SGEI aid notification, mn. 61. 606

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TFEU.610 The Commission thus acknowledges that the adequacy of profit in consideration of the EU treaties’ mandatory objectives (Article 119(1) TFEU), which are based on the principle of an open market economy with free competition, must be determined by objective standards in accordance with competition law. This enables a nearly complete reference to the remarks regarding Article 106(2) TFEU (para. 104 et seq.). Unlike the SGEI framework611, Article 5(8) does not provide the possibility to calculate 167 the average return through the capital costs of the undertaking. On the contrary, it is always to be determined – and not only alternatively – by means of the discount factor for the contract duration according to the interest rate notification of the Commission. 612 Like the SGEI framework,613 Article 5(7) contains a “safe harbour”, according to which a return on investment is considered in any case reasonable if it does not exceed the relevant swap rate in addition to a surcharge of 100 basis points. As long as the entrusted undertaking does not bear any significant economic risks, this simultaneously marks the threshold. If the undertaking bears some considerable contractual or commercial risk, the return on investments may, corresponding to the risk (Article 5(5)), surpass the relevant level.614 The adequacy of the return is also to be determined by means of the market risk 168 according to Article 5(5) sentence 1 SGEI Decision; various economic calculation methods, such as the CAPM (Capital Asset Pricing Model), are suitable for it.615 The market risk affects the necessary return on equity from an investor point of view, as the attachment of capital to corporate success is connected to a special risk. Hence, the investors demand a surcharge on the interest of the capital employed compared to a risk-free investment in order to leave or employ their capital in the concerned undertaking.616 When taking the Commission’s total cost approach, which allows for the compensation of all real costs irrespective of their efficiency-targeted necessity, into consideration, one can hardly speak of a corporate risk, except through withdrawal of the entrustment. This condition is considered in Article 5(5) sentence 1 and 3, as well as the third sentence of Article 5 para. 7 SGEI Decision, insofar as the risk assessment allowing for State intervention is referred to and a lack of risk is also deemed possible. If special or even exclusive rights prevail, these are to be taken into consideration in risk assessment. Such rights can effectively lead to a monopoly position, which may lead to a reduction of corporate risk. Risks remain only limited to a few parameters such as the capacity utilization risk due to customer bankruptcies, business fluctuations or substitution innovations.617 For the reasonable return, Article 5(8) sentence 4 SGEI Decision establishes a max- 169 imum limit for the general case based on the average return in this sector. This process must principally not be applied to the return on equity of the undertaking entrusted with the SGEI, as long as it has already received government compensation payments, in order to prevent circularity. The limit is to be aimed at third party undertakings, as shown by the comparison to Article 5(4) sentence 4 SGEI Decision, which allows for the possibility of a comparison to undertakings from other Member States or from other sectors in case of a lack of similar comparable undertakings in the same state or sector. Structural differences between the comparative undertakings are to be compensated through corresponding surcharges and discounts, as is required under the comparable 610

SGEI framework, mn. 33 and footnote 18. SGEI framework, mn. 34 and footnote 19. 612 OJ 2008 No. C 14/6. 613 SGEI framework, mn. 36, 38. 614 Cf. SGEI framework, mn. 37. 615 For details see Rudolph, Unternehmensfinanzierung und Kapitalmarkt, 2006, p. 81 et seq. 616 Cf. Ku ¨ pper/Pedell, in: BerlKommEnR, 2nd ed. 2010, regulations §§ 21 et seq. EnWG mn. 161. 617 Cf. OLG Du ¨ sseldorf, decision of 11/02/2004 – Kart 4/03(V), WuW/E DE-R 1239, 1245 – TEAG. 611

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market concept used in price abuse control pursuant Article 102 TFEU and in the price regulation of network sectors. 170 The connection of the quality of service to be provided and the productivity gains referred to in Article 5(6) SGEI Decision constitutes an incentive element. The quality must never fall below the degree necessary for the fulfilment of the public interest, since the quality of the service is a decisive reason for its privileged status in accordance with Article 106(2) TFEU.618 Above and beyond the requirements pursuant the Decision 2005/842/EC, Article 5(6) SGEI Decision requires, however, the rewards, which are granted in case of productivity gains to enable a balanced allocation of efficiency gains between the undertaking and the Member State and/or the users. 619 Accordingly, caps must be provided that – if exceeded – either reduce the Member State’s compensation payments by the excess, or prescribe a compulsory reallocation of efficiency benefits to the consumers through adjustment of the mandatory fees.

5. Accounting unbundling (Article 5(9)) Compensations used by the undertaking for other business activities (cross-subsidization) are not necessary for a functioning SGEI and therefore represent incompatible State aid and are to be repaid.620 Hence, Article 5(9) sentence 1 SGEI Decision requires separate accounting for the SGEI. A comparable reasoning justifies the rules about unbundling in the regulated network sectors to avoid a misuse of funds, e. g. cross-subsidies in favour of competition areas.621 Otherwise, the cost allocation of the undertakings would not be sufficiently traceable. For annual sales exceeding EUR 40 million at the time of commissioning, the entrusted undertakings must always conduct separate accounting according to the Transparency Regulation (EC) No. 2006/111/EC. Yet, there are two exceptions. First, this obligation does not apply if any compensation granted for a reasonable time period has been determined in an open, transparent and non-discriminatory process in compliance with alternative 1 of the fourth Altmark criterion. Second, if the service provision is already unsuitable to noticeably impair trade between Member States (Article 1 (2) in conjunction with Article 5(2) Transparency Directive). Thus Article 5(9) sentence 1 SGEI Decision extends the principal obligation effectively to cases below the threshold of the Transparency Regulation, as long as a Member State invokes the SGEI Decision. 622 The wording of Article 5(9) sentence 1 SGEI Decision does not differentiate along economic or non-economic services.623 172 Article 5(9) sentence 1, 2nd halfsentence SGEI Decision requires prior specification of the parameters for the allocation of revenues and expenditures. Notably the calculation of proportionate overhead costs must follow generally accepted standards, 624 for instance, using the rate of utilization (occupancy) for jointly used buildings and properties in order to allocate the share of the rental cost or the deductible costs. 625 On the revenue side, 171

618

GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 211. See also SGEI framework, mn. 41. 620 Recital 16 SGEI Decision. 621 Cf. recital 9 Directive 2009/72/EC. About the transfer of these principles, see Koenig/Paul, EuZW 2009, 844, 846. 622 The first report by the Federal Republic of Germany about the “Altmark package” of the European Commission seems to hold another view, p. 19. 623 Not clear in this respect, the Commission in the working paper from 20/11/2007, SEC(2007)1516 final, para 6.5. 624 Commission, decision of 22/11/2006, C24/2005, OJ 2007 No. L 95/25, mn. 110, 114 – LNE. 625 Accepted for example by the Commission, decision from 22/11/2006, C24/2005, OJ 2007 No. L 95/ 25, mn. 108 – LNE. 619

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according to Article 5(4) SGEI Decision, it is to be determined, for instance, how revenues yielded by services provided in addition to the SGEI are to be accounted. Article 5(9) sentence 2 SGEI Decision also requires that the accounted costs for other 173 activities carried out by the commissioned undertaking must cover all direct costs, a reasonable contribution to the common costs as well as an adequate return on capital. This requirement also serves to prevent anticompetitive cross-subsidies. Hence, the obligation to transparent accounting is extended to other areas. It must be avoided in particularly that common costs are excessively allocated to the SGEI and compensated through government funds, or that profits in competition areas are completely renounced, which is only possible when considerably larger profits are generated in another area. Otherwise, the undertaking would offer the other services for which it competes especially favourable and could oust its competitors from the relevant market. State aid compensating the SGEI costs would have the same effect as competition distorting aid pursuant Article 107 TFEU, which would be granted directly for the business activities crossfinanced by the undertaking and which therefore could not be exempted pursuant Article 106(2) TFEU or the SGEI Decision, respectively. Evidently, the costs of other services must not be compensated pursuant Article 5(9) sentence 3 SGEI Decision.

6. Efficiency incentives (Article 5(6)) Pursuant Article 5(6) SGEI Decision, the reasonable profit granted to the under- 174 taking may consider productivity gains. Thereby incentives to increase efficiency can be created that would otherwise not exist. If the compensation covers all net costs including a reasonable profit, an undertaking has no need to enhance efficiency the same way it would do under competitive pressure. The risk of a loss in efficiency is increasing as long as the obligation to provide the SGEI comes along with a long-term monopoly. One incentive method is the price-cap procedure (regulation of price level), though which only the permissible unit prices are determined. In case of an undertaking producing only a single product, e. g. when an undertaking offers only a single SGEI, a price cap would ultimately not be distinguishable from a revenue cap, which limits the permissible revenue of the undertaking.626 As the cap is based on a fictitious revenueexpenditure-situation that considers efficiency increases of the undertaking that have not yet – but may be – carried out, the undertaking has incentives to increase its own cost efficiency in order to increase its profits. On the other hand, an increase in cost efficiency must not lead to a decrease in service quality. This directly results from Article 106(2) TFEU, as the qualitative requirements are part of the justification for the financing of the SGEI and thus there is no reason for a privileged treatment if the qualitative prerequisites are not met.627 Furthermore, the efficiency gains must be shared between the undertaking, which provides the SGEI on the one hand and the Member State and/or the users on the other hand. An increase in the quality of the service at the same price could be an appropriate proportion of the reward for the benefit of the users. Article 5(6) SGEI Decision does not lever out the principle regulated in primary law 175 according to Article 106(2) TFEU and concretely defined in Article 5(5) SGEI Decision, that the compensation payment may not exceed the amount necessary for the fulfilment of the public task.628 Should the undertaking be able to generate a significant revenue, 626

For details, see Sa¨cker N&R 2009, 78 et seq. GC Case T-442/03 SIC v Commission [2008] ECR II-1161, mn. 211, also see mn. 826 et seq. 628 Dissent apparently from the Commission, decision of 16/05/2006, C (2006) 1847(No. N 604/2005), mn. 85 et seq. – coach operator in the administrative district of Wittenberg, which in analogous application of the Community Guidelines considers an overcompensation as an incentive mechanism necessary under certain circumstances. 627

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then average values for the whole period of the SGEI are to be determined through subsequent control of a payment period pursuant Article 5(6) SGEI Decision in order to determine whether in total an overcompensation has been generated. Accordingly, Article 5(6) SGEI Decision is to be understood as merely declaratory, since Article 106(2) TFEU does not prohibit any return below what is necessary and reasonable. Nevertheless, the provision clarifies that a variable return can also fulfil the requirements under Article 106(2) TFEU, as long as it remains within the boundaries of adequacy. The incentive concept pursuant Article 5 SGEI Decision shows commonalities with Article 107(3)(c) TFEU since such incentive mechanisms may also serve the development of certain economic sectors. However, that provision allows for a reasonable overcompensation as kind of incentive.629 Article 6 Control of overcompensation

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1. Member States shall ensure that the compensation granted for the operation of the service of general economic interest meets the requirements set out in this Decision and in particular that the undertaking does not receive compensation in excess of the amount determined in accordance with Article 5. They shall provide evidence upon request from the Commission. They shall carry out regular checks, or ensure that such checks are carried out, at least every 3 years during the period of entrustment and at the end of that period. 2. Where an undertaking has received compensation in excess of the amount determined in accordance with Article 5, the Member State shall require the undertaking concerned to repay any overcompensation received. The parameters for the calculation of the compensation shall be updated for the future. Where the amount of overcompensation does not exceed 10 % of the amount of the average annual compensation, such overcompensation may be carried forward to the next period and deducted from the amount of compensation payable in respect of that period.

An overcompensation must be cleared based on the arrangements for recovering overcompensation which are to be determined in the entrustment act (Article 4 SGEI Decision). Therefore, the Member States have to install control mechanisms to recognise and prevent any overcompensation. They must review at regular intervals, no later than every three years, whether the granted compensation leads to overcompensation. With the expiry of the entrustment, a general revision is to be conducted, irrespective of the time passed since the previous review. The regular decision concerning the admissibility of compensation payment is to be made by the body granting the aid, not by the recipient itself, even if the recipient is an entrusted public enterprise. 630 The control mechanisms are to be attuned to the legal form of the entrusted undertaking, like special fund assets, institutions governed by public law or private law companies. Depending on the form it is to be determined whether, for instance, municipal auditing institutions or public accountants, if necessary through separate assignments, may directly be commissioned, or whether the assignment (not the review itself) may be done via the undertaking based on the entrustment act.631

629 Cf. Commission, decision of 16/05/2006, C (2006) 1847(No. N 604/2005), mn. 78 et seq. – coach operator in the administrative district of Wittenberg. 630 Also, see Order of the Ministry of Economic Affairs and Energy, as well as the Ministry of the Interior North-Rhine Westphalia from 30/05/2008, MBI. NRW 2008, p. 337, lit. 2. 631 Cf. also Order of the Ministry of Economic Affairs and Energy, as well as the Ministry of the Interior North-Rhine Westphalia from 30/05/2008, MBI. NRW 2008, p. 337, lit. 2.2–2.4; cf. also Jennert/ Pauka KommJur 2009, 321, 329.

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For the undertakings and Member States to retain a certain level of flexibility, an 177 overcompensation amounting of no more than 10 per cent of the annual compensation may be carried forward to the next payment period. However, a concrete clause must be included in the entrustment act as part of the compensation mechanism. Article 6(2) SGEI Decision does not absolve the Member States from their general obligation to enforce a reimbursement.632 If the overcompensation is not carried forward to the following year, but is rather transferred to another undertaking or in favour of another SGEI in the same undertaking, it is classified as an independent compensatory payment that must once again be reviewed on the recipient’s side in regards to its compatibility with the internal market.633 Furthermore, the amount of compensation as provided for in the entrustment act for the following accounting period is to be reduced by the forwarded amount, irrespective of the total amount of the compensation, unless the entrustment act provides for an addition in the latter case. Otherwise, it is to be considered independent additional aid, which is to be measured on the prerequisites of the Decision and which typically does not fulfil the prerequisite of Article 4. The special provision for the area of social housing in the Decision 2005/842/EC, which allowed for taking into consideration up to 20 per cent across accounting periods due to the risk of exceptionally strong income fluctuations in cases of rent lost due to insolvent tenants, which applied if the undertaking did not perform secondary activities, is discontinued.634 Article 7 Transparency

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For compensation above EUR 15 million granted to an undertaking which also has activities outside the scope of the service of general economic interest, the Member State concerned shall publish the following information on the Internet or by other appropriate means: (a) the entrustment act or a summary which includes the elements listed in Article 4; (b) the amounts of aid granted to the undertaking on a yearly basis.

Article 7 creates obligations for Member States to publish information about the SGEI and the compensation measure to the general public. This obligation aims at transparency and enables control. It corresponds to the one mentioned in the SGEI framework (see para. 138 et seq.).635 The limited scope of application in relation to the SGEI framework appears to be rather ambiguous. Whereas the publication duty mentioned in the SGEI framework covers all compensation measures, Article 7 only covers payments starting at EUR 15 million and only to undertakings that provide services other than the SGEI at the same time. Therefore the obligation addresses only aid in the field of hospitals, services meeting special social need, air or maritime links to islands and airports and ports (see Article 2 para 1 lit. b-e) where the compensation is allowed to be higher than EUR 15 million, although a very high level of transparency is needed in all fields due to the exemption from the prior notification obligation. Any methods of publication are deemed suitable, if they are able to establish that 179 degree of transparency, which is necessary to monitor the decision’s conditions. As well as publishing the decision online, one could consider publication in the official journals; however, these are to be accessible online on a regular basis. The online presence of such publications itself is to be freely accessible to internet users without them incurring any extra costs. It is to be ascertained whether the annual amounts of aid granted is to be published 180 ex post or ex ante. In the case of subsequent payments, an obligation to publish the 632

Cf. GC Case T-231/06 NOS v Commission [2010] ECR II-5993, mn. 265 et seq. GC Case T-231/06 NOS v Commission [2010] ECR II-5993, mn. 266. 634 Recital 13 SGEI Decision 2005. 635 SGEI Framework, mn. 60. 633

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information ex ante may imply that the relevant amount is to be published already when advance estimate may be given. Such a prior publication seems to hinder distortions of competition more effectively. This also follows from equal treatment concerning the information already provided by the act of entrustment (a). The same applies to the situation in which the amount may be reduced through overcompensation measures. Article 8 Availability of information

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The Member States shall keep available, during the period of entrustment and for at least 10 years from the end of the period of entrustment, all the information necessary to determine whether the compensation granted is compatible with this Decision. On written request by the Commission, Member States shall provide the Commission with all the information that the latter considers necessary to determine whether the compensation measures in force are compatible with this Decision.

During the period of entrustment and for 10 years from its end the Member States have to keep all documents necessary to determine whether the compensation granted is compatible with this Decision, e. g. annual financial statements or annual accounts of the paying local authority, annual accounts and management reports of the undertaking in question, committee decisions of both the local authority and the undertaking and the corresponding records (justifying documents). During the whole period the Commission may request those documents. A Member State which cannot provide the necessary documents does not meet his burden of proof regarding the conditions of the Decision. Thus, the Commission may be forced to conclude that the compensation measure in question is not compatible with the Decision. That distribution of the burden of proof follows the one provided for in Article 106(2) TFEU (see para 141). Article 9 Reports

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Each Member State shall submit a report on the implementation of this Decision to the Commission every 2 years. The reports shall provide a detailed overview of the application of this Decision for the different categories of services referred to in Article 2(1), including: (a) a description of the application of this Decision to the services falling within its scope, including in-house activities; (b) the total amount of aid granted in accordance with this Decision, with a breakdown by the economic sector of the beneficiaries; (c) an indication of whether, for a particular type of service, the application of this Decision has given rise to difficulties or complaints by third parties; and (d) any other information concerning the application of this Decision required by the Commission and to be specified in due time before the report is to be submitted. The first report shall be submitted by 30 June 2014.

The Member States have comprehensive reporting obligations, which correspond fully with those set out in the SGEI framework.636 The intervals of the reporting obligation were reduced by one year compared to the Decision 2005/842/EC, which obliged the Member States to present a report to the Commission every three years. 637 A breach will not, as a general rule, legally result in the substantive and legal loss of the effects of the exemption decision. However, the Member States will, as a result, not be able to fulfil their obligation to provide the necessary proof for the application of Article 106(2) TFEU

636

SGEI Framework, mn. 62. The first reports had to be turned in by 19 December 2008. See for example the 1 st “Report of the Federal Republic of Germany regarding the ‘Altmark-Packet’ of the European Commission”. 637

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and from which it is not exempted due to the Decision – consequently, it is possible that the Commission may introduce a formal examination procedure. Article 10 Transitional provisions

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This Decision shall apply to individual aid and aid schemes as follows: (a) any aid scheme put into effect before the entry into force of this Decision that was compatible with the internal market and exempted from the notification requirement in accordance with Decision 2005/842/EC shall continue to be compatible with the internal market and exempt from the notification requirement for a further period of 2 years; (b) any aid put into effect before the entry into force of this Decision that was not compatible with the internal market nor exempted from the notification requirement in accordance with Decision 2005/842/EC but fulfils the conditions laid down in this Decision shall be compatible with the internal market and exempt from the requirement of prior notification.

Article 10 contains transitional provisions for compensation measures according to the previous exemption decision 2005/842/EC, as well as others. Paragraph 1 provides that the previous exemption continues to be valid for two years from its entry into force (31 January 2012, according to Article 12). Such exemption is necessary, since Decision 2005/842/EC is no longer applicable due to its annulment pursuant Article 11 and – for the very reason that it did not provide for the exemption merely for a limited period of time – it did not provide for any future regulation beyond its period of enforcement. Therefore, Article 10(1) is no limitation on the previous exemption, but rather a positive exemption order which stands alongside the general requirements set out by this Decision, having regarded the Member States’ interest in protecting their legitimate expectation. Article 10(2) declares State aid as compatible with the internal market and exempts it 184 from the notification requirement even if it had been granted illegally due to the fact that it were not compatible with the internal market according to neither Decision 2005/842/EC nor to other exceptional regulations. According to the wording, compensatory measures laid down in an act of entrustment fall under an exemption not only from the time at which the SGEI Decision entered into force (Article 12), but also retrospectively. Thus, this amnesty granting regulation seems to also exclude any recovery decision pursuant Article 14 Regulation (EC) No 659/1999). However, this comprehensive rule cannot prevent, according to the CELF decision of the ECJ that an interest at an appropriate rate for the period during which the aid was illegal has to be paid.638 Article 11 Repeal Decision 2005/842/EC is hereby repealed.

Article 12 Entry into force This Decision shall enter into force on 31 January 2012.

Article 13 Addressees This Decision is addressed to the Member States.

638

ECJ Case C-199/06 CELF [2008] ECR I-469, mn. 32 et seq.

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PART IV COMMISSION REGULATION (EU) NO 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (“Group Block Exemption Regulation – GBER”) (Text with EEA relevance) THE EUROPEAN COMMISSION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 108(4) thereof, Having regard to Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid1, and in particular Article 1(1)(a) and (b) thereof, After consulting the Advisory Committee on State Aid, Whereas: (1) State funding meeting the criteria in Article 107(1) of the Treaty constitutes State aid and requires notification to the Commission by virtue of Article 108(3) of the Treaty. However, according to Article 109 of the Treaty, the Council may determine categories of aid that are exempted from this notification requirement. In accordance with Article 108(4) of the Treaty the Commission may adopt regulations relating to those categories of State aid. Council Regulation (EC) No 994/98 empowers the Commission to declare, in accordance with Article 109 of the Treaty, that the following categories may, under certain conditions, be exempted from the notification requirement: aid to small and medium-sized enterprises (SMEs), aid in favour of research and development, aid in favour of environmental protection, employment and training aid and aid that complies with the map approved by the Commission for each Member State for the grant of regional aid. On that basis, the Commission adopted Commission Regulation (EC) No 800/20082. Regulation (EC) No 800/2008 originally applied until 31 December 2013 but was subsequently prolonged by Commission Regulation (EU) No 1224/2013 of 29 November 2013 amending Regulation (EC) No 800/2008 as regards its period of application3 and now expires on 30 June 2014. On 22 July 2013 Regulation (EC) No 994/98 was amended by Council Regulation (EU) No 733/2013 of 22 July 2013 amending Regulation (EC) No 994/98 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid4 to empower the Commission to extend the block exemption to new categories of aid, in respect of which clear compatibility conditions can be defined. Such new categories of block exempted aid include: aid to make good the damage caused by certain natural disasters, social aid for transport for residents of remote regions, aid for broadband infrastructures, aid 1

OJ OJ 3 OJ 4 OJ 2

L L L L

142, 241, 320, 204,

14.5.1998, p. 1. 9.8.2008, p. 3. 30.11.2013, p. 22. 31.7.2013, p. 11.

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for innovation, aid for culture and heritage conservation, aid for sport and multifunctional recreational infrastructures. Provided that sufficient case experience is further developed allowing the design of operational exemption criteria ensuring the ex-ante compatibility of other categories of aid, the Commission intends to review the scope of this Regulation with a view to including certain types of aid in those areas. In particular, the Commission envisages developing criteria for port and airport infrastructure by December 2015. (2) With its Communication on EU State Aid Modernisation (SAM)5, the Commission launched a wider review of the State aid rules. The main objectives of this modernisation are (i) to achieve sustainable, smart and inclusive growth in a competitive internal market, while contributing to Member State efforts towards a more efficient use of public finances, (ii) to focus Commission ex ante scrutiny of aid measures on cases with the biggest impact on the internal market, while strengthening Member State cooperation in State aid enforcement, and (iii) to streamline the rules and provide for faster, better informed and more robust decisions based on a clear economic rationale, a common approach and clear obligations. The review of Regulation (EC) No 800/2008 constitutes a central element of SAM. (3) This Regulation should allow for better prioritisation of State aid enforcement activities, greater simplification and should enhance transparency, effective evaluation and the control of compliance with the State aid rules at national and Union levels, while preserving the institutional competences of the Commission and the Member States. In accordance with the principle of proportionality this Regulation does not go beyond what is necessary in order to achieve those objectives. (4) The Commission’s experience in applying Regulation (EC) No 800/2008 has allowed it to better define the conditions under which certain categories of aid can be considered compatible with the internal market and to extend the scope of block exemptions. It also revealed the necessity to strengthen transparency, monitoring and proper evaluation of very large schemes in light of their effect on competition in the internal market. (5) The general conditions for the application of this Regulation should be defined on the basis of a set of common principles that ensure the aid serves a purpose of common interest, has a clear incentive effect, is appropriate and proportionate, is granted in full transparency and subject to a control mechanism and regular evaluation, and does not adversely affect trading conditions to an extent that is contrary to the common interest. (6) Aid that fulfils all the conditions laid down in this Regulation both general and specific to the relevant categories of aid should be exempted from the notification obligation laid down in Article 108(3) of the Treaty. (7) State aid within the meaning of Article 107(1) of the Treaty not covered by this Regulation remains subject to the notification requirement of Article 108(3) of the Treaty. This Regulation is without prejudice to the possibility for Member States to notify aid the objectives of which correspond to objectives covered by this Regulation. (8) In view of the greater potential impact of large schemes on trade and competition, aid schemes with an average annual State aid budget exceeding a threshold based on an absolute value should in principle be subject to State aid evaluation. The evaluation should aim at verifying whether the assumptions and conditions underlying the compatibility of the scheme have been achieved, as well as the effectiveness of the aid measure in the light of its general and specific objectives and should 5

COM(2012) 209, 8.5.2012.

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provide indications on the impact of the scheme on competition and trade. In order to ensure equal treatment, State aid evaluation should be carried out on the basis of an evaluation plan approved by the Commission. While such plan should normally be drawn up at the moment of the design of the scheme and approved in time for the scheme to enter into force, this may not be possible in all cases. Therefore, in order not to delay their entry into force, this Regulation will apply to such schemes for a maximum period of six months. The Commission may decide to extend this period, upon approval of the evaluation plan. To this end, the evaluation plan should be notified to the Commission within 20 working days following the entry into force of the scheme. The Commission can also exceptionally decide that an evaluation is not necessary given the specificities of the case. The Commission should receive from the Member State the necessary information to be able to carry out the assessment of the evaluation plan and request additional information without undue delay allowing the Member State to complete the missing elements for the Commission to take a decision. In view of the novelty of this process, the Commission will provide, in a separate document, a detailed guidance on the procedure applicable during the 6 months period for the approval of the evaluation plan and the relevant templates through which the evaluation plans will have to be submitted. Alterations of schemes subject to evaluation, other than modifications which cannot affect the compatibility of the aid scheme under this Regulation or cannot significantly affect the content of the approved evaluation plan, should be assessed taking account of the outcome of such evaluation and should be excluded from the scope of this Regulation. The alterations such as purely formal modifications, administrative modifications or alterations carried out within the framework of the EU co-financed measures should not, in principle, be considered as significantly affecting the content of the approved evaluation plan. (9) This Regulation should not apply to aid contingent upon the use of domestic over imported products or aid to export-related activities. In particular, it should not apply to aid financing the establishment and operation of a distribution network in other countries. Aid towards the cost of participating in trade fairs or of studies or consultancy services needed for the launch of a new or existing product on a new market in another Member State or third country does not normally constitute aid to export-related activities. (10) This Regulation should apply in principle across most sectors of the economy. However, in some sectors, such as the fisheries and aquaculture sector and primary agricultural production, the scope should be limited in the light of the special rules applicable. (11) This Regulation should apply to the processing and marketing of agricultural products, provided that certain conditions are met. For the purposes of this Regulation neither on-farm activities necessary for preparing a product for the first sale, nor the first sale by a primary producer to resellers or processors or any activity preparing a product for a first sale should be considered processing or marketing. (12) This Regulation should not apply to aid to facilitate the closure of uncompetitive coal mines, which is dealt with by the Council Decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines6. This Regulation should apply to other types of aid in the coal sector, with the exception of regional aid. (13) The Commission should ensure that authorised aid does not adversely affect trading conditions to an extent that is contrary to the common interest. Therefore, 6

OJ L 336, 21.12.2010, p. 24.

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aid in favour of a beneficiary which is subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market should be excluded from the scope of this Regulation, with the exception of aid schemes to make good the damage caused by certain natural disasters. (14) Aid granted to undertakings in difficulty should be excluded from the scope of this Regulation, since such aid should be assessed under the Community guidelines on State aid for rescuing and restructuring firms in difficulty of 1 October 20047 as prolonged by Commission communication concerning the prolongation of the application of the Community guidelines on State aid for rescuing and restructuring firms in difficulty of 1 October 20048 or their successor Guidelines, in order to avoid their circumvention, with the exception of aid schemes to make good the damage caused by certain natural disasters. In order to provide legal certainty, it is appropriate to establish clear criteria that do not require an assessment of all the particularities of the situation of an undertaking to determine whether an undertaking is considered to be in difficulty for the purposes of this Regulation. (15) State aid enforcement is highly dependent on the cooperation of Member States. Therefore, Member States should take all necessary measures to ensure compliance with this Regulation, including compliance of individual aid granted under block-exempted schemes. (16) Due to the high risk of adversely affecting trading conditions, large amounts of aid granted either individually or cumulatively should be assessed by the Commission upon notification. Thresholds should therefore be set for each category of aid falling within the scope of this Regulation at a level which takes into account the category of aid concerned and its likely effect on trading conditions. Any aid granted above those thresholds should remain subject to the notification requirement of Article 108(3) of the Treaty. The thresholds set out in this Regulation should not be circumvented by artificially splitting up aid schemes or aid projects into several aid schemes or projects with similar characteristics, objectives or beneficiaries. (17) For the purpose of transparency, equal treatment and effective monitoring, this Regulation should apply only to aid in respect of which it is possible to calculate precisely the gross grant equivalent ex ante without the need to undertake a risk assessment (‘transparent aid’). For certain specific aid instruments, such as loans, guarantees, tax measures, risk finance measures and, in particular, repayable advances, this Regulation should define the conditions under which they can be considered transparent. Capital injections should not be considered transparent aid, without prejudice to specific conditions concerning risk finance and start-up aid. Aid comprised in guarantees should be considered as transparent if the gross grant equivalent has been calculated on the basis of safeharbour premiums laid down for the respective type of undertaking. In the case of small and medium-sized enterprises (SMEs), the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees9 indicates levels of annual premium above which a State guarantee would be deemed not to constitute aid. (18) In order to ensure that the aid is necessary and acts as an incentive to further develop activities or projects, this Regulation should not apply to aid for activities in which the beneficiary would in any case engage even in the absence of the aid. Aid should only be exempted from notification under this Regulation if the work on the 7

OJ C 244, 1.10.2004, p. 2. OJ C 296, 2.10.2012, p. 3. 9 OJ C 155, 20.6.2008, p. 10. 8

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aided project or activity starts after the beneficiary has submitted a written application for the aid. (19) As regards any ad hoc aid covered by this Regulation granted to a beneficiary who is a large enterprise, the Member State should ensure that, in addition to complying with the conditions relating to incentive effect which apply to beneficiaries who are SMEs, the beneficiary has analysed, in an internal document, the viability of the aided project or activity with aid and without aid. The Member State should verify that this internal document confirms a material increase in the scope of the project/ activity, a material increase in the total amount spent by the beneficiary on the subsidised project or activity or a material increase in the speed of completion of the project/activity concerned. Regional aid should be considered to have an incentive effect if the investment project would not have been carried out in the assisted region concerned in the absence of the aid. (20) Automatic aid schemes in the form of tax advantages should continue to be subject to a specific condition concerning the incentive effect, due to the fact that this kind of aid is granted under different procedures than other categories of aid. Such schemes should already have been adopted before work on the aided project or activity started. However, this condition should not apply in the case of fiscal successor schemes provided the activity was already covered by the previous fiscal schemes in the form of tax advantages. For the assessment of the incentive effect of such schemes, the crucial moment is the moment when the tax measure was set out for the first time in the original scheme, which is then replaced by the successor scheme. (21) As regards regional operating aid, regional urban development aid, aid for access to finance for SMEs, aid for the recruitment of disadvantaged workers, aid for employment of workers with disabilities and aid compensating for the additional costs of employing workers with disabilities, aid in the form of reductions in environmental taxes, aid to make good the damage caused by certain natural disasters, social aid for transport for residents of remote regions and aid for culture and heritage conservation, the requirement regarding the existence of an incentive effect does not apply or should be presumed as having been complied with, if the specific conditions set out for those categories of aid in this Regulation are fulfilled. (22) With a view to ensuring that aid is proportionate and limited to the amount necessary, maximum aid amounts should, whenever possible, be defined in terms of aid intensities in relation to a set of eligible costs. Where the maximum aid intensity cannot be set, because eligible costs cannot be identified or in order to provide simpler instruments for small amounts, maximum aid amounts defined in nominal terms should be set out in order to ensure proportionality of aid measures. The aid intensity and the maximum aid amounts should be fixed, in the light of the Commission’s experience, at a level that minimises distortions of competition in the aided sector while appropriately addressing the market failure or cohesion issue. For regional investment aid, the aid intensity should comply with the allowable aid intensities under the regional aid maps. (23) For the calculation of aid intensity, only eligible costs should be included. The Regulation shall not exempt aid which exceeds the relevant aid intensity as a result of including ineligible costs. The identification of eligible costs should be supported by clear, specific and up-to date documentary evidence. All figures used should be taken before any deduction of tax or other charges. Aid payable in several instalments should be discounted to its value at the moment it is granted. The eligible costs should also be discounted to their value at the moment of granting. The interest rate Jestaedt/Knoblich/v. Wendland/Haslinger/Rosenfeld/Scharf

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to be used for discounting purposes and for calculating the amount of aid in the case of aid which does not take the form of a grant should be respectively the discount rate and the reference rate applicable at the time of the grant, as laid down in the Commission Communication on the revision of the method for setting the reference and discount rates10. Where aid is granted by means of tax advantages, aid tranches should be discounted on the basis of the discount rates applicable on the various dates when the tax advantages become effective. The use of aid in the form of repayable advances should be promoted, since such risk-sharing instruments are conducive to strengthened incentive effect of aid. It is therefore appropriate to establish that where aid is granted in the form of repayable advances the applicable aid intensities laid down in this Regulation may be increased, with the exception of regional aid since the latter may only be exempted if it complies with approved maps. (24) In the case of tax advantages on future taxes, the applicable discount rate and the exact amount of the aid tranches may not be known in advance. In such cases, Member States should set in advance a cap on the discounted value of the aid respecting the applicable aid intensity. Subsequently, when the amount of the aid tranche at a given date becomes known, discounting can take place on the basis of the discount rate applicable at that time. The discounted value of each aid tranche should be deducted from the overall amount of the cap (capped amount). (25) To determine whether the notification thresholds and the maximum aid intensities laid down in this Regulation are respected, the total amount of State aid measures for the aided activity or project should be taken into account. Moreover, this Regulation should specify the circumstances under which different categories of aid may be cumulated. Aid exempted by this Regulation and any other compatible aid exempted under other Regulation or approved by the Commission may be cumulated as long as those measures concern different identifiable eligible costs. Where different sources of aid are related to the same — partly or fully overlapping — identifiable eligible costs, cumulation should be allowed up to the highest aid intensity or aid amount applicable to that aid under this Regulation. This Regulation should also set out special rules for cumulation of aid measures with and without identifiable eligible costs, for cumulation with de minimis aid and for cumulation with aid in favour of workers with disabilities. De minimis aid is often not granted for or attributable to specific identifiable eligible costs. In such a case it should be possible to freely cumulate de minimis aid with State aid exempted under this Regulation. Where, however, de minimis aid is granted for the same identifiable eligible costs as State aid exempted under this Regulation, cumulation should only be allowed up to the maximum aid intensity as set out in Chapter III of this Regulation. (26) Union funding centrally managed by the institutions, agencies, joint undertakings or other bodies of the Union, that is not directly or indirectly under the control of Member States, does not constitute State aid. Where such Union funding is combined with State aid, only the latter should be considered for determining whether notification thresholds and maximum aid intensities are respected, provided the total amount of public funding granted in relation to the same eligible costs does not exceed the most favourable funding rate laid down in the applicable rules of Union law. (27) Given that State aid within the meaning of Article 107(1) of the Treaty is, in principle, prohibited, it is important for all parties to be able to check whether an aid is granted in compliance with the applicable rules. Transparency of State aid is, therefore, essential for the correct application of Treaty rules and leads to better 10

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OJ C 14, 19.1.2008, p. 6.

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compliance, greater accountability, peer review and ultimately more effective public spending. To ensure transparency, Member States should be required to establish comprehensive State aid websites, at regional or national level, setting out summary information about each aid measure exempted under this Regulation. That obligation should be a condition for the compatibility of the individual aid with the internal market. Following the standard practice regarding the publication of information in Directive 2013/37/EU of the European Parliament and of the Council of 26 June 2013 amending Directive 2003/98/EC on the re-use of public sector information11, a standard format should be used which allows the information to be searched, downloaded and easily published on the internet. The links to the State aid websites of all the Member States should be published on the Commission’s website. In accordance with Article 3 of Regulation (EC) No 994/98, as amended by Regulation (EU) No 733/ 2013, summary information on each aid measure exempted under this Regulation should be published on the website of the Commission. (28) To ensure effective monitoring of aid measures in accordance with Regulation (EC) No 994/98, as amended by Regulation (EU) No 733/2013, it is appropriate to establish requirements regarding the reporting by the Member States of aid measures which have been exempted pursuant to this Regulation and the application of this Regulation. Moreover, it is appropriate to establish rules concerning the records that Member States should keep regarding the aid exempted by this Regulation, in light of the limitation period established in Article 15 of Council Regulation (EC) No 659/ 1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty12. (29) To reinforce the effectiveness of compatibility conditions set out in this Regulation, it should be possible for the Commission to withdraw the benefit of the block exemption for the future aid measures in the event of failure to comply with these requirements. The Commission should be able to restrict the withdrawal of the benefit of the block exemption to certain types of aid, certain beneficiaries or aid measures adopted by certain authorities, where non-compliance with this Regulation affects only a limited group of measures or certain authorities. Such a targeted withdrawal should provide a proportionate remedy directly linked to the identified non-compliance with this Regulation. In case of failure to meet compatibility conditions set out in Chapters I and III, aid granted is not covered by this Regulation and, as a consequence, constitutes unlawful aid, which the Commission will examine in the framework of the relevant procedure as set out in Regulation No (EC) No 659/1999. In case of failure to fulfil the requirements of Chapter II, the withdrawal of the benefit of the block exemption in respect of the future aid measures does not affect the fact that the past measures complying with this Regulation were block exempted. (30) To eliminate differences that might give rise to distortions of competition and to facilitate coordination between different Union and national initiatives concerning SMEs, as well as for reasons of administrative clarity and legal certainty, the definition of SME used for the purpose of this Regulation should be based on the definition in Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium sized enterprises13. (31) By addressing the handicaps of disadvantaged regions, regional aid promotes the economic, social and territorial cohesion of Member States and the Union as a whole. Regional aid is designed to assist the development of the most disadvantaged 11

OJ L 175 27.6.2013, p. 1. OJ L 83, 27.3.1999, p. 1. 13 OJ L 124, 20.5.2003, p. 36. 12

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areas by supporting investment and job creation in a sustainable context. In areas fulfilling the conditions of Article 107(3)(a) of the Treaty, regional aid may be granted to promote the setting-up of new establishments, the extension of the capacity of an existing establishment, the diversification of the output of an establishment or a fundamental change in the overall production process of an existing establishment. Considering that large enterprises are less affected by regional handicaps than SMEs when investing in an area fulfilling the conditions of Article 107(3)(c) of the Treaty, regional aid to large enterprises should be exempted from the notification requirement only for initial investments in favour of new economic activity in those areas. (32) Where a regional aid scheme is targeted at a limited number of sectors of the economy, the objective and likely effects of the scheme may be sectorial rather than horizontal. Therefore, sectorial schemes cannot be exempted from the notification requirement. However, the Commission, upon notification, can assess their possible positive effects under the applicable guidelines or frameworks or decisions. In particular, this is the case for aid schemes covering economic activities in the coal sector, the shipbuilding sector, the transport sector. Furthermore, due to particular characteristics of the steel and synthetic fibres sectors, it is considered that the negative effects of regional aid in those sectors cannot be outweighed by the positive cohesion effects; for those reasons, regional aid cannot be granted in these sectors. Finally, the tourism and broadband sectors play an important role in national economies and, in general, have a particularly positive effect on regional development. Regional aid schemes aimed at tourism activities and broadband should therefore be exempted from the notification requirement. Processing and marketing of agricultural products are also strongly linked with local and regional economies and should benefit from the block exemption. (33) Energy generation, distribution and infrastructure are subject to sectorspecific internal market legislation, which is reflected in the criteria for ensuring that aid in these areas is compatible with the internal market and consistent with the Union’s environmental and energy policies. Regional aid granted under Section 1 of this Regulation pursues economic development and cohesion objectives, and is therefore subject to very different compatibility conditions. The provisions of this Regulation on regional aid should therefore not apply to measures concerning energy generation, distribution and infrastructure. (34) Investments enabling undertakings to go beyond Union standards or increase the level of environmental protection in the absence of Union standards, investments for early adaptation to future Union standards, investments for energy efficiency measures, including energy efficiency projects in buildings, investments for remediation of contaminated sites and aid for environmental studies do not directly influence the functioning of energy markets. At the same time, such investments may contribute to both regional policy objectives and to the energy and environmental objectives of the European Union. In such cases, the provisions of this Regulation relating to both regional aid and aid for environmental protection may be applicable, depending on the main objective pursued by the measure concerned. (35) In order not to favour capital investment over investment in labour costs, it should be possible to measure regional investment aid on the basis of either the costs of the investment or the wage costs of employment directly created by an investment project. (36) Regional investment aid should not be exempted from notification when it is granted to a beneficiary that has closed down the same or a similar activity in the European Economic Area in the two years preceding its application for regional 390

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investment aid or, at the time of the aid application, has concrete plans to close down such an activity within a period of up to two years after the initial investment for which aid is requested is completed in the area concerned. (37) The Commission has gained sufficient experience in the application of Article 107(3)(a) and (c) of the Treaty as regards regional operating aid to compensate for the additional transport costs of goods produced in the outermost regions or in sparsely populated areas, and of goods further processed in those areas, as well as the additional production and operating costs (other than additional transport costs) incurred by beneficiaries established in the outermost regions. Since there is a risk of over-compensation for transport costs resulting from additional support under the POSEI programmes in the agriculture sector and since it cannot be excluded that some agricultural products are not produced in an alternative location, the agriculture sector should be excluded from regional operating aid to compensate the additional transport costs of goods produced in the outermost regions or in sparsely populated areas under this Regulation. Regional operating aid to compensate for additional costs in the outermost regions, other than additional transport costs, should only be considered compatible with the internal market and exempted from the notification requirement of Article 108(3) of the Treaty in so far as the level of that aid is limited to either 15 % of the gross value added annually created by the beneficiary in the outermost region concerned or 25 % of the annual labor costs incurred by the beneficiary in the outermost region concerned, or 10 % of the annual turnover of the beneficiary in the outermost region concerned. Where the aid does not exceed the amount resulting from one of those alternative methods to determine the additional operating costs (other than transport costs), it can be considered as justified in terms of contributing to regional development and proportionate to the handicaps that undertakings face in the outermost regions. (38) By addressing the high concentration of economic, environmental and social problems of urban areas located in assisted areas identified in a regional aid map, urban development aid contributes to the economic, social and territorial cohesion of the Member States and the Union as a whole. The market failures to be addressed by urban development aid refer to the urban development funding environment, the lack of an integrated urban development approach, a funding deficit necessitating greater leverage of scarce public resources and the need for a more commercial approach to the regeneration of urban areas. Urban development aid to support the development of participative, integrated and sustainable strategies to tackle the additional problems identified in the assisted areas should therefore be covered by the block exemption. (39) Investments corresponding to the Europe 202014 priorities in green technologies and the shift towards a low carbon economy, undertaken in assisted areas as identified in the relevant regional aid map, should be eligible for higher aid amounts by means of a regional bonus. (40) SMEs play a decisive role in job creation and, more generally, act as a factor of social stability and economic development. However, their development may be hampered by market failures, leading to these SMEs suffering from the following typical handicaps. SMEs often have difficulties in obtaining capital or loans, given the riskaverse nature of certain financial markets and the limited collateral that they may be able to offer. Their limited resources may also restrict their access to information, notably regarding new technology and potential markets. 14

EUCO 13/10 REV 1.

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To facilitate the development of the economic activities of SMEs, this Regulation should therefore exempt certain categories of aid when they are granted in favour of SMEs. Those categories should include, in particular SME investment aid and SME participation in fairs. (41) SMEs participating in the European Territorial Cooperation (ETC) projects covered by Regulation (EU) No 1299/2013 of the European Parliament and of the Council of 17 December 2013 on specific provisions for the support from the European Regional Development Fund to the European territorial cooperation goal15 often find difficulties in financing additional costs stemming from the cooperation between partners located in different regions and in different Member States or third countries. Given the importance of the ETC for the cohesion policy providing a framework for the implementation of joint actions and policy exchanges between national, regional and local actors from different Member States or third countries, this Regulation should address certain difficulties faced by ETC projects in order to facilitate their compliance with State aid rules. The ETC-specific issues that this Regulation should address relate to the applicable regional aid intensity for ETC projects, SMEs’ cooperation costs linked to ETC projects and to obligations concerning publication and information, reporting and keeping records for monitoring purposes. (42) Having regard to the specific handicaps and differences between SMEs, different basic aid intensities and different bonuses may apply. (43) On the basis of the experience gained in applying the Community guidelines on State aid to promote risk capital investments in SMEs16, there are a number of specific risk capital market failures in the Union in respect of certain types of investments at the different stages of the undertakings’ development. Those market failures result from an imperfect matching of supply and demand for risk capital. As a result, the level of risk capital provided in the market may be too restricted and undertakings do not obtain funding despite having a valuable business model and growth prospects. The main source of market failure relevant to risk capital markets, which particularly affects access to capital by SMEs and which may justify public intervention, relates to imperfect or asymmetric information. It not only affects the provision of risk capital, but also hampers access to debt finance for certain SMEs. Consequently, risk finance measures which seek to attract private capital for risk finance provision to unlisted SMEs affected by the funding gap and which ensure profit-driven financing decisions and commercial management of financial intermediaries should be exempted from the notification requirement under certain conditions. (44) Start-up aid for small enterprises, aid to alternative trading platforms specialised in SMEs and aid for costs related to the scouting of SMEs should also be exempted from the notification requirement under certain conditions. (45) Aid for research and development and innovation aid can contribute to sustainable economic growth, strengthen competitiveness and boost employment. Experience with the application of Regulation (EC) No 800/2008 and the Community framework for State aid for research and development and innovation17 shows that market failures may prevent the market from reaching optimal output and lead to inefficiencies related to externalities, public goods/knowledge spill-overs, imperfect and asymmetric information, and coordination and network failures. 15

OJ L 347, 20.12.2013, p. 259. OJ C 194, 18.8.2006, p. 2. 17 OJ C 323, 30.12.2006, p. 1. 16

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(46) SMEs, may experience difficulties in gaining access to new technological developments, knowledge transfer or highly qualified personnel. Aid for research and development projects, aid for feasibility studies and innovation aid for SMEs, including aid to cover the costs of industrial property rights, may remedy those problems and should therefore be exempted from the notification requirement under certain conditions. (47) As regards project aid for research and development, the aided part of the research project should completely fall within the categories of fundamental research, industrial research or experimental development. When a project encompasses different tasks, each task should be qualified as falling under one of those categories or as not falling under any of those categories. That qualification need not necessarily be chronological, moving sequentially over time from fundamental research to activities closer to the market. Accordingly, a task which is carried out at a late project stage may be qualified as industrial research. Similarly, an activity carried out at an earlier stage may constitute experimental development. The aided part of the project may also include feasibility studies preparatory to research activities. (48) High-quality research infrastructures are increasingly necessary for groundbreaking research and innovation because they attract global talent and are essential in supporting new information and communication technologies and key enabling technologies. Public research infrastructures should continue to partner with industry research. Access to publicly funded research infrastructures should be granted on a transparent and non-discriminatory basis and on market terms. If those conditions are not respected, the aid measure should not be exempted from the notification requirement. Multiple parties may own, operate and use a given research infrastructure, and public entities and undertakings may use the infrastructure collaboratively. (49) Research infrastructures may perform both economic and non-economic activities. In order to avoid granting State aid to economic activities through public funding of non-economic activities, the costs and financing of economic and noneconomic activities should be clearly separated. Where an infrastructure is used for both economic and non-economic activities, the funding through State resources of the costs linked to the noneconomic activities of the infrastructure does not constitute State aid. Public funding falls under State aid rules only insofar as it covers costs linked to the economic activities. Only the latter should be taken into account with a view to ensuring compliance with the notification thresholds and maximum aid intensities. If the infrastructure is used almost exclusively for a non-economic activity, its funding may fall outside State aid rules in its entirety, provided that the economic use remains purely ancillary, that is to say, an activity which is directly related to and necessary for the operation of the infrastructure or intrinsically linked to its main non-economic use, and is limited in scope. This should be considered to be the case when the economic activities consume the same inputs (such as material, equipment, labour and fixed capital) as the non-economic activities and the capacity allocated each year to such economic activity does not exceed 20 % of the research infrastructure’s overall annual capacity. (50) Aid for innovation clusters aims at tackling market failures linked with coordination problems hampering the development of clusters, or limiting the interactions and knowledge flows within clusters. State aid can either support investment in open and shared infrastructures for innovation clusters, or support the operation of clusters, so that collaboration, networking and learning is enhanced. Operating aid for innovation clusters should, however, only be allowed on a temporary basis for a limited period not exceeding 10 years. The ratio of the total amount of Jestaedt/Knoblich/v. Wendland/Haslinger/Rosenfeld/Scharf

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aid granted to the total eligible costs should not exceed 50 % during the period over which the aid is granted, (51) Process and organisational innovation may suffer from market failures in the form of imperfect information and positive externalities, which should be addressed by specific measures. Aid for this type of innovation is mainly relevant for SMEs, as they face constraints that may hamper their capability to improve their production or delivery methods or to significantly enhance their business practices, workplace organisation and external relations. In order to stimulate large enterprises to collaborate with SMEs in process and organisational innovation activities, aid measures which support the costs of large enterprises for such activities should also benefit from the block exemption regulation under certain conditions. (52) The promotion of training and the recruitment/employment of disadvantaged workers and of workers with disabilities constitutes a central objective of the economic and social policies of the Union and its Member States. (53) Training usually generates positive externalities for society as a whole, since it increases the pool of skilled workers from which other firms may draw, improves the competitiveness of the Union industry and plays an important role in the Union employment strategy. Aid to promote training should therefore be exempted from the notification requirement under certain conditions. In the light of the particular handicaps which SMEs face and the higher relative costs that they must bear when they invest in training, the intensities of aid exempted by this Regulation should be increased for SMEs. Furthermore, the intensities of aid exempted by this Regulation should be increased if the training is given to disadvantaged workers or to workers with disabilities. The characteristics of training in the maritime transport sector justify a specific approach for that sector. (54) Certain categories of disadvantaged workers and workers with disabilities still experience particular difficulties in entering and remaining in the labour market. For this reason, public authorities may apply measures providing incentives to undertakings to increase the levels of employment of these categories of workers, in particular of young people. As employment costs form part of the normal operating costs of any undertaking aid for the employment of disadvantaged workers and of workers with disabilities should have a positive effect on employment levels of those categories of workers and should not merely enable undertakings to reduce costs which they would otherwise have to bear. Consequently, such aid should be exempted from the notification requirement when it is likely to assist those categories of workers in entering or re-entering and remaining in the job market. As set out in the Communication from the Commission to The European Parliament, the Council, the European Economic And Social Committee and the Committee Of The Regions — European Disability Strategy 2010–2020: A Renewed Commitment to a Barrier-Free Europe18 the core elements of the EU disability strategy, combine anti-discrimination, equal opportunities and active inclusion measures and reflect the United Nations Convention on the Rights of Persons with Disabilities to which the EU and the majority of the Member States are a party. This Regulation should refer to aid for workers with disabilities in the sense of Article 1 of the Convention. (55) As stated in the Communication from the Commission — Europe 2020: A strategy for smart, sustainable and inclusive growth19, Sustainable growth for a resource efficient, greener and more competitive economy is one of the main pillars 18 19

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of the Europe 2020 objective of the smart, sustainable and inclusive growth strategy. Sustainable development is based, amongst other things, on a high level of protection and improvement of the quality of the environment. The area of environmental protection is confronted with market failures so that, under normal market conditions, undertakings may not necessarily have an incentive to reduce the pollution caused by them since any such reduction may increase their costs without corresponding benefits. When undertakings are not obliged to internalise the costs of pollution, society as a whole bears these costs. (56) Introducing mandatory environmental standards can address such market failure. A higher level of environmental protection can be achieved by investments that go beyond mandatory Union standards. In order to incentivise undertakings to improve the level of environmental protection beyond these mandatory Union standards, State aid in this area should be covered by the block exemption. In order not to dissuade Member States from setting mandatory national standards which are more stringent than the corresponding Union standards, such State aid should be exempt, irrespective of the presence of mandatory national standards that are more stringent than the Union standard. (57) In principle aid should not be granted where investments bring undertakings into compliance with Union standards already adopted and not yet in force. However, State aid may result in undertakings improving their environmental behaviour if such State aid incentivises undertakings to adapt early to future Union standards before such standards enter into force and as long as such standards do not apply retroactively. Aid to undertakings to adapt to future Union standards, may result in a high level of environmental protection being achieved sooner and such aid should therefore be exempted. (58) As part of the Europe 2020 strategy, the Union has set itself the objective of achieving a 20 % increase in energy efficiency by 2020 and has, in particular, adopted Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC20 which establishes a common framework to promote energy efficiency within the Union pursuing the overall objective of saving at least 20 % of the Union’s primary energy consumption. In order to facilitate the achievement of those targets, measures supporting energy efficiency, highefficiency cogeneration as well as energy efficient district heating and cooling should be covered by the block exemption. (59) Measures increasing the energy efficiency of buildings correspond to Europe 2020 priorities concerning a shift towards a low carbon economy. Due to the lack of an integrated approach for energy efficiency in buildings, such investments may often face a funding deficit necessitating greater leverage of scarce public resources. Therefore the Member States should have the possibility to support energy efficiency investments in buildings by granting aid in the form of direct grants to the building owners or tenants in line with the general provisions on energy efficiency measures but also in the form of loans and guarantees via financial intermediaries chosen under a transparent selection mechanism under the specific provisions for energy efficiency projects in buildings. (60) To achieve the Union’s renewable energy targets set out in Directive 2009/28/ EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently 20

OJ L 315, 14.11.2012, p. 1.

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repealing Directives 2001/77/EC and 2003/30/EC21 and to the extent that additional support is needed on top of a regulatory framework such as the Union emission trading scheme in Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/ EC22, aid granted to investments supporting energy from renewable sources should be covered by the block exemption. (61) In view of the limited distortions of trade and competition, the block exemption should also cover operating aid for small scale installations producing renewable energy, subject to well-defined conditions. Operating aid to larger scale installations should be covered by the block exemption where distortions of competition are limited. Therefore, such operating aid can be block exempted when granted to new and innovative technologies if the aid is granted on the basis of a competitive bidding process open to at least one such technology using a mechanism which exposes renewable energy producers to market prices. The total aid granted on this basis cannot be granted for more than 5 % of the planned new electricity capacity from renewable energy sources. Aid granted through bidding processes open to all renewable energy technologies should be fully covered by the block exemption. Operating aid schemes should in principle be opened to other EEA countries and contracting parties of the Energy Community to limit the overall distortive effects. Member States are encouraged to consider having a cooperation mechanism in place before allowing cross border support. In the absence of a cooperation mechanism, production from installations in other countries will not count towards their national renewable energy target. In view of these constraints, Member States should be allowed sufficient lead time in order to design appropriate support schemes that are open to other countries. Therefore, such opening is not a condition for exemption from notification, to the extent it is not required under the Treaty. (62) With regard to aid for the production of hydropower, its impact can be twofold. On the one hand, it has a positive impact in terms of low greenhouse gas emissions and on the other hand it might also have a negative impact on water systems and biodiversity. Therefore, when granting aid to hydropower Member States should comply with Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy23 and in particular Article 4(7) which lays down criteria in relation to allowing new modifications of bodies of water. (63) Aid should only be granted to sustainable forms of renewable energy. Aid to biofuels should only be covered by this Regulation in so far as it is granted for sustainable biofuels in accordance with the Directive 2009/28/EC of the European Parliament and the Council. However, aid for food based biofuels should be excluded from aid under this Regulation to incentivise the shift towards the production of more advanced forms of biofuels. Aid to biofuels that are subject to a supply or blending obligation should be excluded from the scope of the block exemption as the above legal obligation may provide sufficient incentive for investments in these types of renewable energy. (64) Aid in the form of tax reductions pursuant to Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy 21

OJ L 140, 5.6.2009, p. 16. OJ L 275, 25.10.2003, p. 32. 23 OJ L 327, 22.12.2000, p. 1. 22

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products and electricity24 favouring environmental protection covered by this Regulation can indirectly benefit the environment. However, environmental taxes should reflect the social cost of emissions while reductions from taxes may adversely impact on this objective. It therefore seems appropriate to limit their duration to the period of application of this Regulation. After this period, Member States should re-evaluate the appropriateness of the tax reductions concerned. In order to minimise the distortion of competition, the aid should be granted in the same way for all competitors found to be in a similar factual situation. To better preserve the price signal for undertakings which the environmental tax aims to give, Member States should have the option to design the tax reduction scheme based on a fixed annual compensation amount (tax refund) disbursement mechanism. (65) In the light of the ‘polluter pays principle’, the costs of measures to deal with pollution should be borne by the polluter who causes the pollution. Aid for the remediation of contaminated sites is justified in cases where the person liable under the applicable law for the contamination cannot be identified. However, the conditions on environmental liability with regard to the prevention and remediation of environmental damage as defined in the Directive 2004/35/EC of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage25 as amended by Directive 2006/21/EC of the European Parliament and of the Council of 15 March 2006 on the management of waste from extractive industries and amending Directive 2004/35/EC26 and Directive 2009/31/EC of the European Parliament and of the Council of 23 April 2009 on the geological storage of carbon dioxide and amending Council Directive 85/337/EEC, European Parliament and Council Directives 2000/60/ EC, 2001/80/EC, 2004/35/EC, 2006/12/EC, 2008/1/EC and Regulation (EC) No 1013/ 200627 should apply. Therefore, to facilitate the correction of existing environmental damage, this type of aid should be covered by the block exemption under certain conditions. (66) In line with the waste hierarchy established in the European Union’s Waste Framework Directive, the Seventh Environment Action Programme identifies waste re-use and recycling as key priorities of the European Union environmental policy. State aid for these activities can contribute to environmental protection provided that Article 4(1) of Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on waste and repealing certain Directives (Waste Framework Directive)28 are respected. Moreover, such aid should not indirectly relieve the polluters of a burden they should bear under Union law, or of a burden that should be considered a normal company cost. Therefore, aid benefitting such activities should be covered by the block exemption including when it concerns waste of other undertakings and where the materials treated would otherwise be disposed of, or be treated in a less environmentally friendly manner. (67) A modern energy infrastructure is crucial both for an integrated energy market and to enable the Union to meet its climate and energy goals. In particular, infrastructure construction and upgrade in assisted regions contribute to the economic, social and territorial cohesion of Member States and the Union as a whole by supporting investment and job creation and the functioning of energy markets in the 24

OJ OJ 26 OJ 27 OJ 28 OJ 25

L L L L L

283, 143, 102, 140, 312,

31.10.2003, p. 51. 30.4.2004, p. 56. 11.4.2006, p. 15. 5.6.2009, p. 114. 22.11.2008, p. 3.

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most disadvantaged areas. In order to limit any undue distortive effects of such aid, only aid to infrastructures subject to and in accordance with the internal energy market legislation should be block exempted. (68) Environmental studies can help to identify the investments necessary to achieve a higher level of environmental protection. State aid to support the carrying out of environmental studies which aim to support investments in environmental protection as covered by this Regulation should therefore be covered by the block exemption. As energy audits are mandatory for large enterprises, they should not benefit from State aid. (69) In accordance with Article 107(2)(b) of the Treaty, aid to make good the damage caused by natural disasters is compatible with the internal market. In order to provide legal certainty it is necessary to define the type of events that may constitute a natural disaster exempted by this Regulation. For the purposes of this Regulation, earthquakes, landslides, floods, in particular floods brought about by waters overflowing river banks or lake shores, avalanches, tornadoes, hurricanes, volcanic eruptions and wildfires of natural origin should be considered events constituting a natural disaster. Damage caused by adverse weather conditions such as frost, hail, ice, rain or drought, which occur on a more regular basis, should not be considered a natural disaster within the eaning of Article 107(2)(b) of the Treaty. In order to ensure that aid granted to make good the damage caused by natural disasters is indeed covered by the exemption, this Regulation should lay down conditions following established practice the fulfilment of which will ensure that aid schemes to make good the damage caused by natural disasters can benefit from block exemption. Those conditions should relate, in particular, to the formal recognition by the competent Member States’ authorities of the character of the event as a natural disaster and to a direct causal link between the natural disaster and the damages suffered by the beneficiary undertaking, which may include undertakings in difficulty, and should ensure that overcompensation is avoided. The compensation should not exceed what is necessary to enable the beneficiary to return to the situation prevailing before the disaster occurred. (70) Aid has a social character for air and maritime passenger transport where it addresses the problem of steady connectivity for residents of remote regions by reducing certain transport ticket costs for them. This may be the case for outermost regions, Malta, Cyprus, Ceuta and Melilla, other islands which are part of the territory of a Member State and sparsely populated areas. Where a remote region is linked to the European Economic Area by several transport routes, including indirect routes, aid should be possible for all those routes and for transport by all carriers operating on these routes. Aid should be granted without discrimination as to the identity of the carrier or type of service and may include regular, charter and low-cost services. (71) Broadband connectivity is of strategic importance for the achievement of the Europe 2020 objective of smart, sustainable and inclusive growth and innovation and for social and territorial cohesion29. Investment aid for broadband infrastructure aims at fostering the deployment of such infrastructure and related civil engineering works in areas where no comparable infrastructure exists nor is likely to be deployed by market operators in the near future. In the light of the Commission’s experience, such investment aid does not give rise to undue distortions of trade and competition, provided that certain conditions are met. Such conditions should aim, in particular, 29

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at limiting distortions of competition by subjecting aid to technology-neutral competitive selection and by ensuring wholesale access to the subsidised networks, taking into account the aid received by the network operator. Although under certain conditions virtual unbundling may be considered equivalent to physical unbundling, until more experience is acquired, there is a need to assess on a case by case basis whether a particular non-physical or virtual wholesale access product should be considered equivalent to local loop unbundling of a copper or fibre network. For this reason, and until such experience in individual State aid cases or in the ex ante regulatory context can be taken into account in a future review, physical unbundling should be required for the purposes of benefiting from the present block exemption regulation. Where future costs and revenue developments are uncertain and there is a strong asymmetry of information, Member States should also adopt financing models that include monitoring and claw-back elements to allow a balanced sharing of unanticipated gains. To avoid a disproportionate burden on small, local projects, such models should be put in place only for projects exceeding a minimum threshold. (72) In the culture and heritage conservation sector, a number of measures taken by Member States may not constitute aid because they do not fulfil all the criteria of Article 107(1) of the Treaty, for example because the activity is not economic or because trade between Member States is not affected. To the extent that such measures are covered by Article 107(1) of the Treaty, cultural institutions and projects do not typically give rise to any significant distortion of competition, and case practice has shown that such aid has limited effects on trade. Article 167 of the Treaty recognises the importance of promoting culture for the Union and its Member States and provides that the Union should take cultural aspects into account in its action under other provisions of the Treaty, in particular in order to respect and to promote the diversity of its cultures. As natural heritage is often crucial to shaping of artistic and cultural heritage, heritage conservation in the sense of this Regulation should be understood to cover also natural heritage linked to cultural heritage or formally recognised by the competent public authorities of a Member State. Because of the dual nature of culture, being on the one hand an economic good that offers important opportunities for the creation of wealth and employment, and, on the other, a vehicle of identities, values and meanings that mirror and shape our societies, State aid rules should acknowledge the specificities of culture and the economic activities related to it. A list of eligible cultural purposes and activities should be established and eligible costs should be specified. The block exemption should cover both investment and operating aid below determined thresholds provided that overcompensation is excluded. In general, activities which, although they may present a cultural aspect, have a predominantly commercial character because of the higher potential for competition distortions, such as press and magazines (written or electronic), should not be covered. Furthermore, the list of eligible cultural purposes and activities should not include commercial activities such as fashion, design or video games. (73) Audiovisual works play an important role in shaping European identities and reflect the different traditions of Member States and regions. While there is strong competition between films produced outside the Union, there is limited circulation of European films outside their country of origin due to the fragmentation into national or regional markets. The sector is characterised by high investment costs, a perceived lack of profitability due to limited audiences and difficulties to generate additional private funding. Due to these factors the Commission has developed specific criteria to assess the necessity, proportionality and adequacy of aid to script-writing, development, Jestaedt/Knoblich/v. Wendland/Haslinger/Rosenfeld/Scharf

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production, distribution and promotion of audiovisual works. New criteria were determined in the Communication from the Commission on State aid for films and other audiovisual works30 and should be reflected in block exemption rules for aid schemes for audiovisual works. Higher aid intensities are justified for cross-border productions and co-productions which are more likely to be distributed in several Member States. (74) Investment aid measures for sport infrastructures should be covered by the block exemption if they fulfil the conditions laid down in this Regulation, to the extent they constitute State aid. In the sport sector a number of measures taken by Member States may not constitute State aid because the beneficiary does not carry out an economic activity or because there is no effect on trade between Member States. This could be, under certain circumstances, the case for aid measures which have a purely local character or which are taken in the field of amateur sport. Article 165 of the Treaty recognises the importance of promoting European sporting issues, while taking account of the specific nature of sport, its structures based on voluntary activity and its social and educational function. Aid to infrastructures which serve more than one purpose of recreation and are thus multifunctional should also be covered by the block exemption. However, aid to multifunctional tourism infrastructures such as leisure parks and hotel facilities should only be exempted if it is part of a regional aid scheme aimed at tourism activities in an assisted region which have a particular positive effect on regional development. The compatibility conditions regarding aid for sport or multifunctional infrastructures should ensure, in particular, open and non-discriminatory access to the infrastructures and a fair process of assignment of concessions to a third party in accordance with the relevant provisions of Union law and the case law of the Union to construct, upgrade and/or operate the infrastructure. If sport infrastructure is used by professional sport clubs, pricing conditions for the use of the infrastructure by those clubs should be made publicly available to ensure transparency and equal treatment of users. The exclusion of overcompensation should be ensured. (75) As emphasized by the conclusions of the European Council of the 17 June 2010 endorsing the Europe 2020 Strategy31, efforts should seek to address the main bottlenecks constraining growth at EU level, including those related to the functioning of the internal market and infrastructure. The availability of local infrastructures is an important prerequisite for development of business and consumer environment and for modernising and developing the industrial base in order to ensure the full functioning of the internal market as referred to in the Council Recommendation on broad guidelines for economic policies of the Member States and of the Union32, which form part of the Europe 2020 integrated guidelines.Such infrastructures, made available to interested parties on an open, transparent and non-discriminatory basis, enable the creation of an environment conducive to private investment and growth, thus contributing positively to objectives of common interest, and in particular to the Europe 2020 priorities and objectives33, while the risks of distortions remain limited. A number of measures taken by Member States with regard to local infrastructures do not constitute aid because they do not fulfil all the criteria of Article 107(1) of the Treaty, for example because the beneficiary does not carry out an economic activity, because there is no effect on trade between Member States, or because the measure consists of compensation for a service of general economic interest which fulfils all

30

OJ C 332, 15.11.2013, p. 1. EUCO 13/10 REV 1. 32 OJ L 191, 23.7.2010, p. 28. 33 COM(2010)2020, 3.3.2010. 31

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the criteria of the Altmark case-law34. However, where the financing of such local infrastructures does constitute State aid within the meaning of Article 107(1) of the Treaty, such aid should be exempted from the notification requirement when only small amounts of aid are granted. (76) Since aid for other types of infrastructures may be subject to specific and welldesigned criteria which ensure its compatibility with the internal market, the provisions of this Regulation regarding aid for local infrastructures should not apply to aid to the following types of infrastructures: research infrastructures, innovation clusters, energy efficient district heating and cooling, energy infrastructures, waste recycling and re-use, broadband infrastructures, culture and heritage conservation, sport and multifunctional recreational infrastructures, airports and ports. (77) In the light of the Commission’s experience in this area, State aid policy should periodically be revised. The period of application of this Regulation should therefore be limited. It is appropriate to lay down transitional provisions, including the rules applicable to exempted aid schemes at the end of the period of application of this Regulation. Such rules should give Member States time to adapt to any future regime. The adjustment period should not, however, apply to regional aid schemes, including regional urban development aid schemes, the exemption of which must expire on the date on which the approved regional aid maps expire, and to certain risk finance aid schemes, HAS ADOPTED THIS REGULATION:

CHAPTER I COMMON PROVISIONS Introduction to Articles 1 et seq. Bibliography: Deiberova/Nyssens, The new General Block Exemption Regulation (GBER): What changed?, EStAL 2009, 27.

Content I. General observations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 5

I. General observations The General Group Exemption Regulation (GBER)1 establishes categories of State aid 1 that are compatible with the Common Market. The former General Group Exemption 2 replaced five pre-existing group exemptions for individual State aid categories and 34 Judgment of the Court of Justice of 24 July 2003 in Case C-280/00, Altmark Trans GmbH and Regierungspra¨sidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH and Oberbundesanwalt beim Bundesverwaltungsgericht ([2003] ECR I-7747). 1 Regulation EC No 651/2014 declaring certain categories of aid compatible with the common market in application of Articles 107 and 108 of the Treaty (General block exemption Regulation), OJ 2014 L 187/1, 26 June 2014. 2 Regulation EC No 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation), OJ 2008 L 214/3.

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exempted a number of other categories that were not previously exempted. In total, it exempted a significantly larger number of State aid measures from the obligation to notify than its predecessor regulations. The new regulation draws on experiences of the Commission with the application of the pre-existing General Group Exemption and on Commission decisions in individual aid cases.3 It only addresses those categories for which the Commission deems to have sufficient experience; all other State aid measures remain subject to the notification obligation pursuant to Article 108(3) TFEU. 4 2 The Group Exemption Regulation applies to State aid within the meaning of Article 107(1) TFEU without defining the respective State aid categories. It merely establishes the conditions that aid must comply with to be compatible with the Common Market.5 These conditions are designed to ensure the proportionality between the aid and the disadvantages or the respective market failure that the aid is meant to address.6 Member States remain free to notify aid covered by the General Block Exemption even if there is no obligation to notify.7 3 The first chapter of the General Block Exemption contains common horizontal provisions that are applicable to all aid under the regulation. They contain definitions of terms and the scope of applicability as well as the main rules on the aid control procedure.

II. Purpose 4

The purpose of the General Block Exemption is to harmonize State aid control by simultaneously reducing the administrative burden on Member States, aid recipients and the Commission.8 It is meant to create a transparent and predictable control by reducing the number of notifications.9 The regulation further aims at inducing Member States to concentrate their aid programs on such measures that contribute to the creation of employment and to the strengthening of competitivity in Europe.10 The enumeration and the expansion of the general compatibility criteria in the General Block Exemption serve the purpose of simplification and higher efficiency of State aid control. In particular, the definitions contained in Chapter 1 of the regulation (Article 1–9) and other horizontal rules are designed to contribute to this. 11

III. History 5

An enabling regulation of 199812 empowered the Commission to declare that aid for small and medium-sized enterprises, research & development, environmental protection, training and employment aid and aid that is compatible with the regional aid map drawn up by the Commission for every Member State, are (under certain conditions) compatible with the Common Market and not subject to the notification requirement under Article 108(3) TFEU. 3

Recital 4 GBER. Deiberova/Nyssens EStAL 2009, 27, 28. 5 Deiberova/Nyssens EStAL 2009, 27. 6 Recital 3 GBER; for a consideration of pros and cons, see: COMMON PRINCIPLES FOR AN ECONOMIC ASSESSMENT OF THE COMPATIBILITY OF STATE AID UNDER ARTICLE 87.3, http://ec.europa.eu/competition/state_aid/reform/economic_assessment_en.pdf. 7 Recital 7 GBER. 8 See State Aid Action Plan, Commission (2005), 107, mn. 52 et seq. 9 See State Aid Action Plan, Commission (2005), 107, mn. 17 et seq. 10 Press release IP/08/1110 of 7 July 2008. 11 Recital 3 GBER. 12 Article 1(1) Regulation 994/1998, OJ 1998 L 142/1. 4

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The following years saw the passing of a number of group exemptions, such as for 6 training aid13, SMEs14, employment aid15 and regional investment aid16. In 2005, the Commission adopted a State Aid Action Plan which contained guide- 7 lines for a comprehensive and coherent modernization of State aid law. The main purpose was to ensure that Member States bring their State aid in line with the aims of the Lisbon Treaty and the goals of improving competitivity of the economy in Europe, creating jobs and enhancing social and regional cohesion. A further goal was the simplification of procedures and the reduction of bureaucracy. Aid was supposed to be reduced, but better targeted and more transparent. The number of notifications was supposed to be reduced and the decision-making process shortened. The General Block Exemption entered into force on 29 August 2008. It revoked the Block Exemption for Regional Investment Aid. The block exemptions for training aid, small and mediumsized enterprises, and employment aid remained into force for two consecutive prolongations until 30 June 2008 and were then also replaced by the General Block Exemption.The new General Block Exemption entered into force on 1 July 2014.The purpose is quite similar as the one under the former General Block Exemption of 2008. The new regulation is designed to allow a better priorisation of enforcement activities and a simplification as well as an enhancement of transparency, an effective evaluation and control of the compliance with State aid rules17.

Article 1 Scope 1. This Regulation shall apply to the following categories of aid: (a) regional aid; (b) aid to SMEs in the form of investment aid, operating aid and SMEs’ access to finance; (c) aid for environmental protection; (d) aid for research and development and innovation; (e) training aid; (f) recruitment and employment aid for disadvantaged workers and workers with disabilities; (g) aid to make good the damage caused by certain natural disasters; (h) social aid for transport for residents of remote regions; (i) aid for broadband infrastructures; (j) aid for culture and heritage conservation; (k) aid for sport and multifunctional recreational infrastructures; and (l) aid for local infrastructures. 2. This Regulation shall not apply to: (a) schemes under Sections 1 (with the exception of Article 15), 2, 3, 4, 7 (with the exception of Article 44), and 10 of Chapter III of this Regulation, if the average 13 Regulation 68/2001, OJ 2001 L 10/20, extended by Regulation 1040/2006, OJ 2006 L 187/8 until 31 December 2007 and by Regulation 1976/2006, OJ 2006 L 368/85 until 30 June 2008. 14 Regulation 70/2001, OJ 2001 L 10/33, amended by Regulation 364/2004 OJ 2004 L 63/22, Regulation 1857/2006, OJ 2006 L 358/3, extended by Regulation 1040/2006, OJ 2006 L 187/8 until 31 December 2007 and by Regulation 1976/2006, OJ 2006 L 368/85 until 30 June 2008. 15 Regulation 2004/2002, OJ 2002 L 337/3, extended by Regulation 1040/2006, OJ 2006 L 187/8 until 31 December 2007 and by Regulation 1976/2006, OJ 2006 L 368/85 until 30 June 2008. 16 Regulation 1628/2006, OJ 2006 L 302/29. 17 Recital 3 GBER.

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annual State aid budget exceeds EUR 150 million, from six months after their entry into force. The Commission may decide that this Regulation shall continue to apply for a longer period to any of these aid schemes after having assessed the relevant evaluation plan notified by the Member State to the Commission, within 20 working days from the scheme’s entry into force; (b) any alterations of schemes referred to in Article 1(2)(a), other than modifications which cannot affect the compatibility of the aid scheme under this Regulation or cannot significantly affect the content of the approved evaluation plan; (c) aid to export-related activities towards third countries or Member States, namely aid directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current costs linked to the export activity; (d) aid contingent upon the use of domestic over imported goods. 3. This Regulation shall not apply to: (a) aid granted in the fishery and aquaculture sector, as covered by Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013 on the common organisation of the markets in fishery and aquaculture products, amending Council Regulations (EC) No 1184/2006 and (EC) No 1224/ 2009 and repealing council Regulation (EC) No 104/20001,with the exception of training aid, aid for SMEs’ access to finance, aid in the field of research and development, innovation aid for SMEs and aid for disadvantaged workers and workers with disabilities; (b) aid granted in the primary agricultural production sector, with the exception of compensation for additional costs other than transport costs in outermost regions as provided for in Article 15(2)(b), aid for consultancy in favour of SMEs, risk finance aid, aid for research and development, innovation aid for SMEs, environmental aid, training aid and aid for disadvantaged workers and workers with disabilities; (c) aid granted in the sector of processing and marketing of agricultural products, in the following cases: (i) where the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on the market by the und0ertakings concerned; or (ii) where the aid is conditional on being partly or entirely passed on to primary producers; (d) aid to facilitate the closure of uncompetitive coal mines, as covered by Council Decision No 2010/787; (e) the categories of regional aid excluded in Article 13. Where an undertaking is active in the excluded sectors as referred to in points (a), (b) or (c) of the first subparagraph and in sectors which fall within the scope of this Regulation, this Regulation applies to aid granted in respect of the latter sectors or activities, provided that Member States ensure by appropriate means, such as separation of activities or distinction of costs, that the activities in the excluded sectors do not benefit from the aid granted in accordance with this Regulation. 4. This Regulation shall not apply to: (a) aid schemes which do not explicitly exclude the payment of individual aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market, with the exception of aid schemes to make good the damage caused by certain natural disasters; 1

OJ L 354, 28.12.2013, p. 1.

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(b) ad hoc aid in favour of an undertaking as referred to in point (a); (c) aid to undertakings in difficulty, with the exception of aid schemes to make good the damage caused by certain natural disasters. 5. This Regulation shall not apply to State aid measures, which entail, by themselves, by the conditions attached to them or by their financing method a nonseverable violation of Union law, in particular: (a) aid measures where the grant of aid is subject to the obligation for the beneficiary to have its headquarters in the relevant Member State or to be predominantly established in that Member State; However, the requirement to have an establishment or branch in the aid granting Member State at the moment of payment of the aid is allowed. (b) aid measures where the grant of aid is subject to the obligation for the beneficiary to use nationally produced goods or national services; (c) aid measures restricting the possibility for the beneficiaries to exploit the research, development and innovation results in other Member States. Bibliography: Deiberova/Nyssens, The new General Block Exemption Regulation (GBER): What changed?, EStAL 2009, 27.

Content I. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Excluded aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2

I. Scope The following categories of aid are covered by the Regulation: 2 regional aid, SME 1 investment and operating aid and SME’s access to finance,3 aid for environmental protection, aid for research, development and innovation, training aid, recruitment and employment aid for disadvantaged workers and workers with disabilities, aid to make good the damage caused by certain natural disasters, social aid fpr transport for residents of remote regions, aid for broadband infrastructures, aid for culture and heritage conservation, aid for sport and multifunctional recreational infrastructures and aid for local infrastructures.4 The enabling Regulation5 further allows the Commission to exempt other, not listed measures, as long as SMEs are their sole beneficiaries.

II. Excluded aid Another Regulation that is based on the 1998 enabling Regulation covers so-called 2 de-minimis aid.6 This Regulation replaces its predecessor of 20017 and remained in force until 31 December 20138. The new Regulation on de-minimis-aid entered into 2

Article 1 GBER. For a definition of the terms, see Article 2 and Annex I. 4 For a definition of the terms, see Article 2. 5 Article 1(1) Regulation 994/98 OJ 1998 L 142/1, see also introductory remarks mn. 5. 6 Article 2(1) Regulation 1998/2006, OJ 2006 379/5, passed on the basis of Article 2(1) Regulation 994/ 1998, OJ 1998 L 142/1. See also Regulation 1407/2013, OJ 2013 352/1. 7 Regulation 69/2001, OJ 2001 L 10/30, passed on the basis of Article 2(1) Regulation 994/1998, OJ 1998 L 142/1. 8 Article 6 Regulation 1998/2006, OJ 2006 L 379/5. 3

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force on 1 January 2014 and shall apply until 31 December 2020 9. The General Block Exemption therefore excludes the category of de-minimis aid. Furthermore, the GBER does not cover aid for export-related activities as well as aid contingent upon the use of domestic over imported goods.10 According to the State Action Plan, the GBER is supposed to cover almost all economic activities, while at the same time excluding some sectors that are subject to special conditions.11 Hence, the following sectors are excluded from the scope of the GBER:12 – Aid for activities in the fishery and aquaculture sectors, as covered by Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013 on the common organisation of the markets in fishery and aquaculture products, amending Council Regulations (EC) No 1184/2006 and (EC) No 1224/ 2009 and repealing council Regulation (EC) No 104/200013,except for training aid, aid for SMEs’ access to finance, aid for research and development, innovation aid for SMEs and aid for disadvantaged workers and workers with disabilities;A special exemption Regulation for small and medium-sized enterprises active in the production, processing, and marketing of fisheries remained in force until the end of 2013. 14 – Aid for activities in the primary agricultural production sector15, except for compensation for additional costs other than transport costs in outermost regions as provided for in Article 15(2)(b), aid for consultancy in favour of SMEs, risk finance aid, aid for research and development, innovation aid for SMEs, environmental aid, training aid and aid for disadvantaged workers and workers with disabilities 16. – Equally excluded is aid for activities in the processing and marketing of agricultural products,17 if the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on the market by the undertakings concerned, or if the aid is conditional on being partly or entirely passed on to primary producers. – Regional Aid excluded in Article 13 GBER. – Aid to facilitate the closure of uncompetitive coal mines, as covered by Council Decision No 2010/787 Furthermore, aid schemes18 which do not explicitly exclude the payment of individual aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market, except aid schemes to make good damages caused by certain natural disasters, are erxcluded. Moreover the regulation does not apply to ad hoc aid in favour of such an undertaking or to aid to undertakings in difficulty, except aid schemes to make good damages caused by certain natural disasters. The argument runs that the exclusion of ad-hoc aid be justified because of difficulties establishing its incentive effect 19. Against this back9

Article 8 Regulation 1407/2013, OJ 2013 352/1. Article 1(2) GBER. 11 State Aid Action Plan, Commission (2005), 107, mn. 12. 12 Article 1(3) GBER. 13 OJ 2000 L 17/22 in its version of 23 September 2003, amended by Regulation 1759/2006, OJ 2006 L 335/3. 14 Article 27 Regulation 736/2008, OJ 2008 L 201/16. 15 For a definition of the terms, see Article 2(9). 16 For a definition of the terms, see Article 2(4) et seq. 17 For a definition of the terms, see Article 2(8) et seq. 18 For a definition of the term, see Article 2(15). 19 See Recital 32 of the former GBER. 10

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ground, which is valid for both general and specific aid schemes and other ad-hoc aids, notification seems necessary in order to establish the incentive effect on a case-to-case basis.20 Indeed, the Lisbon objectives require in particular unfettered competition and active state-aid control.21 For aid to be compatible with the Common Market, it has to contain an incentive effect and keep distortions of competition to a minimum. 22 Assessment of the incentive effect is a corner stone of a deeper economic analysis conducted by the Commission in the context of state-aid under its recently revived Lisbon strategy.23 Furthermore, the GBER does not apply to aid which exceeds the relevant threshold 7 (see Article 4(1) for thresholds).24 Furthermore, the GBER does not apply to the following aids (Article 1(4)): 8 – Aid schemes25 which do not explicitly exclude the payment of individual aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Commission Decision declaring an aid illegal and incompatible with the internal market, except aid schemes to make good damages caused by certain natural disasters. This exception reflects the Deggendorf case law and complies with the objectives of the State Aid Action Plan.26 – Ad-hoc aid27 for enterprises that have failed to comply with a recovery order. This exception also reflects the Deggendorf case law.28 – Aid for undertakings in difficulties, except aid schemes to make good damages caused by certain natural disasters. A small or medium-sized enterprise 29 is considered to be in difficulty if it fulfils the following conditions:30 – in the case of a limited liability company, where more than half of its registered capital has disappeared – in the case of a company where at least some members have unlimited liability for the debt of the company, where more than half of its capital as shown in the company accounts has disappeared – in the case that the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors – in the case that the undertaking has received rescue aid without reimbursing the loan or terminating the guarantee or that the undertaking has received restructuring aid and is still subject to a restructuring plan – In case that the undertaking is not a small or medium-sized enterprise it is considered to be in difficulty when for the past two years the undertaking’s book 20 Memorandum on the draft general block exemption regulation, 11 June 2007, http://ec.europa.eu/ competition/state_aid/reform/archive_docs/final_memorandum_gber.pdf, mn. 19. 21 See Communication to the Spring European Council – Working together for growth and jobs – A new start for the Lisbon Strategy, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52005DC0024:en:HTML, and State Aid Action Plan, http://europa.eu/legislation_summaries/competition/state_aid/l26115_en.htm, mn. 13. 22 State Aid Action Plan, mn. 11. 23 Memorandum on the draft general block exemption regulation, mn. 35, State Aid Action plan, mn. 20 et seq. 24 Article 4 GBER. 25 For a definition of the term, see Article 2(15). 26 ECJ, C-355/95; Memorandum on the draft general block exemption regulation, para 17, State Aid Action plan, mn. 53. 27 For a definition of this term, see Article 2(17). 28 ECJ, C-355/95; Memorandum on the draft general block exemption regulation, mn. 17. 29 For a definition of this term, see Article 2(2) and Annex I. 30 Article 2 (18) GBER.

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debt to equity ratio has been greater than 7,5 and the undertaking’s EBITDA interest coverage ratio has been below 1,031. 9 Since aid for enterprises in difficulties necessarily is rescuing or restructuring aid32, the Community Guidelines on State Aid for Rescuing and Restructuring Aid are applicable.33 However, during the first three years of its establishment, an SME will not be considered as being in difficulty for the purposes of the GBER. The rationale of this exception is that losses incurred during the first few years by newly established enterprises should not automatically make them eligible for aid under the GBER. 34 For SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary concerning the purpose of eligibility for risk finance aid it is just the same. 10 For further details on excluded aid categories, please refer to the comments on Specific Provisions for the Different Categories of Aid.

Article 2 Definitions For the purposes of this Regulation the following definitions shall apply: (1) ‘aid’ means any measure fulfilling all the criteria laid down in Article 107(1) of the Treaty; (2) ‘small and medium-sized enterprises’ or ‘SMEs’ means undertakings fulfilling the criteria laid down in Annex I; (3) ‘worker with disabilities’ means any person who: (a) is recognised as worker with disabilities under national law; or (b) has long-term physical, mental, intellectual or sensory impairment(s) which, in interaction with various barriers, may hinder their full and effective participation in a work environment on an equal basis with other workers; (4) ‘disadvantaged worker’ means any person who: (a) has not been in regular paid employment for the previous 6 months; or (b) is between 15 and 24 years of age; or (c) has not attained an upper secondary educational or vocational qualification (International Standard Classification of Education 3) or is within two years after completing full-time education and who has not previously obtained his or her first regular paid employment; or (d) is over the age of 50 years; or (e) lives as a single adult with one or more dependents; or (f) works in a sector or profession in a Member State where the gender imbalance is at least 25 % higher than the average gender imbalance across all economic sectors in that Member State, and belongs to that underrepresented gender group; or (g) is a member of an ethnic minority within a Member State and who requires development of his or her linguistic, vocational training or work experience profile to enhance prospects of gaining access to stable employment; (5) ‘transport’ means transport of passengers by aircraft, maritime transport, road, rail, or by inland waterway or freight transport services for hire or reward; 31

Article 2 (18) GBER. Memorandum on the draft general block exemption regulation, mn. 18. 33 OJ 2004 C 244/2, applicable until 9 October 2009, mn. 102. 34 Deiberova/Nyssens EStAL 2009, 27, 29. 32

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(6) ‘transport costs’ means the costs of transport for hire or reward actually paid by the beneficiaries per journey, comprising: (a) freight charges, handling costs and temporary stocking costs, in so far as these costs relate to the journey; (b) insurance costs applied to the cargo; (c) taxes, duties or levies applied to the cargo and, if applicable, to the deadweight, both at point of origin and point of destination; and (d) safety and security control costs, surcharges for increased fuel costs; (7) ‘remote regions’ means outermost regions, Malta, Cyprus, Ceuta and Melilla, islands which are part of the territory of a Member State and sparsely populated areas; (8) ‘marketing of agricultural products’ means holding or display with a view to sale, offering for sale, delivery or any other manner of placing on the market, except the first sale by a primary producer to resellers or processors and any activity preparing a product for such first sale; a sale by a primary producer to final consumers shall be considered to be marketing if it takes place in separate premises reserved for that purpose; (9) ‘primary agricultural production’ means production of products of the soil and of stock farming, listed in Annex I to the Treaty, without performing any further operation changing the nature of such products; (10) ‘processing of agricultural products’ means any operation on an agricultural product resulting in a product which is also an agricultural product, except on-farm activities necessary for preparing an animal or plant product for the first sale; (11) ‘agricultural product’ means the products listed in Annex I to the Treaty, except fishery and aquaculture products listed in Annex I to Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013; (12) ‘outermost regions’ means regions as defined in Article 349 of the Treaty. In accordance with European Council Decision 2010/718/EU, from 1 January 2012, SaintBarthe´lemy ceased to be an outermost region. In accordance with European Council Decision 2012/419/EU on 1 January 2014, Mayotte became an outermost region; (13) ‘coal’ means high-grade, medium-grade and low-grade category A and B coal within the meaning of the international codification system for coal established by the United Nations Economic Commission for Europe and clarified in the Council decision of 10 December 2010 on State aid to facilitate the closure of uncompetitive coal mines1; (14) ‘individual aid’ means: (i) ad hoc aid; and (ii) awards of aid to individual beneficiaries on the basis of an aid scheme; (15) ‘aid scheme’ means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be granted to one or several undertakings for an indefinite period of time and/or for an indefinite amount; (16) ‘evaluation plan’ means a document containing at least the following minimum elements: the objectives of the aid scheme to be evaluated, the evaluation questions, the result indicators, the envisaged methodology to conduct the evaluation, the data collection requirements, the proposed timing of the evaluation including the date of submission of the final evaluation report, the description of the independent body conducting the evaluation or the criteria that will be used for its selection and the modalities for ensuring the publicity of the evaluation; 1

OJ L 336, 21.12.2010, p. 24.

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(17) ‘ad hoc aid’ means aid not granted on the basis of an aid scheme; (18) ‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs: (a) In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types of company mentioned in Annex I of Directive 2013/34/EU2 and ‘share capital’ includes, where relevant, any share premium. (b) In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company’ refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU. (c) Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors. (d) Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan. (e) In the case of an undertaking that is not an SME, where, for the past two years: (1) the undertaking’s book debt to equity ratio has been greater than 7,5 and (2) the undertaking’s EBITDA interest coverage ratio has been below 1,0. (19) ‘territorial spending obligations’: mean the obligations imposed by the authority granting the aid on beneficiaries to spend a minimum amount and/or conduct a minimum level of production activity in a particular territory; (20) ‘adjusted aid amount’ means the maximum permissible aid amount for a large investment project, calculated according to the following formula: maximum aid amount = R × (A + 0,50 × B + 0 × C) where: R is the maximum aid intensity applicable in the area concerned established in an approved regional map and which is in force on the date of granting the aid, excluding the increased aid intensity for SMEs; A is the initial EUR 50 million of eligible costs, B is the part of eligible costs between EUR 50 million and EUR 100 million and C is the part of eligible costs above EUR 100 million

2 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC.

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(21) ‘repayable advance’ means a loan for a project which is paid in one or more instalments and the conditions for the reimbursement of which depend on the outcome of the project; (22) ‘gross grant equivalent’ means the amount of the aid if it had been provided in the form of a grant to the beneficiary, before any deduction of tax or other charge; (23) ‘start of works’ means the earlier of either the start of construction works relating to the investment, or the first legally binding commitment to order equipment or any other commitment that makes the investment irreversible. Buying land and preparatory works such as obtaining permits and conducting feasibility studies are not considered start of works. For take-overs, ‘start of works’ means the moment of acquiring the assets directly linked to the acquired establishment; (24) ‘large enterprises’ means undertakings not fulfilling the criteria laid down in Annex I; (25) ‘fiscal successor scheme’ means a scheme in the form of tax advantages which constitutes an amended version of a previously existing scheme in the form of tax advantages and which replaces it. (26) ‘aid intensity’ means the gross aid amount expressed as a percentage of the eligible costs, before any deduction of tax or other charge; (27) ‘assisted areas’ means areas designated in an approved regional aid map for the period 1.7.2014–31.12.2020 in application of Articles 107(3)(a) and (c) of the Treaty; (28) ‘date of granting of the aid’ means the date when the legal right to receive the aid is conferred on the beneficiary under the applicable national legal regime; (29) ‘tangible assets’ means assets consisting of land, buildings and plant, machinery and equipment; (30) ‘intangible assets’ means assets that do not have a physical or financial embodiment such as patents, licences, know-how or other intellectual property; (31) ‘wage cost’ means the total amount actually payable by the beneficiary of the aid in respect of the employment concerned, comprising over a defined period of time the gross wage before tax and compulsory contributions such as social security, child care and parent care costs; (32) ‘net increase in the number of employees’ means a net increase in the number of employees in the establishment concerned compared with the average over a given period in time, and that any posts lost during that period must therefore be deducted and that the number of persons employed full-time, part-time and seasonal has to be considered with their annual labour unit fractions; (33) ‘dedicated infrastructure’ means infrastructure that is built for ex-ante identifiable undertaking(s) and tailored to their needs. (34) ‘financial intermediary’ means any financial institution regardless of its form and ownership, including fund-offunds, private equity investment funds, public investment funds, banks, micro-finance institutions and guarantee societies; (35) ‘journey’ means the movement of goods from the point of origin to the point of destination, including any intermediary sections or stages within or outside the Member State concerned, made using one or more means of transport; (36) ‘fair rate of return (FRR)’ means the expected rate of return equivalent to a risk-adjusted discount rate which reflects the level of risk of a project and the nature and level of capital the private investors plan to invest; (37) ‘total financing’ means the overall investment amount made into an eligible undertaking or project under Section 3 or under Articles 16 or 39 of this Regulation

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to the exclusion of entirely private investments provided on market terms and outside the scope of the relevant State aid measure; (38) ‘competitive bidding process’ means a non-discriminatory bidding process that provides for the participation of a sufficient number of undertakings and where the aid is granted on the basis of either the initial bid submitted by the bidder or a clearing price. In addition, the budget or volume related to the bidding process is a binding constraint leading to a situation where not all bidders can receive aid; (39) ‘operating profit’ means the difference between the discounted revenues and the discounted operating costs over the relevant lifetime of the investment, where this difference is positive. The operating costs include costs such as personnel costs, materials, contracted services, communications, energy, maintenance, rent, administration, but exclude, for the purpose of this Regulation, depreciation charges and the costs of financing if these have been covered by investment aid.

Definitions applying to regional aid (40) Definitions applying to aid for broadband infrastructures (Section 10) are applicable to the relevant regional aid provisions. (41) ‘regional investment aid’ means regional aid granted for an initial investment or an initial investment in favour of a new economic activity; (42) ‘regional operating aid’ means aid to reduce an undertaking’s current expenditure that is not related to an initial investment. This includes cost categories such as personnel costs, materials, contracted services, communications, energy, maintenance, rent, administration, etc., but excludes depreciation charges and the costs of financing if these have been included in the eligible costs when granting investment aid; (43) ‘steel sector’ means all activities related to the production of one or more of the following products: (a) pig iron and ferro-alloys: pig iron for steelmaking, foundry and other pig iron, spiegeleisen and highcarbon ferro-manganese, not including other ferro-alloys; (b) crude and semi-finished products of iron, ordinary steel or special steel: liquid steel whether or not cast into ingots, including ingots for forging semifinished products: blooms, billets and slabs; sheet bars and tinplate bars; hotrolled wide coils, with the exception of production of liquid steel for castings from small and medium-sized foundries; (c) hot finished products of iron, ordinary steel or special steel: rails, sleepers, fishplates, soleplates, joists, heavy sections of 80 mm and over, sheet piling, bars and sections of less than 80 mm and flats of less than 150 mm, wire rod, tube rounds and squares, hot-rolled hoop and strip (including tube strip), hot-rolled sheet (coated or uncoated), plates and sheets of 3 mm thickness and over, universal plates of 150 mm and over, with the exception of wire and wire products, bright bars and iron castings; (d) cold finished products: tinplate, terneplate, blackplate, galvanised sheets, other coated sheets, cold-rolled sheets, electrical sheets and strip for tinplate, cold-rolled plate, in coil and in strip; (e) tubes: all seamless steel tubes, welded steel tubes with a diameter of over 406.4 mm; (44) ‘synthetic fibres sector’ means: (a) extrusion/texturisation of all generic types of fibre and yarn based on polyester, polyamide, acrylic or polypropylene, irrespective of their end-uses; or

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(b) polymerisation (including polycondensation) where it is integrated with extrusion in terms of the machinery used; or (c) any ancillary process linked to the contemporaneous installation of extrusion/ texturisation capacity by the prospective beneficiary or by another company in the group to which it belongs and which, in the specific business activity concerned, is normally integrated with such capacity in terms of the machinery used; (45) ‘transport sector’ means the transport of passengers by aircraft, maritime transport, road or rail and by inland waterway or freight transport services for hire or reward; more specifically, the ‘transport sector’ means the following activities in terms of NACE Rev. 2: (a) NACE 49: Land transport and transport via pipelines, excluding NACE 49.32 Taxi operation, 49.42 Removal services, 49.5 Transport via pipeline; (b) NACE 50: Water transport; (c) NACE 51: Air transport, excluding NACE 51.22 Space transport. (46) ‘scheme targeted at a limited number of specific sectors of economic activity’ means a scheme which covers activities falling within the scope of less than five classes (four-digit numerical code) of the NACE Rev. 2 statistical classification. (47) ‘tourism activity’ means the following activities in terms of NACE Rev. 2: (a) NACE 55:Accommodation; (b) NACE 56: Food and beverage service activities; (c) NACE 79: Travel agency, tour operator reservation service and related activities; (d) NACE 90: Creative, arts and entertainment activities; (e) NACE 91: Libraries, archives, museums and other cultural activities; (f) NACE 93: Sports activities and amusement and recreation activities; (48) ‘sparsely populated areas’ means those areas which are recognized by the Commission as such in the individual decisions on regional aid maps for the period 1.7.2014–31.12.2020; (49) ‘initial investment’ means: (a) an investment in tangible and intangible assets related to the setting-up of a new establishment, extension of the capacity of an existing establishment, diversification of the output of an establishment into products not previously produced in the establishment or a fundamental change in the overall production process of an existing establishment; or (b) an acquisition of assets belonging to an establishment that has closed or would have closed had it not been purchased, and is bought by an investor unrelated to the seller and excludes sole acquisition of the shares of an undertaking; (50) ‘the same or a similar activity’ means an activity falling under the same class (four-digit numerical code) of the NACE Rev. 2 statistical classification of economic activities as laid down in Regulation (EC) No 1893/2006 of the European Parliament and of the Council of 20 December 2006 establishing the statistical classification of economic activities NACE Revision 2 and amending Council Regulation (EEC) No 3037/90 as well as certain EC Regulations on specific statistical domains3; (51) ‘initial investment in favour of new economic activity’ means: (a) an investment in tangible and intangible assets related to the setting up of a new establishment, or to the diversification of the activity of an establishment, under the condition that the new activity is not the same or a similar activity to the activity previously performed in the establishment; 3

OJ L 393, 30.12.2006, p. 1.

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(b) the acquisition of the assets belonging to an establishment that has closed or would have closed had it not been purchased, and is bought by an investor unrelated to the seller, under the condition that the new activity to be performed using the acquired assets is not the same or a similar activity to the activity performed in the establishment prior to the acquisition; (52) ‘large investment project’ means an initial investment with eligible costs exceeding EUR 50 million, calculated at prices and exchange rates on the date of granting the aid; (53) ‘point of destination’ means the place where the goods are unloaded; (54) ‘point of origin’ means the place where the goods are loaded for transport; (55) ‘areas eligible for operating aid’, means an outermost region referred to in Article 349 of the Treaty or a sparsely populated area, as determined in the approved regional aid map for the Member State concerned for the period 1.7.2014–31.12.2020; (56) ‘means of transport’ means rail transport, road freight transport, inland waterway transport, maritime transport, air transport, and intermodal transport; (57) ‘urban development fund’ (‘UDF’) means a specialised investment vehicle set up for the purpose of investing in urban development projects under an urban development aid measure. UDFs are managed by an urban development fund manager; (58) ‘urban development fund manager’ means a professional management company with legal personality, selecting and making investments in eligible urban development projects; (59) ‘urban development project’ (‘UDP’) means an investment project that has the potential to support the implementation of interventions envisaged by an integrated approach to sustainable urban development and contribute to achieving of the objectives defined therein, including projects with an internal rate of return which may not be sufficient to attract financing on a purely commercial basis. An urban development project may be organised as a separate block of finance within the legal structures of the beneficiary private investor or as a separate legal entity, e. g. a special purpose vehicle; (60) ‘integrated sustainable urban development strategy’ means a strategy officially proposed and certified by a relevant local authority or public sector agency, defined for a specific urban geographic area and period, that set out integrated actions to tackle the economic, environmental, climate, demographic and social challenges affecting urban areas; (61) ‘in-kind contribution’ means the contribution of land or real estate where the land or real estate forms part of the urban development project;

Definitions for Aid to SMEs (62) ‘employment directly created by an investment project’ means employment concerning the activity to which the investment relates, including employment created following an increase in the utilisation rate of the capacity created by the investment; (63) ‘organisational cooperation’ means the development of joint business strategies or management structures, the provision of common services or services to facilitate cooperation, coordinated activities such as research or marketing, the support of networks and clusters, the improvement of accessibility and communication, the use of joint instruments to encourage entrepreneurship and trade with SMEs; (64) ‘advisory services linked to cooperation’ means consulting, assistance and training for the exchange of knowledge and experiences and for improvement of cooperation; 414

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(65) ‘support services linked to cooperation’ means the provision of office space, websites, data banks, libraries, market research, handbooks, working and model documents;

Definitions for Aid for access to finance for SMEs (66) ‘quasi-equity investment’ means a type of financing that ranks between equity and debt, having a higher risk than senior debt and a lower risk than common equity and whose return for the holder is predominantly based on the profits or losses of the underlying target undertaking and which are unsecured in the event of default. Quasiequity investments can be structured as debt, unsecured and subordinated, including mezzanine debt, and in some cases convertible into equity, or as preferred equity; (67) ‘guarantee’ in the context of sections 1, 3 and 7 of the Regulation means a written commitment to assume responsibility for all or part of a third party’s newly originated loan transactions such as debt or lease instruments, as well as quasi-equity instruments.; (68) ‘guarantee rate’ means the percentage of loss coverage by a public investor of each and every transaction eligible under the relevant State aid measure; (69) ‘exit’ means the liquidation of holdings by a financial intermediary or investor, including trade sale, write-offs, repayment of shares/loans, sale to another financial intermediary or another investor, sale to a financial institution and sale by public offering, including an initial public offering (IPO); (70) ‘financial endowment’ means a repayable public investment made to a financial intermediary for the purposes of making investments under a risk finance measure, and where all the proceeds shall be returned to the public investor; (71) ‘risk finance investment’ means equity and quasi-equity investments, loans including leases, guarantees, or a mix thereof to eligible undertakings for the purposes of making new investments; (72) ‘independent private investor’ means a private investor who is not a shareholder of the eligible undertaking in which it invests, including business angels and financial institutions, irrespective of their ownership, to the extent that they bear the full risk in respect of their investment. Upon the creation of a new company, private investors, including the founders, are considered to be independent from that company; (73) ‘natural person’ for the purpose of Articles 21 and 23 means a person other than a legal entity who is not an undertaking for the purposes of Article 107(1) of the Treaty; (74) ‘equity investment’ means the provision of capital to an undertaking, invested directly or indirectly in return for the ownership of a corresponding share of that undertaking; (75) ‘first commercial sale’ means the first sale by a company on a product or service market, excluding limited sales to test the market; (76) ‘unlisted SME’ means an SME which is not listed on the official list of a stock exchange, except for alternative trading platforms. (77) ‘follow-on investment’ means additional risk finance investment in a company subsequent to one or more previous risk finance investment rounds; (78) ‘replacement capital’ means the purchase of existing shares in a company from an earlier investor or shareholder; (79) ‘entrusted entity’ means the European Investment Bank and the European Investment Fund, an international financial institution in which a Member State is a shareholder, or a financial institution established in a Member State aiming at the Jestaedt

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achievement of public interest under the control of a public authority, a public law body, or a private law body with a public service mission: the entrusted entity can be selected or directly appointed in accordance with the provisions of Directive 2004/18/ EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts,4 or any subsequent legislation replacing that Directive in full or in part; (80) ‘innovative enterprise’ means an enterprise: (a) that can demonstrate, by means of an evaluation carried out by an external expert that it will in the foreseeable future develop products, services or processes which are new or substantially improved compared to the state of the art in its industry, and which carry a risk of technological or industrial failure, or (b) the research and development costs of which represent at least 10 % of its total operating costs in at least one of the three years preceding the granting of the aid or, in the case of a start-up enterprise without any financial history, in the audit of its current fiscal period, as certified by an external auditor; (81) ‘alternative trading platform’ means a multilateral trading facility as defined in Article 4(1)(15) of Directive 2004/39/EC where the majority of the financial instruments admitted to trading are issued by SMEs; (82) ‘loan’ means an agreement which obliges the lender to make available to the borrower an agreed amount of money for an agreed period of time and under which the borrower is obliged to repay the amount within the agreed period. It may take the form of a loan, or another funding instrument, including a lease, which provides the lender with a predominant component of minimum yield. The refinancing of existing loans shall not be an eligible loan.

Definitions for Aid for research and development and innovation (83) ‘research and knowledge-dissemination organisation’ means an entity (such as universities or research institutes, technology transfer agencies, innovation intermediaries, research-oriented physical or virtual collaborative entities), irrespective of its legal status (organised under public or private law) or way of financing, whose primary goal is to independently conduct fundamental research, industrial research or experimental development or to widely disseminate the results of such activities by way of teaching, publication or knowledge transfer. Where such entity also pursues economic activities the financing, the costs and the revenues of those economic activities must be accounted for separately. Undertakings that can exert a decisive influence upon such an entity, in the quality of, for example, shareholders or members, may not enjoy preferential access to the results generated by it; (84) ‘fundamental research’ means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct commercial application or use in view; (85) ‘industrial research’ means the planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It comprises the creation of components parts of complex systems, and may include the construction of prototypes in a laboratory environment or in an environment with simulated interfaces to existing systems as well as of pilot lines, when necessary for the industrial research and notably for generic technology validation;

4

OJ L 134, 30.4.2004, p. 114.

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(86) ‘experimental development’ means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This may also include, for example, activities aiming at the conceptual definition, planning and documentation of new products, processes or services; Experimental development may comprise prototyping, demonstrating, piloting, testing and validation of new or improved products, processes or services in environments representative of real life operating conditions where the primary objective is to make further technical improvements on products, processes or services that are not substantially set. This may include the development of a commercially usable prototype or pilot which is necessarily the final commercial product and which is too expensive to produce for it to be used only for demonstration and validation purposes. Experimental development does not include routine or periodic changes made to existing products, production lines, manufacturing processes, services and other operations in progress, even if those changes may represent improvements; (87) ‘feasibility study’ means the evaluation and analysis of the potential of a project, which aims at supporting the process of decision-making by objectively and rationally uncovering its strengths and weaknesses, opportunities and threats, as well as identifying the resources required to carry it through and ultimately its prospects for success; (88) ‘personnel costs’ means the costs of researchers, technicians and other supporting staff to the extent employed on the relevant project or activity; (89) ‘arm’s length’ means that the conditions of the transaction between the contracting parties do not differ from those which would be stipulated between independent enterprises and contain no element of collusion. Any transaction that results from an open, transparent and non-discriminatory procedure is considered as meeting the arm’s length principle; (90) ‘effective collaboration’ means collaboration between at least two independent parties to exchange knowledge or technology, or to achieve a common objective based on the division of labour where the parties jointly define the scope of the collaborative project, contribute to its implementation and share its risks, as well as its results. One or several parties may bear the full costs of the project and thus relieve other parties of its financial risks. Contract research and provision of research services are not considered forms of collaboration. (91) ‘research infrastructure’ means facilities, resources and related services that are used by the scientific community to conduct research in their respective fields and covers scientific equipment or sets of instruments, knowledgebased resources such as collections, archives or structured scientific information, enabling information and communication technology-based infrastructures such as grid, computing, software and communication, or any other entity of a unique nature essential to conduct research. Such infrastructures may be ‘single-sited’ or ‘distributed’ (an organised network of resources) in accordance with Article 2(a) of Council Regulation (EC) No 723/2009 of 25 June 2009 on the Community legal framework for a European Research Infrastructure Consortium (ERIC)5; (92) ‘innovation clusters’ means structures or organised groups of independent parties (such as innovative start-ups, small, medium and large enterprises, as well as research and knowledge dissemination organisations, non-forprofit organisations and other related economic actors) designed to stimulate innovative activity through 5

OJ L 206, 8.8.2009, p. 1.

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promotion, sharing of facilities and exchange of knowledge and expertise and by contributing effectively to knowledge transfer, networking, information dissemination and collaboration among the undertakings and other organisations in the cluster; (93) ‘highly qualified personnel’ means staff having a tertiary education degree and at least 5 years of relevant professional experience which may also include doctoral training; (94) ‘innovation advisory services’ means consultancy, assistance and training in the fields of knowledge transfer, acquisition, protection and exploitation of intangible assets, use of standards and regulations embedding them; (95) ‘innovation support services’ means the provision of office space, data banks, libraries, market research, laboratories, quality labelling, testing and certification for the purpose of developing more effective products, processes or services; (96) ‘organisational innovation’ means the implementation of a new organisational method in an undertaking’s business practices, workplace organisation or external relations, excluding changes that are based on organizational methods already in use in the undertaking, changes in management strategy, mergers and acquisitions, ceasing to use a process, simple capital replacement or extension, changes resulting purely from changes in factor prices, customisation, localisation, regular, seasonal and other cyclical changes and trading of new or significantly improved products; (97) ‘process innovation’ means the implementation of a new or significantly improved production or delivery method (including significant changes in techniques, equipment or software), excluding minor changes or improvements, increases in production or service capabilities through the addition of manufacturing or logistical systems which are very similar to those already in use, ceasing to use a process, simple capital replacement or extension, changes resulting purely from changes in factor prices, customisation, localisation, regular, seasonal and other cyclical changes and trading of new or significantly improved products; (98) ‘secondment’ means temporary employment of staff by a beneficiary with the right for the staff to return to the previous employer;

Definitions for aid for disadvantaged workers and for workers with disabilities (99) ‘severely disadvantaged worker’ means any person who: (a) has not been in regular paid employment for at least 24 months; or (b) has not been in regular paid employment for at least 12 months and belongs to one of the categories (b) to (g) mentioned under the definition of ‘disadvantaged worker’. (100) ‘sheltered employment’ means employment in an undertaking where at least 30 % of workers are workers with disabilities;

Definitions applying to aid for environmental protection (101) ‘environmental protection’ means any action designed to remedy or prevent damage to physical surroundings or natural resources by a beneficiary’s own activities, to reduce risk of such damage or to lead to a more efficient use of natural resources, including energy-saving measures and the use of renewable sources of energy; (102) ‘Union standard’ means: (a) a mandatory Union standard setting the levels to be attained in environmental terms by individual undertakings; or (b) the obligation under Directive 2010/75/EU of the European Parliament and of the Council6 to use the best available techniques (BAT) and ensure that emission levels of pollutants are not higher than they would be when applying BAT; for the 6

OJ L 24, 29.1.2008, p. 8.

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cases where emission levels associated with the BAT have been defined in implementing acts adopted under Directive 2010/75/EU, those levels will be applicable for the purpose of this Regulation; where those levels are expressed as a range, the limit where the BAT is first achieved will be applicable; (103) ‘energy efficiency’ means an amount of saved energy determined by measuring and/or estimating consumption before and after implementation of an energyefficiency improvement measure, whilst ensuring normalisation for external conditions that affect energy consumption; (104) ‘energy efficiency project’ means an investment project that increases the energy efficiency of a building; (105) ‘energy efficiency fund (EEF)’ means a specialised investment vehicle set up for the purpose of investing in energy efficiency projects aimed at improving the energy efficiency of buildings in both the domestic and non-domestic sectors. EEFs are managed by an energy efficiency fund manager; (106) ‘energy efficiency fund manager’ means a professional management company with a legal personality, selecting and making investments in eligible energy efficiency projects; (107) ‘high-efficiency cogeneration’ means cogeneration which satisfies the definition of high efficiency cogeneration as set out in Article 2(34) of Directive 2012/27/ EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC7; (108) ‘cogeneration’ or combined heat and power (CHP) means the simultaneous generation in one process of thermal energy and electrical and/or mechanical energy; (109) ‘energy from renewable energy sources’ means energy produced by plants using only renewable energy sources, as well as the share in terms of calorific value of energy produced from renewable energy sources in hybrid plants which also use conventional energy sources. It includes renewable electricity used for filling storage systems, but excludes electricity produced as a result of storage systems; (110) ‘renewable energy sources’ means the following renewable non-fossil energy sources: wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases; (111) ‘biofuel’ means liquid or gaseous fuel for transport produced from biomass; (112) ‘sustainable biofuel’ means a biofuel fulfilling the sustainability criteria set out in Article 17 of Directive 2009/28/EC; (113) ‘food based biofuel’ means a biofuel produced from cereal and other starch rich crops, sugars and oil crops as defined in the Commission’s Proposal for a Directive of the European Parliament and of the Council amending Directive 98/70/ EC relating to the quality of petrol and diesel fuels and amending Directive 2009/28/ EC on the promotion of the use of energy from renewable sources8; (114) ‘new and innovative technology’ means a new and unproven technology compared to the state of the art in the industry, which carries a risk of technological or industrial failure and is not an optimisation or scaling up of an existing technology; (115) ‘balancing responsibilities’ means responsibility for imbalances (deviations between generation, consumption and commercial transactions) of a market participant or its chosen representative, referred to as the ‘Balance Responsible Party’, within a given period of time, referred to as the ‘Imbalance Settlement Period’; 7 8

OJ L 315, 14.11.2012, p. 1. COM (2012) 595, 17.10.2012.

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(116) ‘standard balancing responsibilities’ means non-discriminatory balancing responsibilities across technologies which do not exempt any generator from those responsibilities; (117) ‘biomass’ means the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries including fisheries and aquaculture, as well as biogases and the biodegradable fraction of industrial and municipal waste; (118) ‘total levelized costs of producing energy’ is a calculation of the cost of generating electricity at the point of connection to a load or electricity grid. It includes the initial capital, discount rate, as well as the costs of continuous operation, fuel, and maintenance; (119) ‘environmental tax’ means a tax with a specific tax base that has a clear negative effect on the environment or which seeks to tax certain activities, goods or services so that the environmental costs may be included in their price and/or so that producers and consumers are oriented towards activities which better respect the environment; (120) ‘Union minimum tax level’ means the minimum level of taxation provided for in the Union legislation; for energy products and electricity it means the minimum level of taxation laid down in Annex I to Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity9; (121) ‘contaminated site’ means a site where there is a confirmed presence, caused by man, of hazardous substances of such a level that they pose a significant risk to human health or the environment taking into account current and approved future use of the land; (122) ‘polluter pays principle’ or ‘PPP’ means that the costs of measures to deal with pollution should be borne by the polluter who causes the pollution; (123) ‘pollution’ means the damage caused by a polluter directly or indirectly damaging the environment, or by creating conditions leading to such damage to physical surroundings or natural resources; (124) ‘energy efficient district heating and cooling’ means a district heating and cooling system which satisfies the definition of efficient district heating and cooling system set out in Article 2(41) and (42) of Directive 2012/27/EU. The definition includes the heating/cooling production plants and the network (including related facilities) necessary to distribute the heat/cooling from the production units to the customer premises; (125) ‘polluter’ means someone who directly or indirectly damages the environment or who creates conditions leading to such damage. (126) ‘re-use’ means any operation by which products or components that are not waste are used again for the same purpose for which they were conceived; (127) ‘preparing for re-use’ means checking, cleaning or repairing recovery operations, by which products or components of products that have become waste are prepared so that they can be re-used without any other pre-processing; (128) ‘recycling’ means any recovery operation by which waste materials are reprocessed into products, materials or substances whether for the original or other purposes. It includes the reprocessing of organic material but does not include energy recovery and the reprocessing into materials that are to be used as fuels or for backfilling operations;

9

OJ L 283, 31.10.2003, p. 51.

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(129) ‘state of the art’ means a process in which the re-use of a waste product to manufacture an end product is economically profitable normal practice. Where appropriate, the concept of state of the art must be interpreted from a Union technological and internal market perspective; (130) ‘energy infrastructure’ means any physical equipment or facility which is located within the Union or linking the Union to one or more third countries and falling under the following categories: (a) concerning electricity: (i) infrastructure for transmission, as defined in Article 2(3) by Directive 2009/ 72/EC of 13 July 2009 concerning common rules for internal market in electricity10; (ii) infrastructure for distribution, as defined in Article 2(5) by Directive 2009/ 72/EC; (iii) electricity storage, defined as facilities used for storing electricity on a permanent or temporary basis in above-ground or underground infrastructure or geological sites, provided they are directly connected to high-voltage transmission lines designed for a voltage of 110 kV or more; (iv) any equipment or installation essential for the systems defined in points (i) to (iii) to operate safely, securely and efficiently, including protection, monitoring and control systems at all voltage levels and substations; and (v) smart grids, defined as any equipment, line, cable or installation, both at transmission and low and medium voltage distribution level, aiming at twoway digital communication, real-time or close to realtime, interactive and intelligent monitoring and management of electricity generation, transmission, distribution and consumption within an electricity network in view of developing a network efficiently integrating the behaviour and actions of all users connected to it — generators, consumers and those that do both — in order to ensure an economically efficient, sustainable electricity system with low losses and high quality and security of supply and safety; (b) concerning gas: (i) transmission and distribution pipelines for the transport of natural gas and bio gas that form part of a network, excluding high-pressure pipelines used for upstream distribution of natural gas; (ii) underground storage facilities connected to the high-pressure gas pipelines mentioned in point (i); (iii) reception, storage and regasification or decompression facilities for liquefied natural gas (‘LNG’) or compressed natural gas (‘CNG’); and (iv) any equipment or installation essential for the system to operate safely, securely and efficiently or to enable bi-directional capacity, including compressor stations; (c) concerning oil: (i) pipelines used to transport crude oil; (ii) pumping stations and storage facilities necessary for the operation of crude oil pipelines; and (iii) any equipment or installation essential for the system in question to operate properly, securely and efficiently, including protection, monitoring and control systems and reverse-flow devices;

10

OJ L 211, 14.8.2009, p. 55.

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(d) concerning CO2: networks of pipelines, including associated booster stations, for the transport of CO2 to storage sites, with the aim to inject the CO2 in suitable underground geological formations for permanent storage; (131) ‘internal energy market legislation’ includes Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity, Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas11, Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators12; Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges13 and Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks14 or any subsequent legislation replacing these acts in full or in part;

Definitions applying to social aid for transport for residents of remote regions (132) ‘normal residence’ means the place where a natural person lives for at least 185 days, in each calendar year, because of personal and occupational ties; in the case of a person whose occupational ties are in a different place from his/her personal ties and who lives in two or more Member States, the place of normal residence is regarded as the place of his/her personal ties provided that he/she returns there regularly; where a person is living in a Member State in order to carry out a task of a set duration, the place of residence is still regarded as being the place of his/her personal ties, irrespective of whether he/she returns there during the course of this activity; attendance at a university or school in another Member State does not constitute a transfer of normal residence; alternatively, ‘normal residence’ shall have the meaning attributed to it in Member States’ national law.

Definitions for aid for broadband infrastructures (133) ‘basic broadband’ ‘Basic broadband networks’ means networks with basic functionalities which are based on technology platforms such as asymmetric digital subscriber lines (up to ADSL2+ networks), non-enhanced cable (e. g. DOCSIS 2.0), mobile networks of third generation (UMTS) and satellite systems; (134) ‘broadband-related civil engineering works’ means the civil engineering works which are necessary for the deployment of a broadband network, such as digging up a road in order to enable the placement of (broadband) ducts. (135) ‘ducts’ means underground pipes or conduits used to house (fibre, copper or coax) cables of a broadband network. (136) ‘physical unbundling’ grants access to the end-consumer access line and allows competitors’ own transmission systems to directly transmit over it. (137) ‘passive broadband infrastructure’ means a broadband network without any active component. It typically comprises civil engineering infrastructure, ducts and dark fibre and street cabinets. (138) ‘next generation access (NGA) networks’ means advanced networks which have at least the following characteristics: (a) deliver services reliably at a very high speed per subscriber through optical (or equivalent technology) backhaul sufficiently close to user premises to guarantee the 11

OJ OJ 13 OJ 14 OJ 12

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14.8.2009, 14.8.2009, 14.8.2009, 14.8.2009,

p. 94. p. 1. p. 15. p. 36.

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actual delivery of the very high speed; (b) support a variety of advanced digital services including converged all-IP services, and (c) have substantially higher upload speeds (compared to basic broadband networks). At the current stage of market and technological development, NGA networks are: (a) fibre-based access networks (FTTx), (b) advanced upgraded cable networks and (c) certain advanced wireless access networks capable of delivering reliable high-speeds per subscriber. (139) ‘wholesale access’ means access which enables an operator to utilise the facilities of another operator. The widest possible access to be provided over the relevant network shall include, on the basis of the current technological developments, at least the following access products. For FTTH/FTTB networks: ducts access, access to dark fibre, unbundled access to the local loop, and bitstream access. For cable networks: duct access and bit-stream access. For FTTC networks: duct access, sub-loop unbundling and bit-stream access. For passive network infrastructure: duct access, access to dark fibre and/or unbundled access to the local loop. For ADSLbased broadband networks: unbundled access to the local loop, bit-stream access. For mobile or wireless networks: bit-stream, sharing of physical masts and access to the backhaul networks. For satellite platforms: bit-stream access.

Definitions for aid for culture and heritage conservation (140) ‘difficult audiovisual works’: means the works identified as such by Member States on the basis of pre-defined criteria when setting up schemes or granting the aid and may include films whose sole original version is in a language of a Member State with a limited territory, population or language area, short films, films by first-time and second-time directors, documentaries, or low budget or otherwise commercially difficult works. (141) Development Assistance Committee (DAC) List of the OECD: means all countries and territories that are eligible to receive official development assistance and included in the list compiled by the Organisation for Economic Cooperation and Development (OECD); (142) ‘reasonable profit’ shall be determined with respect to the typical profit for the sector concerned. In any event, a rate of return on capital that does not exceed the relevant swap rate plus a premium of 100 basis points will be considered to be reasonable.

Definitions for aid for sport and multifunctional recreational infrastructures (143) ‘professional sport’ means the practice of sport in the nature of gainful employment or remunerated service, irrespective of whether or not a formal labour contract has been established between the professional sportsperson and the relevant sport organisation, where the compensation exceeds the cost of participation and constitutes a significant part of the income for the sportsperson. Travel and accommodation expenses to participate to the sport event shall not be considered as compensation for the purposes of this Regulation. For the sake of clarity, the GBER lays down a set of common harmonised definitions 1 in Article 2. Under previous regulations, some terms were not uniformly defined. 15 Article 2 defines terms that apply throughout the Regulation. These common provi- 2 sions are completed by special definitions under the Specific Provisions for the Different Categories of Aid under Chapter II on the one hand, and by Annex I on the definition

15

Memorandum on the draft general block exemption regulation, mn. 20.

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of SME (to which Article 2(2) refers). The definition of SME that was already contained in previous regulations16 caused problems in the past that will persist under the GBER.

Article 3 Conditions for exemption Aid schemes, individual aid granted under aid schemes and ad hoc aid shall be compatible with the internal market within the meaning of Article 107(2) or (3) of the Treaty and shall be exempted from the notification requirement of Article 108(3) of the Treaty provided that such aid fulfils all the conditions laid down in Chapter I of this Regulation, as well as the specific conditions for the relevant category of aid laid down in Chapter III of this Regulation. 1

Aid schemes1, individual aid granted under aid schemes2 and ad hoc aid3 that fulfil all the requirements of Chapter I of the GBER and comply with the relevant provisions of Chapter III are compatible with the Common Market under Article 107(3) and exempt from the notification requirement under Article 108(3).

Article 4 Notification tresholds 1. This Regulation shall not apply to aid which exceeds the following thresholds: (a) for regional investment aid: the ‘adjusted aid amount’ of aid, as calculated in accordance with the mechanism defined in Article 2, point 20 for an investment with eligible costs of EUR 100 million; (b) for regional urban development aid, EUR 20 million as laid down in Article 16(3); (c) for investment aid to SMEs: EUR 7,5 million per undertaking per investment project; (d) for aid for consultancy in favour of SMEs: EUR 2 million per undertaking, per project; (e) for aid to SMEs for participation in fairs: EUR 2 million per undertaking, per year; (f) for aid to SMEs for cooperation costs incurred by participating in European Territorial Cooperation projects: EUR 2 million per undertaking, per project; (g) for risk finance aid: EUR 15 million per eligible undertaking as laid down in Article 21(9); (h) for aid for start-ups: the amounts laid down per undertaking in Article 22(3), (4) and (5); (i) for aid for research and development: (i) if the project is predominantly fundamental research: EUR 40 million per undertaking, per project; that is the case where more than half of the eligible costs of the project are incurred through activities which fall within the category of fundamental research; 16 See Regulation 364/2004 OJ 2004 L 63/27, Annex I, as extract from Commission Recommendation concerning the definition of micro, small and medium-sized enterprises, OJ 2003 L 124/36. 1 For a definition of this term, see Article 2(15). 2 For a definition of this term, see Article 2(14)(ii). 3 For a definition of this term, see Article 2(17).

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(j) (k) (l) (m) (n) (o) (p) (q) (r) (s)

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(ii) if the project is predominantly industrial research: EUR 20 million per undertaking, per project; that is the case where more than half of the eligible costs of the project are incurred through activities which fall within the category of industrial research or within the categories of industrial research and fundamental research taken together; (iii) if the project is predominantly experimental development: EUR 15 million per undertaking, per project; that is the case where more than half of the eligible costs of the project are incurred through activities which fall within the category of experimental development; (iv) if the project is a Eureka project or is implemented by a Joint Undertaking established on the basis of Article 185 or of Article 187 of the Treaty, the amounts referred to in points (i) to (iii) are doubled. (v) if the aid for research and development projects is granted in the form of repayable advances which, in the absence of an accepted methodology to calculate their gross grant equivalent, are expressed as a percentage of the eligible costs and the measure provides that in case of a successful outcome of the project, as defined on the basis of a reasonable and prudent hypothesis, the advances will be repaid with an interest rate at least equal to the discount rate applicable at the time of grant, the amounts referred to in points (i) to (iv) are increased by 50 %; (vi) aid for feasibility studies in preparation for research activities: EUR 7,5 million per study; for investment aid for research infrastructures: EUR 20 million per infrastructure; for aid for innovation clusters: EUR 7,5 million per cluster; innovation aid for SMEs: EUR 5 million per undertaking, per project; for aid for process and organisational innovation: EUR 7,5 million per undertaking, per project; for training aid: EUR 2 million per training project; for aid for the recruitment of disadvantaged workers: EUR 5 million per undertaking, per year; for aid for the employment of workers with disabilities in the form of wage subsidies: EUR 10 million per undertaking, per year; for aid for compensating the additional costs of employing workers with disabilities: EUR 10 million per undertaking, per year; for aid for compensating the costs of assistance provided to disadvantaged workers: EUR 5 million per undertaking, per year; for investment aid for environmental protection, excluding investment aid for the remediation of contaminated sites and aid for the distribution network part of the energy efficient district heating and cooling installation: EUR 15 million per undertaking per investment project; for investment aid for energy efficiency projects: EUR 10 million as laid down in Article 39(5); for investment aid for remediation of contaminated sites: EUR 20 million per undertaking per investment project; for operating aid for the production of electricity from renewable sources and operating aid for the promotion of energy from renewable sources in small scale installations: EUR 15 million per undertaking per project. When the aid is granted on the basis of a competitive bidding process under Article 42:

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EUR 150 million per year taking into account the combined budget of all schemes falling under Article 42; (w) for investment aid for the district heating or cooling distribution network: EUR 20 million per undertaking per investment project; (x) for investment aid for energy infrastructure: EUR 50 million per undertaking, per investment project; (y) for aid for broadband infrastructures: EUR 70 million total costs per project; (z) for investment aid for culture and heritage conservation: EUR 100 million per project; operating aid for culture and heritage conservation: EUR 50 million per undertaking per year; (aa) for aid schemes for audiovisual works: EUR 50 million per scheme per year; (bb) for investment aid for sports and multifunctional infrastructures: EUR 15 million or the total costs exceeding EUR 50 million per project; operating aid for sport infrastructure: EUR 2 million per infrastructure per year; and (cc) for investment aid for local infrastructures: EUR 10 million or the total costs exceeding EUR 20 million for the same infrastructure. 2. The thresholds set out or referred to in paragraph 1 shall not be circumvented by artificially splitting up the aid schemes or aid projects. 1

2

3

4 5

Because of its potential adverse effects on competition, large aid continues to be assessed individually and is subject to a notification requirement under Article 108(3) TFEU. The administrative procedure for aid that is manifestly compatible with the Single Market is however be simplified by the GBER.1 The thresholds have to be read in conjunction with the GBER’s special provisions for specific aid groups and their respective rules on aid intensity2 (for the calculation of aid intensity see above at point). With a view to ensuring that aid is proportionate and limited to the amount necessary, thresholds should, whenever possible, be expressed in terms of aid intensities in relation to a set of eligible costs. Because it is based on a form of aid for which eligible costs are difficult to identify, the threshold with regard to aid in the form of risk capital should be formulated in terms of maximum aid amounts. (See also Article 21 for risk finance aid for small and medium-sized enterprises, and Community guidelines on state aid to promote risk capital investments in small and medium-sized enterprises, OJ 2006 C 194.) Thresholds are therefore set for each category of aid within the scope of this Regulation, at a level which takes into account the category of aid concerned and its likely effects on competition.3 Henceforth, only one threshold is applicable to most aid groups, which is part of the GBER’s objective to simply the rules. 4 Some thresholds are significantly higher than under previous regulations. Aid for research and development in case of a predominantely fundamental research, for example, has seen its threshold rise from EUR 20 million to EUR 40 million5. Where the GBER thresholds are exceeded, aid has to be notified. For the subsequent assessment, the respective specific rules are applicable; the GBER is then not relevant. For details on thresholds and intensities of the GBER, see the comments on the respective aid groups.

1

Memorandum on the draft general block exemption regulation (fn. 62), mn. 26. For a definition of this term, see Article 2(26). 3 Recital 16 GBER. 4 Memorandum on the draft general block exemption regulation (footnote 62), mn. 27. 5 Article 4 (1) i GBER. 2

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Article 5 Transparency of aid 1. This Regulation shall apply only to aid in respect of which it is possible to calculate precisely the gross grant equivalent of the aid ex ante without any need to undertake a risk assessment (‘transparent aid’). 2. The following categories of aid shall be considered to be transparent: (a) aid comprised in grants and interest rate subsidies; (b) aid comprised in loans, where the gross grant equivalent has been calculated on the basis of the reference rate prevailing at the time of the grant; (c) aid comprised in guarantees: (i) where the gross grant equivalent has been calculated on the basis of safeharbour premiums laid down in a Commission notice; or (ii) where before the implementation of the measure, the methodology to calculate the gross grant equivalent of the guarantee has been accepted on the basis of the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees1, or any successor notice, following notification of that methodology to the Commission under any regulation adopted by the Commission in the State aid area applicable at the time, and the approved methodology explicitly addresses the type of guarantee and the type of underlying transaction at stake in the context of the application of this Regulation; (d) aid in the form of tax advantages, where the measure provides for a cap ensuring that the applicable threshold is not exceeded; (e) aid for regional urban development if the conditions laid down in Article 16 are fulfilled; (f) aid comprised in risk finance measures if the conditions laid down in Article 21 are fulfilled; (g) aid for start-ups if the conditions laid down in Article 22 are fulfilled; (h) aid for energy efficiency projects if the conditions laid down in Article 39 are fulfilled; (i) aid in the form of premiums in addition to the market price if the conditions laid down in Article 42 are fulfilled; (j) aid in the form of repayable advances, if the total nominal amount of the repayable advance does not exceed the thresholds applicable under this Regulation or if, before implementation of the measure, the methodology to calculate the gross grant equivalent of the repayable advance has been accepted following its notification to the Commission. Bibliography: Deiberova/Nyssens, The new General Block Exemption Regulation (GBER): What changed?, EStAL 2009, 27.

For the sake of transparency, equity, and effective control, the exemption Regulation 1 only applies to transparent aid.2 Aid is considered transparent if its gross grant equivalent (see Article 7) can be calculated precisely ex ante without need to undertake 1

OJ C 155, 20.6.2008, p. 10. Article 5(1) and recital 17 of GBER For this criterion, see also the de-minimis Regulation 1998/2006, OJ 2006 L 379/5, mn. 13 and Article 2(4) and Regulation 1628/2006 for regional investment aid, OJ 2006 L 302/29, mn. 5. 2

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a risk assessment. In particular, aid comprised in grants and interest rate subsidies, aid comprised in loans, where the gross grant equivalent has been calculated on the basis of the reference rate prevailing at the time of the grant, aid in the form of tax advantages, the measure provides for a cap ensuring that the applicable threshold is not exceeded, aid for regional urban development if the conditions laid down in Article 16 are fulfilled, comprised in risk finance measures if the conditions laid down in Article 21 are fulfilled, aid for start-ups if the conditions laid down in Article 22 are fulfilled, aid for energy efficiency projects if the conditions laid down in Article 39 are fulfilled, aid in the form of premiums in addition to the market price if the conditions laid down in Article 42 are fulfilled are considered to be transparent; and aid in the form of repayable advances, if the total nominal amount of the repayable advance does not exceed the thresholds applicable under this Regulation or if, before implementation of the measure, the methodology to calculate the gross grant equivalent of the repayable advance has been accepted following its notification to the Commission.3 2 For aid comprised in guarantee schemes, the following special rules are applicable. Aid is considered transparent where the gross grant equivalent has been calculated on the basis of safe-harbour premiums laid down in a Commission notice or where before the implementation of the measure, the methodology to calculate the gross grant equivalent of the guarantee has been accepted on the basis of the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees, or any successor notice, following notification of that methodology to the Commission under any regulation adopted by the Commission in the State aid area applicable at the time, and the approved methodology explicitly addresses the type of guarantee and the type of underlying transaction at stake in the context of the application of this Regulation. These rules are intended to preclude fraud as it occurred under previous Regulations. 4 3 The enumeration of transparent aid is not exclusive.5 4 On the other hand, aid comprised in capital injections, without prejudice to the specific provisions concerning risk capital and aid comprised in risk capital measures, with the exception of aid fulfilling the conditions of Article 21 are not considered to be transparent.6 Special rules apply to aid in the form of repayable advances. 7

Article 6 Incentive effect 1. This Regulation shall apply only to aid which has an incentive effect. 2. Aid shall be considered to have an incentive effect if the beneficiary has submitted a written application for the aid to the Member State concerned before work on the project or activity starts. The application for the aid shall contain at least the following information: (a) undertaking’s name and size; (b) description of the project, including its start and end dates; (c) location of the project; (d) list of project costs; (e) type of aid (grant, loan, guarantee, repayable advance, equity injection or other) and amount of public funding needed for the project; 3

Article 5(2) GBER. Deiberova/Nyssens EStAL 2009, 27, 32. 5 Deiberova/Nyssens EStAL 2009, 27, 31. 6 Article 5(2) GBER. 7 Article 5(2) GBER. 4

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3. Ad hoc aid granted to large enterprises shall be considered to have an incentive effect if, in addition to ensuring that the condition laid down in paragraph 2 is fulfilled, the Member State has verified, before granting the aid concerned, that documentation prepared by the beneficiary establishes that the aid will result in one or more of the following: (a) in the case of regional investment aid: that a project is carried out, which would not have been carried out in the area concerned or would not have been sufficiently profitable for the beneficiary in the area concerned in the absence of the aid. (b) in all other cases, that there is: – a material increase in the scope of the project/activity due to the aid, or – a material increase in the total amount spent by the beneficiary on the project/ activity due to the aid, or – a material increase in the speed of completion of the project/activity concerned; 4. By way of derogation from paragraphs 2 and 3, measures in the form of tax advantages shall be deemed to have an incentive effect if the following conditions are fulfilled: (a) the measure establishes a right to aid in accordance with objective criteria and without further exercise of discretion by the Member State; and (b) the measure has been adopted and is in force before work on the aided project or activity has started, except in the case of fiscal successor schemes, where the activity was already covered by the previous schemes in the form of tax advantages. 5. By way of derogation from paragraphs 2, 3 and 4, the following categories of aid are not required to have or shall be deemed to have an incentive effect: (a) regional operating aid, if the conditions laid down in Article 15 are fulfilled, (b) aid for access to finance for SMEs, if the relevant conditions laid down in Articles 21 and 22 are fulfilled, (c) aid for the recruitment of disadvantaged workers in the form of wage subsidies and aid for the employment of workers with disabilities in the form of wage subsidies, if the relevant conditions laid down in Articles 32 and 33 respectively are fulfilled, (d) aid compensating for the additional costs of employing workers with disabilities, if the conditions laid down in Article 34 are fulfilled; (e) aid in the form of reductions in environmental taxes under Directive 2003/96/EC, if the conditions laid down in Article 44 of this Regulation are fulfilled; (f) aid to make good the damage caused by certain natural disasters, if the conditions laid down in Article 50 are fulfilled; (g) social aid for transport for residents of remote regions, if the conditions laid down in Article 51 are fulfilled; (h) aid for culture and heritage conservation, if the conditions laid down in Article 53 are fulfilled. Content I. II. III. IV. V.

Previous group exemption regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Basic rules applicable to both SMEs and large enterprises. . . . . . . . . . . . . 4 Ad hoc aid to large enterprises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Derogations for tax advantages and socially motivated aid. . . . . . . . . . . . 9 Legal consequences in case of failure to fulfil conditions . . . . . . . . . . . . . . 11

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Art. 6 1–7

Commission Regulation (EU) No 651/2014

The GBER only exempts aid with an incentive effect.1

I. Previous group exemption regulations The previous Group Exemptions dealt with the incentive effect requirement in different ways. 3 The old SME Regulation did not use the term of “incentive effect”, but required that aid was “necessary”. To prove that aid was necessary, it was sufficient that a request for aid was filed by the beneficiary with the Member State’s authorities prior to the start of the aid project.2 The old exemption Regulation for training aid did not contain any such provision, but mentioned the necessity to ensure that aid be strictly limited to the means required to achieve the Community goal that could not be achieved by market forces alone.3 The old exemption Regulation for labour aid explained in a recital that the exemption did not apply if the beneficiary had created new employment without aid and under market conditions.4 Pursuant to the old Regulation on regional investment aid, such aid had to offer a genuine incentive for investments that would otherwise not have been made in these regions and an incentive to develop new activities. Prior to commencement of a project benefitting from aid, the competent authorities therefore had to confirm in writing that the project met the aid requirements prima facie. 5 Furthermore, the exemption (again under the heading “necessity”) for regional aid filed with national authorities after 1 January 2007 only applied if the beneficiary had filed a written aid request with national or regional authorities. After an examination, the authority had to confirm in writing that the project complied with the aid criteria of the Regulation.6 2

II. Basic rules applicable to both SMEs and large enterprises Under the old GBER, aid granted to SMEs only was considered to have incentive effect if the beneficiary of the aid (SME) had requested the aid from the Member State prior to the start of the project or activity. 7 5 The new Article 6 (2) GBER does not explicitly mention SMEs, which suggests that also large enterprises now benefit from the presumption under Article 6 (2) GBER. 6 The initial distinction between large enterprises and SMEs remains in force with regard to ad hoc aid and aid for access to finance for SMEs. For ad hoc aid granted to large enterprises to be considered as having an incentive effect, Article 6 (3) GBER contains additional criteria. Aid for access to finance need not have an incentive effect, or is deemed to have an incentive effect, if the criteria of Article 6 (5) (b) GBER are met. 4

III. Ad hoc aid to large enterprises 7

Article 6(3) establishes special rules for ad hoc aid to large enterprises. It imposes an additional burden of proof on large enterprises to establish an incentive effect of the aid granted as compared to the previous exemption Regulations. Assessment of the 1

Article 6(1) GBER. Regulation 70/2001 OJ 2001 L 10/33 Article 7. 3 Recital 11 of Regulation 68/2001, OJ 2001 L 10/20. 4 Recital 27 of Regulation 2204/2002, OJ 2002 L 337/3, see also recital 28 of GBER. 5 Recital 16 of Regulation 1628/2006, OJ 2006 L 302/29. 6 Article 5(1) and mn. 16 of Regulation 1628/2006, OJ 2006 L 302/29. 7 Article 8 (2) of Regulation 800/2008, OJ L 214/3. 2

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incentive effect is part of a more detailed economic approach conducted by the Commission in accordance with its Lisbon strategy.8 The standard of documentation and proof is intended to be practical and easily applicable, in particular for judges of the Member States.9 However, Member States and lobbyists voiced concerns during the preparatory phase of the former GBER.10 Critics of the obligations of documentation and proof found that it complicates the 8 procedure for both beneficiary and issuer, and that the Commission’s margin of appreciation would be a source of legal uncertainty and lead to an increase in redtape.11 Furthermore, proof that the project would not have been carried out in the absence of aid is difficult to provide in practice.12 According to some critics, these risks and shortcomings of the “incentive effect” test might in practice lead to a notification of an aid for the sake of legal certainty.13 The Commission on the other hand believes that these obligations do not increase administrative burdens. The Commission assumes that the concerned undertakings already conduct the necessary analysis for their internal financial estimations, regardless of the new obligations, 14 and argues that it would be unlikely that a large enterprise envisaged a major investment without a prior plan, an alternative strategy or a cost-benefit analysis. Moreover, it would be difficult to imagine a Member State spending substantial amounts without knowledge of the impact of this expenditure.15 As far as the Commission’s potential margin of appreciation is concerned, the argument goes that no such margin is foreseen because of the direct applicability of the Regulation.16

IV. Derogations for tax advantages and socially motivated aid Aid granted in the form of a tax advantages need not have an incentive effect, or is 9 deemed to have an incentive effect, if the criteria of Article 6 (5) are fulfilled. Furthermore, special rules continue to apply to the hiring and employing of 10 disadvantaged or disabled workers and to environmental tax reductions, as was the case under the old GBER.17 Article 6 (5) (f) – (h) GBER now provide for exemptions for aid after natural disasters, for social aid for transport for residents of remote regions, and for aid for culture and heritage conservation.

V. Legal consequences in case of failure to fulfil conditions If the above-mentioned conditions are not met, the aid will not be exempt under the 11 GBER. 8 Memorandum on the draft general block exemption regulation (fn 62),mn. 35; State aid action plan – Less and better targeted state aid: a roadmap for state aid reform 2005–2009, COM 2005(0107), mn. 20 f., www.eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52005DC0107&from=EN, 8 May 2015, 14:09 h. 9 Evans, Evans/Nyssens, mn. 33. 10 Evans/Nyssens, mn. 31. 11 Comment by Germany on the Draft of the old GBER, 11 April 2008, available (in German) at: www.ec.europa.eu/competition/state_aid/reform/comments_gber3/bmwi_1.pdf, 8 May 2015, 13:35 h, p. 2. 12 Comment by Germany on the Draft of the old GBER, 11 April 2008, available (in German) at: www.ec.europa.eu/competition/state_aid/reform/comments_gber3/bmwi_1.pdf, 8 May 2015, 13:35 h, p. 13; Comment by Bundesverband der Industrie, 8 June 2008, available (in German) at: www.ec.europa.eu/competition/state_aid/reform/comments_gber1/34771.pdf, 8 May 2015, 14:35 h, p. 3. 13 Pfaffenbach, comment 2 b. 14 Memorandum on the draft general block exemption regulation (fn 62), mn. 35. 15 Evans/Nyssens, mn. 32 and 33. 16 Deiberova/Nyssens EStAL 2009, 27, 31. 17 Article 8 (5).

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Art. 6 12–15

Commission Regulation (EU) No 651/2014

As a consequence, an aid notification and an individual review by the Commission will have to be conducted in accordance with general EU State Aid law. The condition of an incentive effect is part of the general assessment of whether aid is, as an exception to article 107(1) TFEU, compatible with the Common Market under Article 107(3) TFEU. An assessment of the economic compatibility and a balance of interests are conducted.18 The negative effects of the aid on trade and competition are balanced against its positive effects on achieving goals of Community interest. For the compatibility analysis, the Commission has developed the so-called ‘balancing test’ that contains different steps and evaluates whether the aid serves a Community interest. To that end its suitability and proportionality are assessed. The distortions of competition and commerce must be sufficiently low for the overall balance to be in favour of the grant of the aid.19 13 The incentive effect is crucial for the assessment. An aid has to incentivize an undertaking to conduct an activity that is in the Community interest and which it would have implemented to a lesser degree or would not have implemented at all in the absence of the aid.20 Only changes that contribute to the achievement of a relevant goal, in particular a change that corrects market failure, are sufficient. 21 The Member State has to establish that the aid does not compensate costs that are incurred regardless of the project/activity for which the aid is granted. A so-called counterfactual analysis which compares the hypothetical situation with and without the aid is conducted. 22 To the extent the aid serves efficiency objectives, the Member State has to prove that the change of activity corrects market failure and improves the market outcome. 23 If necessary, the various forms of market failure are further outlined in connection with the relevant aid group. In general, Member States are required to provide the Commission with documents allowing a detailed assessment of the incentive effect. 24 These include in particular projections of the costs covered by the aid, business plans and other documents that were prepared for investment committees in the context of an approval procedure, calculations of earning power of the project with and without aid, financial analyses of the project including several likely scenarios and/or cash-flow projections and risk assessment that consider the risk of insolvency, the finality of the investment and associated costs and/or cost efficiency of the measure that is considered for aid. 14 If the aid pursues cohesion objectives, the incentive effect is proven by the additional costs of the targeted activity that result from social or regional disadvantages meant to be compensated for by the aid.25 15 For the State Aid assessment, the “incentive effect” is closely linked to the necessity (or proportionality) of the aid.26 Aid is only proportionate if the same objective could not have been achieved with less aid and less distortion of competition. 27 If the required minimum is exceeded, the beneficiary would benefit from unexpected profits. 28 Even 12

18 Common Principles For An Economic Assessment Of The Compatibility Of State Aid Under Article 87.3, mn. 4, available at: www.ec.europa.eu/competition/state_aid/reform/economic_assessment_en.pdf, 8 May 2015, 16:02 h. 19 Ibidem, mn. 9. 20 Ibidem, mn. 32. See also ECJ, Case C-730/79 Philip Morris [1980] 2671, mn. 16 f. 21 Ibidem, mn. 33, and Evans/Nyssens, mn. 11. 22 Ibidem, mn. 32. 23 Ibidem, mn. 34. 24 Ibidem, mn. 35. 25 Ibidem, mn. 37. 26 Ibidem, mn. 9. 27 Ibidem, mn. 39. 28 Commission, OJ 2006 L 94/50, mn. 39 – Kronoply, see also GC, Case T-162/06 – Kronoply, mn. 72 f. –.

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1 Art. 7

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though the criteria of incentive effect and necessity can eventually overlap, 29 and even though the same information has to be taken into account for the analysis of both criteria,30 they are assessed separately in recent Commission decisions and case law. 31 While assessment of the incentive effect essentially looks for the above-mentioned change in behaviour, proportionality assesses whether the aid exceeds what is necessary to produce the change in behaviour.32 Both terms are used interchangeably both in legal doctrine as well as in (especially older) Commission documents33. Others consider that the incentive effect used to be called “necessity”.34

Article 7 Aid intensity and eligible costs 1. For the purposes of calculating aid intensity and eligible costs, all figures used shall be taken before any deduction of tax or other charge. The eligible costs shall be supported by documentary evidence which shall be clear, specific and contemporary. 2. Where aid is granted in a form other than a grant, the aid amount shall be the gross grant equivalent of the aid. 3. Aid payable in several instalments shall be discounted to its value at the moment it is granted. The eligible costs shall be discounted to their value at the moment the aid is granted. The interest rate to be used for discounting purposes shall be the discount rate applicable at the moment the aid is granted. 4. Where aid is granted by means of tax advantages, discounting of aid tranches shall take place on the basis of the discount rates applicable at the various times the tax advantage takes effect. 5. Where aid is granted in the form of repayable advances which, in the absence of an accepted methodology to calculate their gross grant equivalent, are expressed as a percentage of the eligible costs and the measure provides that in case of a successful outcome of the project, as defined on the basis of a reasonable and prudent hypothesis, the advances will be repaid with an interest rate at least equal to the discount rate applicable at the moment the aid is granted, the maximum aid intensities laid down in Chapter III may be increased by 10 percentage points. 6. Where regional aid is granted in the form of repayable advances, the maximum aid intensities established in a regional aid map in force at the moment the aid is granted may not be increased. Aid intensity is the aid amount expressed as a percentage of the eligible costs. 1 1 Article 7 governs the general calculation of aid intensity. These rules are linked to the special thresholds of the Regulation and are applicable to the respective aid intensities (as governed by the special rules on the respective aid groups). 29

Ibidem. Common Principles For An Economic Assessment Of The Compatibility Of State Aid Under Article 87., mn. 40. 31 GC, T-162/06 – Kronoply, mn. 60, Commission OJ 2006 L 94/50, para. 15, 20, 24, 26 f., 36 f. – Kronoply. 32 Common Principles For An Economic Assessment Of The Compatibility Of State Aid Under Article 87., mn. 40–41. 33 See OJ 2006, C 323/1, mn. 6; also Regulation 70/2001, OJ 2001 L 10/33, Article 7 where the heading ‘necessity’ considers aspects that are now covered by ‘incentive effect’, Article 8(2). 34 Evans/Nyssens, mn. 16. 1 Recital 23, for the term see Article 2(26) GBER. 30

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Art. 8

Commission Regulation (EU) No 651/2014

The thresholds in terms of aid intensity or aid amount were fixed, in light of the Commission’s experience, at a level that strikes the appropriate balance between minimising distortions of competition in the aided sector and addressing the market failure or cohesion issue concerned.2 3 For purposes of calculating aid intensity, all figures used must be taken before any deduction of tax or other charge. Where aid does not take the form of a subsidy, but is for example awarded by means of tax exemptions or reductions on future taxes, the aid amount is the grant equivalent3 of the aid.4 Aid payable in several instalments must be discounted to its value at the moment of granting.5 The interest rate to be used for discounting purposes must be the reference rate applicable at the time of grant. 6 4 Where aid is awarded by means of tax exemptions or reductions on future taxes due, subject to the respect of a certain aid intensity defined in gross grant equivalent, discounting of aid tranches must take place on the basis of the reference rates applicable at the various times the tax advantages become effective.7 In the case of tax exemptions or reductions on future taxes, the applicable reference rate and the exact amount of the aid tranches may not be known in advance. In such a case, Member States should set in advance a cap on the discounted value of the aid respecting the applicable aid intensity. Subsequently, when the amount of the aid tranche in a given year becomes known, discounting can take place on the basis of the reference rate applicable at that time. The discounted value of each aid tranche should be deducted from the overall amount of the cap.8 The eligible costs must be supported by documentary evidence which must be clear and itemised.9 2

Article 8 Cumulation 1. In determining whether the notification thresholds in Article 4 and the maximum aid intensities in Chapter III are respected, the total amount of State aid for the aided activity or project or undertaking shall be taken into account. 2. Where Union funding centrally managed by the institutions, agencies, joint undertakings or other bodies of the Union that is not directly or indirectly under the control of the Member State is combined with State aid, only the latter shall be considered for determining whether notification thresholds and maximum aid intensities or maximum aid amounts are respected, provided that the total amount of public funding granted in relation to the same eligible costs does not exceed the most favourable funding rate laid down in the applicable rules of Union law. 3. Aid with identifiable eligible costs exempted by this Regulation may be cumulated with: (a) any other State aid, as long as those measures concern different identifiable eligible costs, (b) any other State aid, in relation to the same eligible costs, partly or fully overlapping, only if such cumulation does not result in exceeding the highest aid intensity or aid amount applicable to this aid under this Regulation. 2

Recital 25 GBER. Article 7(4) GBER. 4 Article 7(4) GBER. 5 Article 7(3) GBER. 6 Article 7(3) GBER. 7 Article 7(4) GBER. 8 Recital 24 GBER. 9 Article 7(1) GBER. 3

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4. Aid without identifiable eligible costs exempted under Articles 21, 22 and 23 of this Regulation may be cumulated with any other State aid with identifiable eligible costs. Aid without identifiable eligible costs may be cumulated with any other State aid without identifiable eligible costs, up to the highest relevant total financing threshold fixed in the specific circumstances of each case by this or another block exemption regulation or decision adopted by the Commission. 5. State aid exempted under this Regulation shall not be cumulated with any de minimis aid in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding those laid down in Chapter III of this Regulation. 6. By way of derogation from paragraph 3(b), aid in favour of workers with disabilities, as provided for in Articles 33 and 34 may be cumulated with other aid exempted under this Regulation in relation to the same eligible costs above the highest applicable threshold under this Regulation, provided that such cumulation does not result in an aid intensity exceeding 100 % of the relevant costs over any period for which the workers concerned are employed. Bibliography: Deiberova/Nyssens, The new General Block Exemption Regulation (GBER): What changed?, EStAL 2009, 27.

Assessment of the article 4 thresholds of individual aid and of maximum aid intensity (chapter III) takes into consideration the total amount of public aid, irrespective of whether it is financed from local, regional, national, or Community aid.1 Aid exempt under the GBER can be cumulated with other aid exempt under this Regulation, as long as those aid measures concern different identifiable eligible costs 2 One might for example think of cumulating training aid on the one hand and regional investment aid on the other. Such cumulation is legal without reservations. 3 The GBER applies a different rule to such aid that concerns overlapping costs. Aid exempt under the GBER can be cumulated with other aid exempt under this Regulation in relation to the same eligible costs, partly or fully overlapping, only if such cumulation does not result in exceeding the highest aid intensity or aid amount applicable to this aid under this Regulation. But state aid exempted under this Regulation shall not be cumulated with any de minimis aid4 in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding those laid down in Chapter III of this Regulation.5 For cumulation of aid exempt under the GBER with aid exempt under the de-minimis Regulation, the maximum intensity of the GBER is exclusively relevant. Exceptions from the above-mentioned rules6 may, under conditions, apply to disabled workers.7 The GBER now expressly says that aid exempted by this regulation and any other compatible aid exempted under other regulation or approved by the Commission may be cumulated as long as those measures concern different identifiable eligible costs. 8 Special rules apply to cumulation of aid without identifiable eligible costs exempted under Articles 21, 22 and 23 of this Regulation with any other State aid with identifiable eligible costs. Aid without identifiable eligible costs may be cumulated with any other State aid without identifiable eligible costs, up to the highest relevant total financing 1

Article 8(1) GBER. Article 8(3) GBER. 3 Deiberova/Nyssens EStAL 2009, 27, 33. 4 Regulation 1998/2006, OJ 2006 L 379/5. 5 Article 8(3) GBER. 6 Article 8(5) GBER. 7 For a definition of this term, see Article 2(3). 8 Recital 25, see also Deiberova/Nyssens EStAL 2009, 27, 33 concerning the former regulation. 2

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2

3

4

5

IV

Art. 9 1–2

Commission Regulation (EU) No 651/2014

threshold fixed in the specific circumstances of each case by this or another block exemption regulation or decision adopted by the Commission.9

Article 9 Publication and information 1. The Member State concerned shall ensure the publication on a comprehensive State aid website, at national or regional level of: (a) the summary information referred to in Article 11 in the standardised format laid down in Annex II or a link providing access to it; (b) the full text of each aid measure, as referred to in Article 11 or a link providing access to the full text; (c) the information referred to in Annex III on each individual aid award exceeding EUR 500 000. As regards aid granted to European Territorial Cooperation projects, the information referred to in this paragraph shall be placed on the website of the Member State in which the Managing Authority concerned, as defined in Article 21 of Regulation (EC) No 1299/2013 of the European Parliament and of the Council, is located. Alternatively, the participating Member States may also decide that each of them shall provide the information relating to the aid measures within their territory on the respective websites. 2. For schemes in the form of tax advantages, and for schemes covered by Article 16 and 211 the conditions set out in paragraph 1(c) of this Article shall be considered fulfilled if Member States publish the required information on individual aid amounts in the following ranges (in EUR million): 0,5–1; 1–2; 2–5; 5–10; 10–30; and 30 and more. 3. For schemes under Article 51 of this Regulation, the publication obligations laid down in this article shall not apply to final consumers. 4. The information referred to in paragraph 1(c) of this Article shall be organised and accessible in a standardized manner, as described in Annex III, and shall allow for effective search and download functions. The information referred to in paragraph 1 shall be published within 6 months from the date the aid was granted, or for aid in the form of tax advantage, within 1 year from the date the tax declaration is due, and shall be available for at least 10 years from the date on which the aid was granted. 5. The Commission shall publish on its website: (a) the links to the State aid websites referred to in paragraph 1 of this Article; (b) the summary information referred to in Article 11. 6. Member States shall comply with the provisions of this Article at the latest within two years after the entry into force of this Regulation. The GBER contains procedural rules intended to ensure transparency. This is an overview of the procedure:2 2 Upon coming into force of an aid-scheme or granting of an ad-hoc aid that are exempt under the GBER, the Member State transmits a short description of the aidscheme to the Commission. For this, the electronic form provided by the Commission 1

9

Article 8(4) GBER. For schemes under Article 16 and 21 of the present Regulation, the requirement to publish information on each individual award exceeding EUR 500 000 can be waived with respect to SMEs which have not carried out any commercial sale in any market. 2 For details, see Article 9. 1

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Art. 10

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and the samples in Annex III of the GBER have to be used. The short description is then published by the Commission in the Official Journal and on the Commission website. In the run-up to the GBER, concerns were voiced that competitors could draw conclusion from the published details, with a particular danger in the R&D sector. 3 Some also feared having to disclose business secrets.4 The recitals mention the possibility of deleting business secrets in the case of ad-hoc aid-schemes; the beneficiary’s name and the amount of the aid are, however, not considered business secrets. 5 Upon coming into force of an aid-scheme or granting of an ad-hoc aid that are 3 exempt under the GBER, the Member State must publish the entire wording of the measure online and provide internet access for the entire period of the aid scheme. In the case of aid-schemes this publication must contain the national conditions ensuring compliance with the GBER. In the case of exempt single aid-measures, except for fiscal measures, the decree granting the aid must refer to the rules of chapter II (in particular rules for single aid groups), to the national rules ensuring compliance with the GBER, as well as to the internet address that contains the wording of the aid measure. This new procedural requirement has to be read in conjunction with Article 3(see also under Article 3 point 1).6 An unspecific general reference to the GBER is not sufficient to exempt an aid from the notification requirement. This might imply that any aid measure without such explicit reference is ipso facto illegal.7 Irrespective of this, the Member States, after granting the aid, have to transmit to the 4 Commission the short description in the sample of Annex II the GBER if based on an existing aid-scheme a single aid for R&D projects under Article 31 is granted that exceeds EUR 3 million, or if based on an existing aid-scheme for large-scale investment projects a regional, single investment aid is granted, that does not require individual notification under Article 6.

CHAPTER II Monitoring Article 10 Withdrawal of the benefit of the block exemption Where a Member State grants aid allegedly exempted from the notification requirement under this Regulation without fulfilling the conditions set out in Chapters I to III, the Commission may, after having provided the Member State concerned with the possibility to make its views known, adopt a decision stating that all or some of the future aid measures adopted by the Member State concerned which would otherwise fulfil the requirements of this Regulation, are to be notified to the Commission in accordance with Article 108(3) of the Treaty. The measures to be notified may be limited to the measures granting certain types of aid or in favour of certain beneficiaries or aid measures adopted by certain authorities of the Member State concerned. Article 10 of the GBER contains rules on monitoring of aid.

1

3 Comments by Germany on the Draft of the GBER, available at http://e.europa.eu/state-aid/reform_comments-gber 1/34739.pdf. 4 Ibid. 5 Recital 33 GBER. 6 Deiberova/Nyssens EStAL 2009, 27, 32. 7 Ibid., mn. 33.

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Art. 10 2–5

Commission Regulation (EU) No 651/2014

The Commission regularly monitors the aid measures of which it has been informed pursuant to Article 9 (see under Article 9, point 1). Member States have to maintain detailed records regarding any individual aid or aid scheme exempted under the Regulation. Such records must contain all information necessary to establish that the conditions laid down in this Regulation are fulfilled, including information on the status of any undertaking whose entitlement to aid or a bonus depends on its status as an SME, information on the incentive effect of the aid, and information making it possible to establish the precise amount of eligible costs for the purpose of applying the Regulation. 1 3 On written request, the Member State concerned must provide the Commission with all the information which the Commission considers necessary to monitor the application of the Regulation. In the run-up to the Regulation, the possibility to control irrespective of events was criticised as too wide. Some wanted to require the Commission to have reasonable doubts as to the due application of the exemption regulation before authorizing a re-examination, as required by the enabling regulation 994/1998. 2 In this context, concerns were voiced over the limited powers of the Commission and their unlawful extension.3 Despite these concerns, the GBER does not include a ‘reasonable doubts’ requirement. 4 If the information provided by the Member State is either missing, incomplete, or delayed, the Commission can send a reminder setting a new deadline for the submission of the information. According to the Commission, failure to duly provide the information requested could be interpreted as an indication that the conditions for the exemption are not respected.4 If after such reminder the Member State still does not provide the information requested, the Commission might, after having given the Member State the opportunity to make representations, take the decision that some or all-future aid schemes will have to be notified. This consequence has on various occasions been criticised as too harsh.5 This rule is criticised as building on unfounded allegations, which is not in conformity with previous aid policy. Indeed, such handling puts a strain on the loyal cooperation between national authorities and the Commission.6 In any event, the Commission can deprive the Member State of the benefits of the GBER only for the future; aid schemes that have already been implemented remain unaffected. The Commission furthermore retains the right to open proceedings under Article 108(2) TFEU concerning the (past) application of aid schemes or past ad-hocschemes.7 One should note that the possibility to bring proceedings under Article 258 TFEU for a violation of the Treaty in case of a lack of cooperation remains unaffected by the above rules.8 5 Article 10 does not cover the possibility that correct and complete information is subsequently provided. According to the recitals to the GBER, the Commission should then restore full applicability of the Regulation.9 2

1

Concerning the period for which records must be held, see Article 10(2)(2) GBER. OJ 1998 L 142/1, Article 3(3). 3 Comments by Germany on the Draft of the GBER, available at http://e.europa.eu/state-aid/reform_comments-gber 1/34739.pdf. 4 See recital 6 GBER. 5 See for example Bundesverband O ¨ ffentlicher Banken Deutschlands, Results of the consultation on the first draft of the General Block Exemption Regulation – 20.11.2007, http://ec.europa.eu/competition/ state_aid/reform/comments_gber 1/. 6 See Germany’s submission to the consultation on GBER, http://ec.europa.eu/competition/state_aid/ reform/comments_gber 1/. 7 Deiberova/Nyssens EStAL 2009, 27, 33. 8 Memorandum on the draft general block exemption regulation, para. 39. 9 Recital 6 GBER. 2

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1 Art. 12

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Article 11 Reporting Member States, or in the case of aid granted to European Territorial Cooperation projects, alternatively the Member State in which the Managing Authority, as defined in Article 21 of Regulation (EC) No 1299/2013 of the European Parliament and of the Council, is located, shall transmit to the Commission: (a) via the Commission’s electronic notification system, the summary information about each aid measure exempted under this Regulation in the standardised format laid down in Annex II, together with a link providing access to the full text of the aid measure, including its amendments, within 20 working days following its entry into force; (b) an annual report, as referred to in the Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty1 as amended, in electronic form, on the application of this Regulation, containing the information indicated in the Implementing Regulation, in respect of each whole year or each part of the year during which this Regulation applies. Pursuant to Article 11, Member States compile a report in accordance with Chapter 1 III of Regulation 794/20042 in respect of each whole year or each part of the year during which the Regulation applies.3

Article 12 Monitoring In order to enable the Commission to monitor the aid exempted from notification by this Regulation, Member States, or alternatively, in the case of aid granted to European Territorial Cooperation projects, the Member State in which the Managing Authority is located, shall maintain detailed records with the information and supporting documentation necessary to establish that all the conditions laid down in this Regulation are fulfilled. Such records shall be kept for 10 years from the date on which the ad hoc aid was granted or the last aid was granted under the scheme. The Member State concerned shall provide the Commission within a period of 20 working days or such longer period as may be fixed in the request, with all the information and supporting documentation which the Commission considers necessary to monitor the application of this Regulation. Special rules apply to eligible costs for investment aid. Eligible costs are investments 1 in tangible and/or intangible assets1 incurred due to the construction of a new or the extension of an existing site, the diversification of the production of a site into new, additional products or a fundamental restructuring of the entire production process. Unlike for other aid, regional aid in the transportation sector does not cover the means of transport and the equipment as eligible tangible assets. Because of overcapacities and 1

For a definition of these terms, see Article 2(10)-(11) GBER. OJ 2004 L 140/1, see consolidated version from 27 March 2009. 3 For details, see Article 11 GBER. 1 For a definition of these terms, see Article 2(10)-(11) GBER. 2

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distortions to competition in the Community sector of transport by road and rail, these two sectors exclude means of transport and equipment wholly and generally, and not only as far as investment aid is concerned.2 Further, the acquisition of assets directly linked to an establishment are eligible if the site was closed or would have been closed had it not been purchased and the assets are bought by an independent investor. For small enterprises that are taken over by family members of the initial owner of by former employees, the condition that the assets must be bought by an independent investor does not apply.3 The sole acquisition of shares does not amount to an investment. This rule was criticised in the run-up to the Regulation because of the need to stimulate the takeover of shares of SMEs. 4 Intangible assets are eligible costs if they are subject to mandatory amortization, were acquired from a third party under market conditions and are used exclusively by the beneficiary. In the case of regional aid, the establishment receiving the aid may only use them.5 For purchase from third parties, it is essential that the buyer does not exert control over the seller and vice-versa pursuant to Article 3 of the EU merger regulation. 6 Investment aid to SMEs must be included in the assets of the undertaking for at least three years. Regional aid must be included in the assets of the undertaking for at least five years (three years for SMEs) and remain in the establishment receiving the aid. 7 Concerning conditions under which employment directly created by an investment project are eligible costs, see Article 12(3). See also Articles 13 and 14.

CHAPTER III SPECIFIC PROVISIONS FOR DIFFERENT CATEGORIES OF AID Section 1 Regional aid Subsection A Regional investment and operating aid Article 13 Scope of regional aid This Section shall not apply to: (a) aid which favours activities in the steel sector, the coal sector, the shipbuilding sector, the synthetic fibres sector, the transport sector as well as the related infrastructure, energy generation, distribution and infrastructure; (b) regional aid in the form of schemes which are targeted at a limited number of specific sectors of economic activity; schemes aimed at tourism activities, broadband infrastructures or processing and marketing of agricultural products are not considered to be targeted at specific sectors of economic activity; 2

Article 2(10) and recital 35 GBER. Article 12(1)(b) GBER. Comments by Germany on the Draft of the GBER, available at http://e.europa.eu/state-aid/reform_comments-gber 1/34739.pdf. 5 Article 12(2)(a)-(c) GBER. 6 Regulation 139/2004, OJ 2004 L 24/1. 7 Article 12(2)(d) GBER. 3 4

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(c) regional aid in the form of schemes which compensate the transport costs of goods produced in the outermost regions or in sparsely populated areas and granted in favour of: (i) activities in the production, processing and marketing of products listed in Annex I to the Treaty; or (ii) activities classified in Regulation (EC) No 1893/2006 of the European Parliament and of the Council of 20 December 2006 establishing statistical classification of economic activities NACE Revision 2 and amending Council Regulation (EEC) No 3037/90 as well as certain EC Regulations on specific statistical domains (53) as agriculture, forestry and fishing under section A of the NACE Rev. 2 statistical classification of economic activities, mining and quarrying under section B of the NACE Rev. 2 and electricity, gas, steam and air conditioning supply under section D of the NACE Rev. 2; or (iii) transport of goods by pipeline; (d) individual regional investment aid to a beneficiary that has closed down the same or a similar activity in the European Economic Area in the two years preceding its application for regional investment aid or which, at the time of the aid application, has concrete plans to close down such an activity within a period of up to two years after the initial investment for which aid is requested is completed in the area concerned; (e) regional operating aid granted to undertakings whose principal activities fall under Section K ‘Financial and insurance activities’ of the NACE Rev. 2 or to undertakings that perform intra-group activities whose principal activities fall under classes 70.10 ‘Activities of head offices’ or 70.22 ‘Business and other management consultancy activities’ of NACE Rev. 2.

Article 14 Regional investment aid 1. Regional investment aid measures shall be compatible with the internal market within the meaning of Article 107(3) of the Treaty and shall be exempted from the notification requirement of Article 108(3) of the Treaty, provided that the conditions laid down in this Article and in Chapter I are fulfilled. 2. The aid shall be granted in assisted areas. 3. In assisted areas fulfilling the conditions of Article 107(3)(a) of the Treaty, the aid may be granted for an initial investment regardless of the size of the beneficiary. In assisted areas fulfilling the conditions of Article 107(3)(c) of the Treaty, the aid may be granted to SMEs for any form of initial investment. Aid to large enterprises shall only be granted for an initial investment in favour of new economic activity in the area concerned. 4. The eligible costs shall be as follows: (a) investment costs in tangible and intangible assets; (b) the estimated wage costs arising from job creation as a result of an initial investment, calculated over a period of two years; or (c) a combination of points (a) and (b) not exceeding the amount of (a) or (b), whichever is higher. 5. The investment shall be maintained in the recipient area for at least five years, or at least three years in the case of SMEs, after completion of the investment. This shall not prevent the replacement of plant or equipment that has become outdated or Knoblich

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broken within this period, provided that the economic activity is retained in the area concerned for the relevant minimum period. 6. The assets acquired shall be new except for SMEs and for the acquisition of an establishment. Costs related to the lease of tangible assets may be taken into account under the following conditions: (a) for land and buildings, the lease must continue for at least five years after the expected date of completion of the investment project for large undertakings or three years in the case of SMEs; (b) for plant or machinery, the lease must take the form of financial leasing and must contain an obligation for the beneficiary of the aid to purchase the asset upon expiry of the term of the lease. In the case of acquisition of the assets of an establishment within the meaning of Article 2 point 49, only the costs of buying the assets from third parties unrelated to the buyer shall be taken into consideration. The transaction shall take place under market conditions. If aid has already been granted for the acquisition of assets prior to their purchase, the costs of those assets shall be deducted from the eligible costs related to the acquisition of an establishment. Where a member of the family of the original owner, or an employee, takes over a small enterprise, the condition that the assets be bought from third parties unrelated to the buyer shall be waived. The acquisition of shares does not constitute initial investment. 7. For aid granted for a fundamental change in the production process, the eligible costs must exceed the depreciation of the assets linked to the activity to be modernised in the course of the preceding three fiscal years. For aid granted for a diversification of an existing establishment, the eligible costs must exceed by at least 200 % the book value of the assets that are reused, as registered in the fiscal year preceding the start of works. 8. Intangible assets are eligible for the calculation of investment costs if they fulfil the following conditions: (a) they must be used exclusively in the establishment receiving the aid; (b) they must be amortisable; (c) they must be purchased under market conditions from third parties unrelated to the buyer; and (d) they must be included in the assets of the undertaking receiving the aid and must remain associated with the project for which the aid is granted for at least five years or three years in the case of SMEs. For large undertakings, costs of intangible assets are eligible only up to a limit of 50 % of the total eligible investment costs for the initial investment. 9. Where eligible costs are calculated by reference to the estimated wage costs as referred to in paragraph 4(b), the following conditions shall be fulfilled: (a) the investment project shall lead to a net increase in the number of employees in the establishment concerned, compared with the average over the previous 12 months, meaning that any job lost shall be deducted from the apparent created number of jobs during that period; (b) each post shall be filled within three years of completion of works; and (c) each job created through the investment shall be maintained in the area concerned for a period of at least five years from the date the post was first filled, or three years in the case of SMEs. 10. Regional aid for broadband network development shall fulfil the following conditions:

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(a) aid shall be granted only in areas where there is no network of the same category (either basic broadband or NGA) and where no such network is likely to be developed on commercial terms within three years from the decision to grant the aid; and (b) the subsidised network operator must offer active and passive wholesale access under fair and non-discriminatory conditions including physical unbundling in the case of NGA networks; and (c) aid shall be allocated on the basis of a competitive selection process. 11. Regional aid for research infrastructures shall be granted only if the aid is made conditional on giving transparent and non-discriminatory access to the aided infrastructure. 12. The aid intensity in gross grant equivalent shall not exceed the maximum aid intensity established in the regional aid map which is in force at the time the aid is granted in the area concerned. Where the aid intensity is calculated on the basis of paragraph 4(c), the maximum aid intensity shall not exceed the most favourable amount resulting from the application of that intensity on the basis of investment costs or wage costs. For large investment projects the aid amount shall not exceed the adjusted aid amount calculated in accordance with the mechanism defined in Article 2, point 20; 13. Any initial investment started by the same beneficiary (at group level) within a period of three years from the date of start of works on another aided investment in the same level 3 region of the Nomenclature of Territorial Units for Statistics shall be considered to be part of a single investment project. Where such single investment project is a large investment project, the total aid amount for the single investment project shall not exceed the adjusted aid amount for large investment projects. 14. The aid beneficiary must provide a financial contribution of at least 25 % of the eligible costs, either through its own resources or by external financing, in a form, which is free of any public support. In the outermost regions an investment made by an SME may receive an aid with a maximum aid intensity above 75 %, in such situations the remainder shall be provided by way of a financial contribution from the aid beneficiary. 15. For an initial investment linked to European territorial cooperation projects covered by Regulation (EU) No 1299/2013, the aid intensity of the area in which the initial investment is located shall apply to all beneficiaries participating in the project. If the initial investment is located in two or more assisted areas, the maximum aid intensity shall be the one applicable in the assisted area where the highest amount of eligible costs is incurred. In assisted areas eligible for aid under Article 107(3)(c) of the Treaty, this provision shall apply to large undertakings only if the initial investment concerns a new economic activity.

Article 15 Regional operating aid 1. Regional operating aid schemes in outermost regions and sparsely populated areas as designated by the Member States within their regional aid map approved by the Commission in accordance with paragraph 161 of the Guidelines on regional State aid for 2014–2020 (54) shall be compatible with the internal market within the meaning of Article 107(3) of the Treaty and shall be exempted from the notification requirement of Article 108(3) of the Treaty, provided that the conditions laid down in this Article and in Chapter I are fulfilled. Knoblich

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2. The regional operating aid schemes shall compensate for: (a) the additional transport costs of goods which have been produced in areas eligible for operating aid, as well as additional transport costs of goods that are further processed in these areas, under the following conditions: (i) the beneficiaries have their production activity in those areas; (ii) the aid is objectively quantifiable in advance on the basis of a fixed sum or per tonne/kilometre ratio or any other relevant unit; (iii) these additional transport costs are calculated on the basis of the journey of the goods inside the national border of the Member State concerned using the means of transport which results in the lowest costs for the beneficiary. Only for outermost regions, additional transport costs of goods that are further processed in these areas may include the costs of transporting goods from any place of their production to these areas. (b) the additional operating costs other than transport costs, incurred in outermost regions as a direct effect of one or several of the permanent handicaps referred to in Article 349 of the Treaty, under the following conditions: (i) the beneficiaries have their economic activity in an outermost region; (ii) the annual aid amount per beneficiary under all operating aid schemes does not exceed: – 15 % of the gross value added annually created by the beneficiary in the outermost region concerned; or – 25 % of the annual labour costs incurred by the beneficiary in the outermost region concerned; or – 10 % of the annual turnover of the beneficiary realised in the outermost region concerned. 3. The aid intensity shall not exceed 100 % of the eligible additional costs as determined in this Article.

Subsection B Urban development aid Article 16 Regional urban development aid 1. Regional urban development aid shall be compatible with the internal market within the meaning of Article 107(3) of the Treaty and shall be exempted from the notification requirement of Article 108(3) of the Treaty, provided that the conditions laid down in this Article and in Chapter I are fulfilled. 2. Urban development projects shall fulfil the following criteria: (a) they are implemented via urban development funds in assisted areas; (b) they are co-financed by the European Structural and Investment Funds; (c) they support the implementation of an ‘integrated sustainable urban development strategy’; 3. The total investment in an urban development project under any urban development aid measure shall not exceed EUR 20 million. 4. The eligible costs shall be the overall costs of the urban development project to the extent that they comply with Articles 65 and 37 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (55). 444

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5. Aid granted by an urban development fund to the eligible urban development projects may take the form of equity, quasi-equity, loans, guarantees, or a mix thereof. 6. The urban development aid shall leverage additional investment from private investors at the level of the urban development funds or the urban development projects, so as to achieve an aggregate amount reaching minimum 30 % of the total financing provided to an urban development project. 7. Private and public investors may provide cash or an in-kind contribution or a combination of those for the implementation of an urban development project. An in-kind contribution shall be taken into account at its market value, as certified by an independent qualified expert or duly authorised official body. 8. The urban development measures shall fulfil the following conditions: (a) urban development fund managers shall be selected through an open, transparent and non-discriminatory call in accordance with the applicable Union and national laws. In particular, there shall be no discrimination between urban development fund managers on the basis of their place of establishment or incorporation in any Member State. Urban development fund managers may be required to fulfil predefined criteria objectively justified by the nature of the investments; (b) the independent private investors shall be selected through an open, transparent and non-discriminatory call in accordance with applicable Union and national laws aimed at establishing the appropriate risk-reward sharing arrangements whereby, for investments other than guarantees, asymmetric profit-sharing shall be given preference over downside protection. If the private investors are not selected by such a call, the fair rate of return to the private investors shall be established by an independent expert selected via an open, transparent and nondiscriminatory call; (c) in the case of asymmetric loss-sharing between public and private investors, the first loss assumed by the public investor shall be capped at 25 % of the total investment; (d) in the case of guarantees to private investors in urban development projects, the guarantee rate shall be limited to 80 % and total losses assumed by a Member State shall be capped at 25 % of the underlying guaranteed portfolio; (e) the investors shall be allowed to be represented in the governance bodies of the urban development fund, such as the supervisory board or the advisory committee; (f) the urban development fund shall be established according to the applicable laws. The Member State shall provide for a due diligence process in order to ensure a commercially sound investment strategy for the purpose of implementing the urban development aid measure. 9. Urban development funds shall be managed on a commercial basis and shall ensure profit-driven financing decisions. This is considered to be the case when the managers of the urban development fund fulfill the following conditions: (a) the managers of urban development funds shall be obliged by law or contract to act with the diligence of a professional manager in good faith and avoiding conflicts of interest; best practices and regulatory supervision shall apply; (b) the remuneration of the managers of urban development funds shall conform to market practices. This requirement is considered to be met where a manager is selected through an open, transparent and non-discriminatory call, based on objective criteria linked to experience, expertise and operational and financial capacity; Knoblich

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(c) the managers of urban development funds shall receive a remuneration linked to performance, or shall share part of the investment risks by co-investing own resources so as to ensure that their interests are permanently aligned with the interests of the public investors; (d) the managers of urban development funds shall set out an investment strategy, criteria and the proposed timing of investments in urban development projects, establishing the ex ante financial viability and their expected impact on urban development; (e) a clear and realistic exit strategy shall exist for each equity and quasi-equity investment. 10. Where an urban development fund provides loans or guarantees to urban development projects, the following conditions shall be fulfilled: (a) in the case of loans, the nominal amount of the loan is taken into account in calculating the maximum investment amount for the purposes of paragraph 3 of this Article; (b) in the case of guarantees, the nominal amount of the underlying loan is taken into account in calculating the maximum investment amount for the purposes of paragraph 3 of this Article. 11. The Member State may assign the implementation of the urban development aid measure to an entrusted entity. Content A. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Rationale and purpose of regional aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Justification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Compensation for regional handicaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incentive effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Regional aid and European regional policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Guidelines on regional State aid for 2014–2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Pre Synopses of General Block Exemption Regulations and Guidelines on regional State aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Synopsis of the General Block Exemption Regulations 2008 and 2014 . . I. GBER I to GBER II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. GBER II to GBER I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Synopsis of Guidelines on regional State aid for 2007 and 2014 . . . . . . . . . I. RAG 2007 to RAG 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. RAG 2014 to RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary on Articles 13 and 14 of Regulation 800/2008 (GBER I). .

1 1 4 5 7 8 9 11 12 13 13 14 15 15 16 17

A. Introduction Bibliography: Bacon/Wishlade, European Communitiy Law of State Aid, 2009; Borchardt, Die Ru¨ckfu¨hrung zu Unrecht gewa¨hrter staatlicher Beihilfen beim Verkauf von Vermo¨genswerten des Beihilfeempfa¨ngers durch den Insolvenzverwalter, ZIP 2001, 1301; Cavallo/Junginger-Dittel, The Multisectoral Framework 2002, Competition Policy Newsletter 1/2004, 78; Ehricke, Ru¨ckzahlung gemeinschaftsrechtswidriger Beihilfen in der Insolvenz des Beihilfeempfa¨ngers, ZIP 2001, 489; Fiebelkorn/Petzold, Durchfu¨hrungsverbot gema¨ß Article 88 III 3 EG, Ru¨ckforderungsverpflichtung und Nichtigkeitsfolge: Ist die BGH-Rechtsprechung praxisgerecht?, EuZW 2009, 323; Fisher, Statistical Methods for Research Workers, 1. Aufl. 1925; Helbling, Zur Bedeutung der US GAAP, Der Schweizer Treuha¨nder 2001, 763; Knoblich, Die Entwicklung des Regionalbeihilferechts und aktuelle Herausforderungen, in: Oberender, Der ‘more economic approach’ in der Beihilfenkontrolle, 85; Koenig/Heratsch, Staatliche und kommunale Bu¨rgschaften auf dem Pru¨fstand des EG-Beihilferechts – Neue Tendenzen, ZHR 169(2005), 77; Lang, Marktmacht und Marktmachtmessung

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im deutschen Großhandelsmarkt fu¨r Strom, 2007; Pechstein, EuZW 1999, 499;., EuZW 2003, 447; Solte´sz, Hat sich das Europa¨ische Beihilferecht in der Krise bewa¨hrt?, in: Schwarze, Rechtsschutz und Wettbewerb in der neueren europa¨ischen Rechtsanwendung, 2010, 61; Solte´sz, Subventionskahlschlag oder Beihilfenkontrolle? – Der neue Multisektorale Regionalbeihilferahmen als europaweites Investitionshemmnis?, EWS 2004, 241; Solte´sz/Marquier, Ku¨nstliche Aufteilung von Investitionsprojekten zur Umgehung der Beihilfekontrollen (?) – Das Beispiel des neuen Multisektoralen Rahmens, EuZW 2004, 587; Solte´sz/Scha¨dle, Zur Umgehung beihilferechtlicher Notifizierungspflichten – Aktuelle Entwicklungen bei der 3-Jahres-Regel, EuZW 2008, 134; Tetsch, Die Bund-La¨nder-Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur, 1996; Weitnauer, Der Unternehmenskauf nach neuem Kaufrecht, NJW 2002, 2511.

I. Rationale and purpose of regional aid Regional aids are State aids targeted at regions. They promote the economic develop- 1 ment of certain disadvantaged areas within the European Economic Area. 1 Being a special form of horizontal aid, they address the handicaps of disadvantaged regions, and promote the economic, social and territorial cohesion of Member States and the European Union as a whole (concept of cohesion).2 Regional aids are specifically designed to assist disadvantaged regions3 through supporting investment and job creation.4 Under the condition that they are focussed on the most disadvanted regions, they are regarded as being compatible with the internal market (until 30 November 2009 “the common market”) according to Article 107(3) lit. a and c TFEU. Without such focus, on the other hand, regional aids lose their incentive quality and economic impact, and interfere with the normal interplay of market forces and reduce the efficacy of the Community economy as a whole. 5 Regional aids must remain neutral towards the intersectoral allocation of economic 2 resources.6 They are thus considered compatible with the internal market only if they constitute multisectoral aid schemes open, for a given region, to all firms in the sectors concerned.7 Usually, regional aids are granted as regional addition on investment aids, 8 as 1 Guidelines on regional State aid for 2014–2020 (“Regional aid Guidelines 2014” – RAG 2014), OJ 2013 C 209/1, para. 1; Guidelines on national regional aid for 2007–2013 (“Regional aid Guidelines 2007 – RAG 2007), OJ 2006 C 54/13, para. 1. The European Economic Area (EEA) covers the territory of the Member States of the European Union and of the EFTA-States excluding Switzerland, see Agreement on the European Economic Area of 2 May 1992, Agreement on the first enlargement of the EEA of 14 October 2003, and Agreement on the second enlargement of the EEA of 25 July 2007. 2 RAG 2007, para. 2; Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Article 87 und 88 of the Treaty to national regional investment aid (“Block exemption Regulation on regional investment aid” – RRIA), OJ 2006 L 302/29, recital 3; Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty, OJ 2008 L 214/3 (“General block exemption Regulation 2008” – GBER 2008 or GBER I), recital 40. 3 RAG 2014, para. 5; RAG 2007, para. 3; RRIA, recital 3; GBER 2008, recital 40. 4 Teleworking jobs can therefore only be promoted in eligible regions regardless where the firm which creates the teleworking jobs is located, Com., Decision of 25 February 1998 concerning aid which Germany intends to grant under the 26th framework plan of the joint scheme for improving regional economic structures with a view to promoting teleworking, OJ 1999 L 271/25; Heidenhain/Jestaedt, EC State Aid Law, § 15 para. 8. 5 RAG 1998, para. 1.7. 6 RAG 1998, para. 2.3. 7 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ 2014 L 187/1 (“General Block exemption Regulation 2014” – GBER 2014 or GBER II), Art. 13(b) 1 st half-sentence; GBER 2008, recital 14 and Art. 1(4) sentence 1; RRIA, recital 9 and Article 7 lit. b 1 st half-sentence; RAG 1998, para. 2.5. An exception applies to schemes aimed at tourism activities, broadband infrastructures or processing and marketing of agricultural products, GBER 2014, Art. 13(b) 2 nd half-sentence. 8 GBER 2014, Art. 14; GBER 2008, Art. 13; RRIA, Art. 1(1); RAG 2007, para. 1, 3; RAG 1998, para. 1.4. Regional investment aids include regional employment aid (cost of labour aid) linked with an investment; RRIA, recital 14; GBER 2008 recital 37 and Art 2 no. 17, Art. 13(5) and (8).

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regional investment aids granted to small and medium-sized enterprises (SME) 9 or as aids granted to newly created enterprises.10 In exceptional cases, if such aid is not enough to trigger a process of regional development because the structural handicaps of the region concerned are too great, supplemental operating aid may be granted.11 3 The European Commission does not regard regional top-ups for other forms of horizontal aids in eligible areas as regional aids, such as aids for research, development and innovation, employment,12 training or the environment, hence aids, which pursue other objectives of common European interest.13

II. Justification 4

The justification of regional State aids in the sense of compatibility of regional State aids with the internal market is based on two approaches: the concept of compensation of regional handicaps in favour of the recipient undertakings in order to create a benefit of the eligible area on the one hand, and the concept of the incentive effect on the other. Both concepts are covered in detail by the relevant legal acts.

1. Compensation for regional handicaps An aid is of lowest effect on the internal market if the recipient does not receive an additional advantage but if existing regional handicaps are simply compensated. 14 Considering that the amount of aid depends on the economic power of a region15, regional aids are first of all meant as a compensation for regional handicaps,16 i. e. a generalized compensation for the disadvantages which an undertaking has to sustain if it decides to set up or expand its business in an economically disadvantaged region, which typically has a poor infrastructure.17 6 A compensation for regional disadvantages is, however, only necessary if an undertaking is free to set up its business at another, less handicapped location (free choice of location). A compensation for regional disadvantages is not justified if an undertaking is bound to a specific location.18 5

9 RAG 2007, para. 1, amended by GBER 2008, recital 39; RAG 1998, para. 1.3 Fn. 1. These are regional aids for investment granted to small and medium-sized enterprises which are accepted not only in disadvantaged areas. 10 GBER 2008, recital 43 and Art. 14; RAG 2007, para. 7, 84–91. 11 GBER 2014, Art. 15; RAG 1998, para 1.5; RAG 2007, para 1, 6, 76–83. 12 That does not apply to regional employment aid (cost of labour aid) linked with an investment. That regional employment aid is to be regarded as a regional aid, see above Fn. 8. 13 RAG 2007, para. 2, Fn. 1. 14 See the Community Framework for State Aid to the Motor Vehicle Industry, 1997 OJ C 279/1, para. 3.2 lit. c, amended by the notice on the extension of the period of validity of the Community framework for State aid to the motor vehicle industry, OJ 2000 C 258/6 (Motor vehicle-Community Framework 1997): That requires a cost-benefit analysis with regards to the actual location in an eligible area and at least another location in order to calculate the disadvantage the investor is facing. 15 RAG 2007, para. 1, 5 and the provisions on the relevant GDP in RAG 2007, para. 15–20, 25, 27, 30. 16 GBER 2014, recital. 40; Cavallo/Junginger-Dittel, The Multisectoral Framework 2002, European Commission, Competition Policy Newsletter 1/2004, 78: ‘… which should compensate the regional handicaps …’. 17 European Commission, Communication concerning the criteria for an in-depth assessment of regional aid to large investment projects, OJ 2009 C 223/3, previously published on 17/6/2009 as ‘guidance paper setting out criteria for the in-depth assessment of regional aid to large investment projects’ (criteria), para. 2, 22 no. 2; Knoblich, Die Entwicklung des Regionalbeihilferechts und aktuelle Herausforderungen, in: Oberender, Der ‘more economic approach’ in der Beihilfenkontrolle, 85, 90. 18 See Motor vehicle-Community Framework 1997, Sec. 3.2 lit. a. Therefore, the Free State of Saxony does not promote undertakings mixing asphalt. Those undertakings have to set up their business where

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2. Incentive effect The exemption of regional aid is based on the assumption that an undertaking will 7 only make a desired investment if that investment is financially supported. This incentive effect can become manifest in the investment itself, the investment volume or the investment period.19

3. Legal framework The relevant legal acts for examing if a particular regional aid is compatible with the 8 internal market are: (1) Art. 13–16 of Commission Regulation (EU) No. 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (General block exemption Regulation – GBER) and the European Commission Guidelines on regional State aid for 2014–2020 (Regional aid Guidelines 2014 – RAG 2014).

III. Regional aid and European regional policy The European Economic Policy does not only comprise the European Competition 9 Policy including the European State Aid Policy but also the European Regional Policy.20 The latter is aimed at strengthening economic, social and territorial cohesion as well as promoting an overall harmonious development of the European Union (Art. 174(1) TFEU). In particular, the EU strives for reducing disparities between the levels of development of its various regions and the backwardness of the least favoured regions (Art. 174(2) TFEU). These objectives shall be attained primarily by the economic policies of the Member States.21 The EU supports efforts of the Member States through its so-called Structural Funds22 that include the European Regional Development Fund (ERDF)23 and

they want to supply the asphalt. Asphalt is very difficult to be transported over long distances, see ‘Richtlinie des Sa¨chsischen Staatsministeriums fu¨r Wirtschaft und Arbeit zur Fo¨rderung der gewerblichen Wirtschaft einschließlich der Tourismuswirtschaft im Rahmen der Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur’ (GRW) (RIGA) of 19/2/2009, OJ of the Free State of Saxony: Sa¨chsABl. 2009, 525(RIGA SN 2009), Annex no. 2.4. 19 GBER 2014, recital 29 sentence 3 and Art. 8(2), (3); RAG 2007, para. 38. 20 Art. 174, 175 sentence 3, 176, 177 sentence 1, 178 sentence 1 TFEU. 21 Art. 175 sentence 1 TFEU. 22 For common provisions regarding all funds see Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006, OJ 2013 L 347, p. 320–469 (the Common provisions Regulation – CPR). 23 Regulation (EU) No 1301/2013 of the European Parliament and of the Council of 17 December 2013 on the European Regional Development Fund and on specific provisions concerning the Investment for growth and jobs goal and repealing Regulation (EC) No 1080/2006, OJ 2013 L 347, p. 289–302 (ERDF Regulation); Regulation (EU) No 1299/2013 of the European Parliament and of the Council of 17 December 2013 on specific provisions for the support from the European Regional Development Fund to the European territorial cooperation goal, OJ 2013 L 347, p. 259–280 (ETC Regulation); Regulation (EU) No 1302/2013 of the European Parliament and of the Council of 17 December 2013 amending Regulation (EC) No 1082/2006 on a European grouping of territorial cooperation (EGTC) as regards the clarification, simplification and improvement of the establishment and functioning of such groupings, OJ 2013 L 347, p. 303–319 (EGTC Regulation).

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the European Social Fund (ESF).24 Further important tools of the EU’s regional policy are funds under the Common Agricultural Policy (CAP), namely the European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD)25, the European Maritime and Fisheries Fund (EMFF)26, and the Cohesion Fund.27 Particularly the ERDF is intended to help to redress the main regional imbalances in the EU through participation in the development and structural adjustment of regions whose development is lagging behind and in the conversion of declining industrial regions.28 Furthermore, the EU supports the Member States through the European Investment Bank (EIB), and other financial facilities.29 Collectively, through its Structural Funds, the EU provides the Member States with very substantial funding for their regional policies.30 10 The European State Aid Policy and the European Regional Policy are closely linked. This is intended by the European Commission,31 which is thereby following case law of the ECJ.32 The coherence of both policy fields becomes particularly evident when comparing the supported regions. The least favoured regions according to Article 174 sentence 2 TFEU (i. e. the regions with the greatest need for assistance under the European Regional Policy rules, the so-called “Objective-1 regions” 33 or “Convergence objective regions”34 or “less developed regions”35) are identical with the regions according to Article 107(3) lit. a TFEU (the so-called “a-areas”36, including statistical effect regions).37 The same criterion applies to both types of regions: in order to be eligible for regional state aid or funding under regional policy, their gross domestic product (GDP), measured in purchasing power parities (PPP) and calculated on the basis of the Community figures provided by EUROSTAT for the last three years on average available at the time of fixing must be lower than 75 percent of the Community average.38

24 Regulation (EU) No 1304/2013 of the European Parliament and of the Council of 17 December 2013 on the European Social Fund and repealing Council Regulation (EC) No 1081/2006, OJ 2013 L 347, p. 470–486 (ESF Regulation). 25 Regulation (EU) No 1305/2013 of the European Parliament and of the Council of 17 December 2013 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) and repealing Council Regulation (EC) No 1698/2005, OJ 2013 L 347, p. 487–548 (EAFRD Regulation). 26 Regulation (EU) No 508/2014 of the European Parliament and of the Council of 15 May 2014 on the European Maritime and Fisheries Fund (EMFF) and repealing Council Regulations (EC) No 2328/2003, (EC) No 861/2006, (EC) No 1198/2006 and (EC) No 791/2007 and Regulation (EU) No 1255/2011 of the European Parliament and of the Council, OJ 2014 L 149, p. 1–66 (EMFF Regulation). 27 Council Regulation (EU) No 1300/2013 of 17 December 2013 on the Cohesion Fund and repealing Council Regulation (EC) No 1084/2006, OJ 2013 L 347, p. 281–288 (Cohesion fund Regulation). 28 Art. 176 TFEU. 29 Article 175 sentence 4 TFEU. 30 Funding for regional and cohesion policy in 2014–2020 amounts to roughly E 350 bn. 31 Communication of the Commission to the Member States on the links between regional and competition policy — Reinforcing concentration and mutual consistency, OJ 1998 C 90/3; Hancher/ Ottervanger/Slot/Jestaedt, para. 18–005: ‘regional policy as a cornerstone of the Community cohesion policy’; Bacon/Wishlade, para. 15.01, 15.06. 32 ECJ, Case C-248/84, Federal Republic of Germany v Commission of the European Communities, judgement of 14 October 1987. 33 Art. 1 sentence 2 no. 1 Structural Funds Regulation 1999. 34 Art. 3(2) lit. a Structural Funds Regulation 2006. 35 Art. 90(2) lit. a oft he Common provisions Regulation. 36 RAG 2007, para. 16 sentence 3; RAG 1998, para. 3.10.5. 37 RAG 2007, para. 18–20; Article 8(2) Regulation on Structural Funds 2006; in concrete terms, particularly regarding the assessment of the assisted area status of the statistical effect regions. 38 Article 5(1) Regulation on Structural Funds 2006; Article 3(1) Regulation on Structural Funds 1999; Article 8 para. 1 Regulation on Structural Funds 1993; Article 8(1) Regulation on Structural Funds 1988; RAG 2007, para. 16 sentence 1 and 3; RAG 1998, para. 3.9 and 3.10.5.

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B. Guidelines on regional State aid for 2014–2020 (2013/C 209/01)

11

INTRODUCTION 1. On the basis of Article 107(3)(a) and (c) of the Treaty on the Functioning of the European Union (TFEU), the Commission may consider compatible with the internal market State aid to promote the economic development of certain disadvantaged areas within the European Union1. This kind of State aid is known as regional aid. 2. In these guidelines, the Commission sets out the conditions under which regional aid may be considered to be compatible with the internal market and establishes the criteria for identifying the areas that fulfil the conditions of Article 107(3)(a) and (c) of the Treaty. 3. The primary objective of State aid control in the field of regional aid is to allow aid for regional development while ensuring a level playing field between Member States, in particular by preventing subsidy races that may occur when they try to attract or retain businesses in disadvantaged areas of the Union, and to limit the effects of regional aid on trade and competition to the minimum necessary. 4. The objective of geographical development distinguishes regional aid from other forms of aid, such as aid for research, development and innovation, employment, training, energy or for environmental protection, which pursue other objectives of common interest in accordance with Article 107(3) of the Treaty. In some circumstances higher aid intensities may be allowed for those other types of aid, whenever granted to undertakings established in disadvantaged areas, in recognition of the specific difficulties which they face in such areas2. 5. Regional aid can only play an effective role if it is used sparingly and proportionately and is concentrated on the most disadvantaged regions of the European Union3. In particular, the permissible aid ceilings should reflect the relative seriousness of the problems affecting the development of the regions concerned. Furthermore, the advantages of the aid in terms of the development of a less-favoured region must outweigh the resulting distortions of competition4. The weight given to the positive effects of the aid is likely to vary according to the applied derogation of Article 107(3) of the Treaty, so that a greater distortion of competition can be accepted in the case of the most disadvantaged regions covered by Article 107(3)(a) than in those covered by Article 107(3)(c)5. 6. Regional aid can further be effective in promoting the economic development of disadvantaged areas only if it is awarded to induce additional investment or economic activity in those areas. In certain very limited, well-identified cases, the obstacles that these particular areas may encounter in attracting or maintaining economic activity may be so severe or permanent that investment aid alone may not be sufficient to allow the development of that area. Only in such cases may regional investment aid be supplemented by regional operating aid not linked to an investment. 7. In the Communication on State aid modernisation of 8 May 20126, the Commission announced three objectives pursued through the modernisation of State aid control: (a) to foster sustainable, smart and inclusive growth in a competitive internal market; (b) to focus Commission ex ante scrutiny on cases with the biggest impact on the internal market while strengthening the cooperation with Member States in State aid enforcement; 1 Areas eligible for regional aid under Article 107(3)(a) of the Treaty, commonly referred to as ‘a’ areas, tend to be the more disadvantaged within the Union in terms of economic development. Areas eligible under Article 107(3)(c) of the Treaty, referred to as ‘c’ areas, also tend to be disadvantaged but to a lesser extent. 2 Regional top-ups for aid granted for such purposes are therefore not considered as regional aid. 3 Each MemberStatemay identify these areas in a regional aid map on the basis of the conditions laid down in Section 5. 4 See in this respect Case 730/79, Philip Morris [1980], ECR 2671, paragraph 17 and in Case C-169/95, Spain v Commission [1997], ECR I-148, paragraph 20. 5 See in this respect Case T-380/94, AIUFFASS and AKT v Commission [1996], ECR II-2169, paragraph 54. 6 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of regions EU State Aid Modernisation (SAM), COM/2012/0209 final.

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(c) to streamline the rules and provide for faster decisions. 8. In particular, the Communication called for a common approach to the revision of the different guidelines and frameworks with a view to strengthening the internal market, promoting more effectiveness in public spending through a better contribution of State aid to the objectives of common interest, greater scrutiny of the incentive effect, limiting the aid to the minimum, and avoiding the potential negative effects of the aid on competition and trade. The compatibility conditions set out in these guidelines are based on those common assessment principles and are applicable to notified aid schemes and individual aid. 1. SCOPE AND DEFINITIONS 1.1. Scope of regional aid 9. 10.

11. 12.

13. 14.

Regional aid to the steel7 and synthetic fibres8 sectors will not be considered to be compatible with the internal market. The Commission will apply the principles set out in these guidelines to regional aid in all sectors of economic activity9, apart from the fisheries and aquaculture10, agricultural11 and the transport sector12, which are subject to special rules laid down by specific legal instruments, which might derogate partially or totally from these guidelines. The Commission will apply these guidelines for processing and marketing of agricultural products into non-agricultural products. These guidelines apply to aid measures supporting activities outside the scope of Article 42 of the Treaty but covered by the Rural Development Regulation and are either co-financed by the European Agriculture Fund for Rural Development or are being granted as an additional national financing to such co-financed measures, unless sectoral rules provide for otherwise. These guidelines will not apply to State aid granted to airports13 or in the energy sector14. Regional investment aid to broadband networks may be considered compatible with the internal market if, in addition to the general conditions laid down in these guidelines, it complies also with the following specific conditions: (i) aid is granted only to areas where there is no network of the same category (either basic broadband or NGA) and where none is likely to be developed in the near future; (ii) the subsidised network operator offers active and passive wholesale access under fair and non-discriminatory conditions with the possibility of effective and full unbundling; (iii) aid should be allocated on the basis of a competitive selection process in accordance with paragraph 78(c) and (d) of the Broadband guidelines15. Regional investment aid to research infrastructures16 may be regarded to be compatible with the internal market if, in addition to the general conditions laid down in these guidelines the aid is made conditional on giving transparent and non-discriminatory access to this infrastructure. Large undertakings tend to be less affected than small and medium enterprises (SMEs) by regional handicaps for investing or maintaining economic activity in a less developed area. Firstly, large companies can more easily obtain capital and credit on global markets and are less constrained by the more limited offer of financial services in a particular disadvantaged region. Secondly, invest-

7

As defined in Annex IV. As defined in Annex IV. Following the expiry on 31 December 2013 of the Framework on State aid to shipbuilding (OJ C 364, 14.12.2011, p. 9.), regional aid to shipbuilding is also covered by these guidelines. 10 As covered by Council Regulation (EC) No 104/2000 of 17 December 1999 on the common organisation of the markets in fishery and aquaculture products (OJ L 17, 21.1.2000, p. 22). 11 State aid for the primary production, processing and marketing of agricultural products resulting in agricultural products listed in Annex I to the Treaty and forestry is subject to rules laid down in the Guidelines for State aid in the agricultural sector. 12 Transport means transport of passengers by aircraft, maritime transport, road, railway and by inland waterway or freight transport services for hire or reward. 13 Community guidelines on the application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA Agreement to State aid to the aviation sector (OJ C 350, 10.12.1994, p. 5.), Community guidelines on financing of airports and start-up aid to airlines departing from regional airports (OJ C 312, 9.12.2005, p. 1.) as amended or replaced. 14 The Commission will assess the compatibility of State aid to the energy sector on the basis of the future energy and environmental aid guidelines, amending the current guidelines on State aid for environmental protection, where the specific handicaps of the assisted areas will be taken into account. 15 Communication from the Commission, EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks (OJ C 25, 26.1.2013, p. 1). 16 As defined in Council Regulation (EC) No 723/2009 of 25 June 2009 on the Community legal framework for a European Research Infrastructure Consortium (ERIC) (OJ L 206, 8.8.2009, p. 1). 8 9

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16.

17.

18. 19.

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ments by large undertakings can produce economies of scale that reduce location-specific initial costs and, in many respects, are not tied to the region in which the investment takes place. Thirdly, large companies making investments usually possess considerable bargaining power vis-a`-vis the authorities, which may lead to aid being awarded without need or due justification. Finally, large companies are more likely to be significant players on the market concerned and, consequently, the investment for which the aid is awarded may distort competition and trade on the internal market. Since regional aid to large undertakings for their investments is unlikely to have an incentive effect, it cannot be regarded to be compatible with the internal market under Article 107(3)(c) of the Treaty, unless it is granted for initial investments that create new economic activities in these areas17, or for the diversification of existing establishments into new products or new process innovations. Regional aid aimed at reducing the current expenses of an undertaking constitutes operating aid and will not be regarded as compatible with the internal market, unless it is awarded to tackle specific or permanent handicaps faced by undertakings in disadvantaged regions. Operating aid may be considered compatible if it aims to reduce certain specific difficulties faced by SMEs in particularly disadvantaged areas falling within the scope of Article 107(3)(a) of the Treaty, or to compensate for additional costs to pursue an economic activity in an outermost regions or to prevent or reduce depopulation in very sparsely populated areas. Operating aid awarded to undertakings whose principal activity falls under Section K ‘Financial and insurance activities’ of the NACE Rev. 2 statistical classification of economic activities18 or to undertakings that perform intra-group activities and whose principal activity falls under classes 70.10 ‘Activities of head offices’ or 70.22 ‘Business and other management consultancy activities’ of NACE Rev. 2 will not be considered to be compatible with the internal market. Regional aid may not be awarded to firms in difficulties, as defined for the purposes of these guidelines by the Community guidelines on State aid for rescuing and restructuring firms in difficulty19, as amended or replaced. When assessing regional aid awarded to an undertaking which is subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market, the Commission will take account of the amount of aid still to be recovered20.

1.2. Definitions 20. For the purposes of these guidelines, the following definitions apply: (a) ‘ “a” areas’ mean those areas designated in a regional aid map in application of the provisions of Article 107(3)(a) of the Treaty; ‘ “c” areas’ mean those areas designated in a regional aid map in application of the provisions of Article 107(3)(c) of the Treaty; (b) ‘ad hoc aid’ means aid that is not awarded on the basis of a scheme; (c) ‘adjusted aid amount’ means the maximum permissible aid amount for a large investment project, calculated according to the following formula: maximum aid amount = R × (50 + 0,50 × B + 0,34 × C) where: R is the maximum aid intensity applicable in the area concerned, excluding the increased aid intensity for SMEs. B is the part of eligible costs between EUR 50 million and EUR 100 million. C is the part of eligible costs above EUR 100 million; (d) ‘date of award of the aid’ means the date when the Member State took a legally binding commitment to award the aid that can be invoked before the national courts; (e) ‘eligible costs’ means, for the purpose of investment aid, tangible and intangible assets related to an initial investment or wage costs; (f) ‘gross grant equivalent’ (GGE) means the discounted value of the aid expressed as a percentage of the discounted value of the eligible costs, as calculated at the time of award of the aid on the basis of the reference rate applicable on that date; 17

See, paragraph 20(i). Regulation (EC) No 1893/2006 of the European Parliament and of the Council of 20 December 2006 establishing the statistical classification of economic activities NACE Revision 2 and amending Council Regulation (EEC) No 3037/90 as well as certain EC Regulations on specific statistical domains (OJ L 393, 30.12.2006, p. 1). 19 OJ C 244, 1.10.2004, p. 2, as prolonged by OJ C 156, 9.7.2009, p. 3 and OJ C 296, 2.10.2012, p. 3. As explained in paragraph 20 of those guidelines, given that its very existence is in danger, a firm in difficulty cannot be considered an appropriate vehicle for promoting other public policy objectives until such time as its viability is assured. 20 See in this respect the joint Cases T-244/93 and T-486/93, TWD Textilwerke Deggendorf GmbH v Commission of the European Communities, [1995] ECR II-02265. 18

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(g) ‘individual aid’ means aid granted either on the basis of a scheme or on an ad hoc basis; (h) ‘initial investment’ means: (a) an investment in tangible and intangible assets related to: — the setting-up of a new establishment, — the extension of the capacity of an existing establishment, — the diversification of the output of an establishment into products not previously produced in the establishment, or — a fundamental change in the overall production process of an existing establishment; or (b) an acquisition of assets directly linked to an establishment provided the establishment has closed or would have closed if it had not been purchased, and is bought by an investor unrelated to the seller. The sole acquisition of the shares of an undertaking does not qualify as initial investment; (i) ‘initial investment in favour of new economic activity’ means: (a) an investment in tangible and intangible assets related to: — the setting up of a new establishment, or — the diversification of the activity of an establishment, under the condition that the new activity is not the same or a similar activity to the activity previously performed in the establishment; or (b) the acquisition of the assets belonging to an establishment that has closed or would have closed if it had not been purchased, and is bought by an investor unrelated to the seller, under the condition that the new activity to be performed using the acquired assets is not a same or similar activity to the activity performed in the establishment prior to the acquisition; (j) ‘intangible assets’ means assets acquired through a transfer of technology such as patent rights, licences, know-how or unpatented technical knowledge; (k) ‘job creation’ means a net increase in the number of employees in the establishment concerned compared with the average over the previous 12 months after deducting from the apparent created number of jobs any job lost during that period; (l) ‘large investment project’ means an initial investment with eligible costs exceeding EUR 50 million, calculated at prices and exchange rates on the date of award of the aid; (m) ‘maximum aid intensities’ means the aid intensities in GGE for large undertakings as laid down in subsection 5.4 of these guidelines and reflected in the relevant regional aid map; (n) ‘notification threshold’ means aid amounts exceeding the thresholds set out in the table below: Aid intensity

Notification threshold

10 %

EUR 7,5 million

15 %

EUR 11,25 million

25 %

EUR 18,75 million

35 %

EUR 26,25 million

50 %

EUR 37,5 million

(o) ‘number of employees’ means the number of annual labour units (ALU), namely the numbers of persons employed full-time in one year; persons working part-time or employed in seasonal work are counted in ALU fractions; (p) ‘outermost regions’ means the regions referred to in Article 349 of the Treaty21; (q) ‘operating aid’ means aid aimed to reduce an undertaking’s current expenditure that is not related to an initial investment. This includes costs categories such as personnel costs, 21 Currently: Guadeloupe, French Guiana, Martinique, Re ´union, Saint-Martin, the Azores, Madeira and the Canary Islands. In accordance with European Council Decision (2010/718/EU) of 29 October 2010 amending the status with regard to the European Union of the island of Saint-Barthe´lemy (OJ L 325, 9.12.2010, p. 4), from 1 January 2012, Saint-Barthe´lemy ceased to be an outermost region and became an overseas country or territory referred to in Part Four of the Treaty. In accordance with European Council Decision (2012/419/EU) of 11 July 2012 amending the status of Mayotte with regard to the European Union (OJ L 204, 31.7.2012, p. 131), from 1 January 2014, Mayotte ceases to be an overseas country or territory and becomes an outermost region.

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materials, contracted services, communications, energy, maintenance, rent, administration, etc., but excludes depreciation charges and the costs of financing if these have been included in the eligible costs when granting regional investment aid; ‘regional aid map’ means the list of areas designated by a Member State in accordance with the conditions laid down in these guidelines and approved by the Commission; ‘the same or a similar activity’ means an activity falling under the same class (four-digit numerical code) of the NACE Rev. 2 statistical classification of economic activities; ‘single investment project’ means any initial investment started by the same beneficiary (at group level) in a period of three years from the date of start of works on another aided investment in the same NUTS 3 region; ‘SMEs’ means undertakings that fulfil the conditions laid down in Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises22; ‘start of works’ means either the start of construction works on the investment or the first firm commitment to order equipment or other commitment that makes the investment irreversible, whichever is the first in time. Buying of land and preparatory works such as obtaining permits and conducting preliminary feasibility studies are not considered as start of works. For take-overs, ‘start of works’ means the moment of acquiring the assets directly linked to the acquired establishment; ‘sparsely populated areas’ mean those areas designated by the Member State concerned in accordance with paragraph 161 of these guidelines; ‘tangible assets’ means assets such as land, buildings, and plant, machinery and equipment; ‘very sparsely populated areas’ means NUTS 2 regions with less than 8 inhabitants per km2 (based on Eurostat data on population density for 2010) or parts of such NUTS 2 regions designated by the Member State concerned in accordance with paragraph 162 of these guidelines; ‘wage costs’ means the total amount actually payable by the beneficiary of the aid in respect of the employment concerned, comprising the gross wage before tax and compulsory contributions such as social security, child care and parent care costs over a defined period of time.

2. NOTIFIABLE REGIONAL AID 21. In principle, Member States must notify regional aid pursuant to Article 108(3)23 of the Treaty, with the exception of measures that fulfil the conditions laid down in a block exemption Regulation adopted by the Commission pursuant to Article 1 of Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid (Enabling Regulation)24. 22. The Commission will apply these guidelines to notified regional aid schemes and individual aid. 23. Individual aid granted under a notified scheme remains subject to the notification obligation pursuant to Article 108(3) of the Treaty, if the aid from all sources exceeds the notification threshold25 or if it is granted to a beneficiary that has closed down the same or similar activity in the EEA two years preceding the date of applying for aid or at the moment of aid application has the intention to close down such an activity within a period of two years after the investment to be subsidised is completed. 24. Investment aid granted to a large undertaking to diversify an existing establishment in a ‘c’ area into new products, remains subject to the notification obligation pursuant to Article 108(3) of the Treaty. 3. COMPATIBILITY ASSESSMENT OF REGIONAL AID 3.1. Common assessment principles 25. To assess whether a notified aid measure can be considered compatible with the internal market, the Commission generally analyses whether the design of the aid measure ensures that the positive impact of the aid towards an objective of common interest exceeds its potential negative effects on trade and competition. 22

OJ L 124, 20.5.2003, p. 36. The Commission intends to exempt from the notification obligation ad-hoc aid to infrastructure meeting the compatibility criteria of a general block exemption regulation despite the fact that it is not granted as part of a scheme. 24 OJ L 142, 14.5.1998, p. 1. 25 See paragraph 20(n). 23

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26. The Communication on State aid modernisation of 8 May 2012 called for the identification and definition of common principles applicable to the assessment of compatibility of all the aid measures carried out by the Commission. For this purpose, the Commission will consider an aid measure compatible with the Treaty only if it satisfies each of the following criteria: (a) contribution to a well-defined objective of common interest: a State aid measure must aim at an objective of common interest in accordance with Article 107(3) Treaty; (Section 3.2) (b) need for state intervention: a State aid measure must be targeted towards a situation where aid can bring about a material improvement that the market cannot deliver itself, for example by remedying a market failure or addressing an equity or cohesion concern; (Section 3.3) (c) appropriateness of the aid measure: the proposed aid measure must be an appropriate policy instrument to address the objective of common interest; (Section 3.4) (d) incentive effect: the aid must change the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity which it would not carry out without the aid or it would carry out in a restricted or different manner or location; (Section 3.5) (e) proportionality of the aid (aid to the minimum): the aid amount must be limited to the minimum needed to induce the additional investment or activity in the area concerned; (Section 3.6) (f) avoidance of undue negative effects on competition and trade between Member States: the negative effects of aid must be sufficiently limited, so that the overall balance of the measure is positive (Section 3.7) (g) transparency of aid: Member States, the Commission, economic operators, and the public, must have easy access to all relevant acts and to pertinent information about the aid awarded thereunder. (Section 3.8) 27. The overall balance of certain categories of schemes may further be made subject to a requirement of ex post evaluation as described in Section 4 of these guidelines. In such cases, the Commission may limit the duration of those schemes (normally to four years or less) with a possibility to renotify their prolongation afterwards. 28. If a State aid measure or the conditions attached to it (including its financing method when the financing method forms an integral part of the State aid measure) entail a non-severable violation of EU law, the aid cannot be declared compatible with the internal market26. 29. In assessing the compatibility of any individual aid with the internal market, the Commission will take account of any proceedings concerning infringement to Article 101 or 102 of the Treaty which may concern the beneficiary of the aid and which may be relevant for its assessment under Article 107(3) of the Treaty27. 3.2. Contribution to a common objective 30. The primary objective of regional aid is to reduce the development gap between the different regions in the European Union. Through its equity or cohesion objective regional aid may contribute to the achievement of the Europe 2020 strategy delivering an inclusive and sustainable growth. 3.2.1. Investment aid schemes 31. Regional aid schemes should form an integral part of a regional development strategy with clearly defined objectives and should be consistent with and contribute towards these objectives. 32. This would be the case in particular for measures implemented in accordance with regional development strategies defined in the context of the European Regional Development Fund (ERDF), the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development or the European Maritime and Fisheries Fund with a view to contributing towards the objectives of the Europe 2020 strategy. 33. For aid schemes outside an operational programme financed from the cohesion policy funds, Member States should demonstrate that the measure is consistent and contributes to the development strategy of the area concerned. For this purpose, Member States can rely on evaluations of past State aid schemes, impact assessments made by the granting authorities, or expert opinions. To ensure that the aid scheme contributes to this development strategy, it must include a system that will enable the granting authorities to prioritise and select the investment projects according to the objectives of the scheme (for example, on the basis of a formal scoring approach) 28. 26 See for instance Case C-156/98 Germany v Commission [2000] ECR I-6857, paragraph 78 and Case C-333/07 Re´gie Networks v Rhone Alpes Bourgogne[2008] ECR I-10807, paragraphs 94–116. 27 See Case C-225/91 Matra v Commission, [1993] ECR I-3203, paragraph 42. 28 For broadband network infrastructure the aid beneficiary must be selected on the basis of a competitive selection process in accordance paragraph 78(c) and (d) of the Broadband Guidelines, see footnote 15.

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34. Regional aid schemes may be put in place in ‘a’ areas to support initial investments of SMEs or of large undertakings. In ‘c’ areas schemes may be put in place to support initial investments of SMEs and initial investment in favour of new activity of large undertakings. 35. When awarding aid to individual investment projects on the basis of a scheme, the granting authority must confirm that the selected project will contribute towards the objective of the scheme and thus towards the development strategy of the area concerned. For this purpose, Member State can rely on the information provided by the applicant for aid in the form annexed to these guidelines where the positive effects of the investment on the area concerned must be described29. 36. To ensure that the investment makes a real and sustained contribution to the development of the area concerned, the investment must be maintained in the area concerned for at least five years, or three years for SMEs, after its completion30. 37. If the aid is calculated on the basis of wage costs, the posts must be filled within three years of the completion of works. Each job created through the investment must be maintained within the area concerned for a period of five years from the date the post was first filled. For investments carried out by all SMEs, Member States may reduce this five-year period for the maintenance of an investment or jobs to a minimum of three years. 38. To ensure that the investment is viable, the Member State must ensure that the beneficiary provides a financial contribution of at least 25 %31 of the eligible costs, through its own resources or by external financing, in a form that is exempted of any public financial support32. 39. To avoid that State aid measures would lead to environmental harm, Member States must also ensure compliance with Union environmental legislation, including in particular the need to carry out an environmental impact assessment when required by law and ensure all relevant permits. 3.2.2. Notified individual investment aid 40. To demonstrate the regional contribution of individual investment aid notified to the Commission, Member States may use a variety of indicators such as the ones mentioned below that can be both direct (for example. direct jobs created) and indirect (for example. local innovation): (a) The number of direct jobs created by the investment is an important indicator of the contribution to regional development. The quality of the jobs created and the required skill level should also be considered. (b) An even higher number of new jobs might be created in the local (sub-)supplier network, helping to better integrate the investment in the region concerned and ensuring more widespread spillover effects. The number of indirect jobs created will therefore also be taken into account. (c) A commitment by the beneficiary to enter into widespread training activities to improve the skills (general and specific) of its workforce will be considered as a factor that contributes to regional development. Emphasis will also be put on providing traineeships or apprenticeships, especially for young people and on training that improves the knowledge and employability of workers outside the undertaking. General or specific training for which training aid is approved will not be counted as a positive effect of the regional aid to avoid double counting. (d) External economies of scale or other benefits from a regional development viewpoint may arise as a result of proximity (clustering effect). Clustering of undertakings in the same industry allows individual plants to specialise more, which leads to increased efficiency. However, the importance of this indicator in determining the contribution to regional development depends on the state of development of the cluster. (e) Investments embody technical knowledge and can be the source of a significant transfer of technology (knowledge spillovers). Investments taking place in technology intensive industries are more likely to involve technology transfer to the recipient region. The level and the specificity of the knowledge dissemination are also important in this regard. 29

See Annex V to these guidelines. The obligation to maintain the investment in the area concerned for a minimum period of five years (three years for SMEs) should not prevent the replacement of plant or equipment that has become outdated or broken within this period, provided that the economic activity is retained in the area concerned for the minimum period. However, regional aid may not be awarded to replace that plant or equipment. 31 The 25 % own contribution requirement in paragraph 38 does not apply to investment aid granted for investments in outermost regions where the maximum aid intensities can exceed 75 % GGE and go up to 90 % for SMEs in accordance with paragraph 173 of these guidelines. 32 This is not the case for example for subsidised loans, public equity-capital loans or public participations which do not meet the market investor principle, state guarantees containing elements of aid, or public support granted within the scope of de minimis rule. 30

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(f) The projects’ contribution to the region’s ability to create new technology through local innovation can also be considered. Cooperation of the new production facility with local higher education institutions can be considered positively in this respect. (g) The duration of the investment and possible future follow-on investments are an indication of a durable engagement of a company in the region concerned. 41. Member States can also refer to the business plan of the aid beneficiary which could provide information on the number of jobs to be created, salaries to be paid (increase in household wealth as spill-over effect), volume of acquisition from local producers, turnover generated by the investment and benefiting the area possibly through additional tax revenues. 42. For ad hoc aid33, the Member State must demonstrate, in addition to the requirements laid down in paragraphs 35 to 39, that the project is coherent with and contributes towards the development strategy of the area concerned. 3.2.3. Operating aid schemes 43. Operating aid schemes will promote the development of disadvantaged areas only if the challenges facing these areas are clearly identified in advance. The obstacles to attracting or maintaining economic activity may be so severe or permanent that investment aid alone is not sufficient to allow the development of those areas. 44. As regards aid to reduce certain specific difficulties faced by SMEs in ‘a’ areas, the Member States concerned must demonstrate the existence and importance of those specific difficulties and must demonstrate that an operating aid scheme is needed as those specific difficulties cannot be overcome with investment aid. 45. As regards operating aid to compensate certain additional costs in the outermost regions, the permanent handicaps which severely restrain the development of the outermost regions are set out in Article 349 of the Treaty and include remoteness, insularity, small size, difficult topography and climate, and economic dependence on a few products. The Member State concerned must however identify the specific additional costs related to these permanent handicaps that the operating aid scheme is intended to compensate. 46. As regards operating aid to prevent or reduce depopulation in very sparsely populated areas, the Member State concerned must demonstrate the risk of depopulation of the relevant area in the absence of the operating aid. 3.3. Need for State intervention 47. In order to assess whether State aid is necessary to achieve the objective of common interest, it is necessary first to diagnose the problem to be addressed. State aid should be targeted towards situations where aid can bring about a material improvement that the market cannot deliver itself. This holds especially in a context of scarce public resources. 48. State aid measures can indeed, under certain conditions, correct market failures thereby contributing to the efficient functioning of markets and enhancing competitiveness. Furthermore, where markets provide efficient outcomes but these are deemed unsatisfactory from an equity or cohesion point of view, State aid may be used to obtain a more desirable, equitable market outcome. 49. As regards aid granted for the development of areas included in the regional aid map in accordance with the rules developed in Section 5 of these guidelines, the Commission considers that the market is not delivering the expected cohesion objectives set out in the Treaty without state intervention. Therefore, aid granted in those areas should be considered compatible with the internal market pursuant to Article 107(3)(a) and (c) of the Treaty. 3.4. Appropriateness of regional aid 50. The notified aid measure must be an appropriate policy instrument to address the policy objective concerned. An aid measure will not be considered compatible if other less distortive policy instruments or other less distortive types of aid instrument make it possible to achieve the same positive contribution to regional development. 3.4.1. Appropriateness among alternative policy instruments 3.4.1.1. Investment aid schemes 51. Regional investment aid is not the only policy instrument available to Member States to support investment and job creation in disadvantaged regions. Member States can use other measures such 33 Ad hoc aid is subject to the same requirements as individual aid granted on the basis of a scheme, unless otherwise mentioned.

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as infrastructure development, enhancing the quality of education and training, or improvements in the business environment. 52. Member States must indicate why regional aid is an appropriate instrument to tackle the common objective of equity or cohesion when introducing a scheme outside an operational programme financed from the cohesion policy funds. 53. If a Member State decides to put in place a sectoral aid scheme outside an operational programme financed from the Union funds mentioned in paragraph 32 above, it must demonstrate the advantages of such an instrument compared to a multi-sectoral scheme or other policy options. 54. The Commission will in particular take account of any impact assessments of the proposed aid scheme that the Member State may make available. Likewise, the results of ex post evaluations as described in Section 4 may be taken into account to assess the appropriateness of the proposed scheme. 3.4.1.2. Individual investment aid 55. For ad hoc aid, the Member State must demonstrate how the development of the area concerned is better ensured by such aid than by aid under a scheme or other types of measures. 3.4.1.3. Operating aid schemes 56. The Member State must demonstrate that the aid is appropriate to achieve the objective of the scheme for the problems that the aid is intended to address. To demonstrate that the aid is appropriate, the Member State may calculate the aid amount ex ante as a fixed sum covering the expected additional costs over a given period, to incentivise undertakings to contain costs and develop their business in a more efficient manner over time34. 3.4.2. Appropriateness among different aid instruments 57. Regional aid can be awarded in various forms. The Member State should however ensure that the aid is awarded in the form that is likely to generate the least distortions of trade and competition. In this respect, if the aid is awarded in forms that provide a direct pecuniary advantage (for example, direct grants, exemptions or reductions in taxes, social security or other compulsory charges, or the supply of land, goods or services at favourable prices, etc.), the Member State must demonstrate why other potentially less distortive forms of aid such as repayable advances or forms of aid that are based on debt or equity instruments (for example, low-interest loans or interest rebates, state guarantees, the purchase of a share-holding or an alternative provision of capital on favourable terms) are not appropriate. 58. For aid schemes implementing the objectives and priorities of operational programmes, the financing instrument chosen in this programme is considered to be an appropriate instrument. 59. The results of ex post evaluations as described in Section 4 may be taken into account to assess the appropriateness of the proposed aid instrument. 3.5. Incentive effect 60. Regional aid can only be found compatible with the internal market, if it has an incentive effect. An incentive effect is present when the aid changes the behaviour of an undertaking in a way it engages in additional activity contributing to the development of an area which it would not have engaged in without the aid or would only have engaged in such activity in a restricted or different manner or in another location. The aid must not subsidise the costs of an activity that an undertaking would have incurred in any event and must not compensate for the normal business risk of an economic activity. 61. The existence of an incentive effect can be proven in two possible scenarios: (a) the aid gives an incentive to adopt a positive investment decision because an investment that would otherwise not be sufficiently profitable for the beneficiary can take place in the area concerned35 (scenario 1, investment decision); or (b) the aid gives an incentive to opt to locate a planned investment in the relevant area rather than elsewhere because it compensates for the net disadvantages and costs linked to a location in the area concerned (scenario 2, location decision). 34 However, where future costs and revenue developments are surrounded by a high degree of uncertainty and there is a strong asymmetry of information, the public authority may also wish to adopt compensation models that are not entirely ex ante, but rather a mix of ex ante and ex post (for example,. using claw backs such as to allow sharing of unanticipated gains). 35 Such investments may create conditions allowing further investments that are viable without additional aid.

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62. If the aid does not change the behaviour of the beneficiary by stimulating (additional) investment in the area concerned, it can be considered that the same investment would take place in the region even without the aid. Such aid lacks incentive effect to achieve the regional objective and cannot be approved as compatible with the internal market. 63. However, for regional aid awarded through cohesion policy funds in ‘a’ regions to investments necessary to achieve standards set by Union law, the aid may be considered to have an incentive effect, if in absence of the aid, it would not have been sufficiently profitable for the beneficiary to make the investment in the area concerned, thereby leading to the closure of an existing establishment in that area. 3.5.1. Investment aid schemes 64. Works on an individual investment can start only after submitting the application form for aid. 65. If works begin before submitting the application form for aid, any aid awarded in respect of that individual investment will not be considered compatible with the internal market. 66. Member States must introduce a standard application form for aid annexed to these guidelines36. In the application form, SMEs and large companies must explain counterfactually what would have happened had they not received the aid indicating which of the scenarios described in paragraph 61 applies. 67. In addition, large companies must submit documentary evidence in support of the counterfactual described in the application form. SMEs are not subject to such obligation. 68. The granting authority must carry out a credibility check of the counterfactual and confirm that regional aid has the required incentive effect corresponding to one of the scenarios described in paragraph 61. A counterfactual is credible if it is genuine and relates to the decision-making factors prevalent at the time of the decision by the beneficiary regarding the investment. 3.5.2. Notified individual investment aid 69. In addition to the requirements of paragraphs 64 to 67, for notified individual aid37, the Member State must provide clear evidence that the aid effectively has an impact on the investment choice or the location choice38. It must specify which scenario described in paragraph 61 applies. To allow a comprehensive assessment, the Member State must provide not only information concerning the aided project but also a comprehensive description of the counterfactual scenario, in which no aid is awarded to the beneficiary by any public authority in the EEA. 70. In scenario 1, the Member State could prove the existence of the incentive effect of the aid by providing company documents that show that the investment would not be sufficiently profitable without the aid. 71. In scenario 2, the Member State could prove the incentive effect of the aid by providing company documents showing that a comparison has been made between the costs and benefits of locating in the area concerned and those in alternative area(s). The Commission verifies whether such comparisons have a realistic basis. 72. The Member States are, in particular, invited to rely on official board documents, risk assessments (including the assessment of location-specific risks), financial reports, internal business plans, expert opinions and other studies related to the investment project under assessment. Documents containing information on demand forecasts, cost forecasts, financial forecasts, documents that are submitted to an investment committee and that elaborate on various investment scenarios, or documents provided to the financial institutions could help the Member States to demonstrate the incentive effect. 73. In this context, and in particular in scenario 1, the level of profitability can be evaluated by reference to methodologies which are standard practice in the particular industry concerned, and which may include methods to evaluate the net present value of the project (NPV)39, the internal rate of return (IRR)40 or the average return on capital employed (ROCE). The profitability of the project is to be compared with normal rates of return applied by the company in other investment 36

See Annex V. Ad hoc aid must also respect the requirements laid down in paragraphs 64 to 67 of these guidelines, in addition to the requirements of Section 3.5.2. 38 The counterfactual scenarios are described in paragraph 61. 39 The net present value of a project is the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value (typically using the cost of capital). 40 The internal rate of return is not based on accounting earnings in a given year, but takes into account the stream of future cash flows that the investor expects to receive over the entire lifetime of the investment. It is defined as the discount rate for which the NPV of a stream of cash flows equals zero. 37

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projects of a similar kind. Where these rates are not available, the profitability of the project is to be compared with the cost of capital of the company as a whole or with the rates of return commonly observed in the industry concerned. 74. If the aid does not change the behaviour of the beneficiary by stimulating (additional) investment in the area concerned, there is no positive effect for the region. Therefore, aid will not be considered compatible with the internal market in cases where it appears that the same investment would take place in the region even without the aid having been granted. 3.5.3. Operating aid schemes 75. For operating aid schemes, the incentive effect of the aid will be considered to be present if it is likely that, in the absence of aid, the level of economic activity in the area or region concerned would be significantly reduced due to the problems that the aid is intended to address. 76. The Commission will therefore consider that the aid induces additional economic activity in the areas or regions concerned, if the Member State has demonstrated the existence and substantial nature of those problems in the area concerned (see paragraphs 44 to 46). 3.6. Proportionality of the aid amount (aid limited to the minimum) 77. In principle, the amount of the regional aid must be limited to the minimum needed to induce additional investment or activity in the area concerned. 78. As a general rule, notified individual aid will be considered to be limited to the minimum, if the aid amount corresponds to the net extra costs of implementing the investment in the area concerned, compared to the counterfactual in the absence of aid. Likewise, in the case of investment aid granted to large undertakings under notified schemes, Member States must ensure that the aid amount is limited to the minimum on the basis of a ‘net-extra cost approach’. 79. For scenario 1 situations (investment decisions) the aid amount should therefore not exceed the minimum necessary to render the project sufficiently profitable, for example to increase its IRR beyond the normal rates of return applied by the undertaking concerned in other investment projects of a similar kind or, when available, to increase its IRR beyond the cost of capital of the company as a whole or beyond the rates of return commonly observed in the industry concerned. 80. In scenario 2 situations (location incentives), the aid amount should not exceed the difference between the net present value of the investment in the target area with the net present value in the alternative location. All relevant costs and benefits must be taken into account, including for example administrative costs, transport costs, training costs not covered by training aid and also wage differences. However, where the alternative location is in the EEA, subsidies granted in that other location are not to be taken into account. 81. To ensure predictability and a level playing field, the Commission further applies maximum aid intensities41 for investment aid. These maximum aid intensities serve a dual purpose. 82. First, for notified schemes, these maximum aid intensities serve as safe harbours for SMEs: as long as the aid intensity remains below the maximum permissible, the criterion of ‘aid limited to the minimum’ is deemed to be fulfilled. 83. Second, for all other cases, the maximum aid intensities are used as a cap to the net-extra costs approach described in paragraphs 79 and 80. 84. The maximum aid intensities are modulated in function of three criteria: (a) the socioeconomic situation of the area concerned, as a proxy for the extent to which the area is in need of further development and, potentially, the extent to which it suffers from a handicap in attracting and maintaining economic activity; (b) the size of the beneficiary as proxy for the specific difficulties to finance or implement a project in the area; and (c) the size of the investment project, as indicator for the expected level of distortion of competition and trade. 85. Accordingly, higher aid intensities (and, potentially, higher resulting distortions of trade and competition) are allowed the less developed the target region is, and if the aid beneficiary is an SME. 86. In view of the expected higher distortions of competition and trade, the maximum aid intensity for large investment projects must be scaled down using the mechanism as defined in paragraph 20(c). 3.6.1. Investment aid schemes 87. For aid to SMEs, the increased maximum aid intensities described in Section 5.4 may be used. However, SMEs may not benefit from these increased intensities where the investment relates to a large investment project. 41

See subsection 5.4 on regional aid maps.

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88. For aid to large undertakings, the Member State must ensure that the aid amount corresponds to the net extra costs of implementing the investment in the area concerned, compared to the counterfactual in the absence of aid. The method explained in paragraphs 79 and 80 must be used together with maximum aid intensities as a cap. 89. For aid to large investment projects, it must be ensured that the aid does not exceed the scaled down intensity. Where aid is awarded to a beneficiary for an investment that is considered to be part of a single investment project, the aid must be scaled down for the eligible costs exceeding EUR 50 million42. 90. The maximum aid intensity and aid amount per project must be calculated by the granting authority when awarding the aid. The aid intensity must be calculated on the basis of a gross grant equivalent either in relation to the total eligible costs of the investment or eligible wage costs declared by the aid beneficiary when applying for aid. 91. If investment aid calculated on the basis of investment costs is combined with regional investment aid calculated on the basis of wage costs, the total aid must not exceed the highest aid amount resulting from either calculation up to the maximum permissible aid intensity for the area concerned. 92. Investment aid may be awarded concurrently under several regional aid schemes or cumulated with ad hoc aid, provided that the total aid from all sources does not exceed the maximum permissible aid intensity per project that must be calculated in advance by the first granting authority. 93. For an initial investment linked to European Territorial Cooperation (ETC) projects meeting the criteria of the Regulation laying down the specific provisions for the support of the European Regional Development Fund to the ETC cooperation goal43, the aid intensity which applies to the area in which the initial investment is located will apply to all beneficiaries participating in the project. If the initial investment is located in two or more assisted areas, the maximum aid intensity for the initial investment will be the one applicable in the assisted area where the largest part of the eligible costs are incurred. Initial investments carried out by large undertakings in ‘c’ areas may only benefit from regional aid in the context of ETC projects if they are initial investments in favour of new activities or new products. 3.6.1.1. Eligible costs calculated on the basis of investment costs 94.

The assets acquired should be new, except for SMEs or in the case of acquisition of an establishment44. 95. For SMEs, up to 50 % of the costs of preparatory studies or consultancy costs linked to the investment may also be considered as eligible costs. 96. For aid awarded for a fundamental change in the production process, the eligible costs must exceed the depreciation of the assets linked to the activity to be modernised in the course of the preceding three fiscal years. 97. For aid awarded for a diversification of an existing establishment, the eligible costs must exceed by at least 200 % the book value of the assets that are reused, as registered in the fiscal year preceding the start of works. 98. Costs related to the lease of tangible assets may be taken into account under the following conditions: (a) for land and buildings, the lease must continue for at least five years after the expected date of completion of the investment for large companies, and three years for SMEs; (b) for plant or machinery, the lease must take the form of financial leasing and must contain an obligation for the beneficiary of the aid to purchase the asset at the expiry of the term of the lease. 99. In the case of acquisition of an establishment only the costs of buying the assets from third parties unrelated to the buyer should be taken into consideration. The transaction must take place under market conditions. Where aid has already been granted for the acquisition of assets prior to their purchase, the costs of those assets should be deducted from the eligible costs related to the acquisition of an establishment. If the acquisition of an establishment is accompanied by an additional investment eligible for aid, the eligible costs of this latter investment should be added to the costs of purchase of the assets of the establishment. 100. For large undertakings, costs of intangible assets are eligible only up to a limit of 50 % of the total eligible investment costs for the project. For SMEs, the full costs related to intangible assets may be taken into consideration. 42

Scaled down aid intensities are the result of the mechanism defined in paragraph 20(c). Regulation of the European Parliament and of the Council on specific provisions for the support from the European Regional Development Fund to the European territorial cooperation goal. Commission proposal COM(2011) 611 ERDF/ETC Regulation. 44 Defined in paragraph 20(h) and (i). 43

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101. Intangible assets which are eligible for the calculation of the investments costs must remain associated with the assisted area concerned and must not be transferred to other regions. To this end, the intangible assets must fulfil the following conditions: (a) they must be used exclusively in the establishment receiving the aid; (b) they must be amortisable; (c) they must be purchased under market conditions from third parties unrelated to the buyer. 102. The intangible assets must be included in the assets of the undertaking receiving the aid and must remain associated with the project for which the aid is awarded for at least five years (three years for SMEs). 3.6.1.2. Eligible costs calculated on the basis of wage costs 103. Regional aid may also be calculated by reference to the expected wage costs arising from job creation as a result of an initial investment. Aid can compensate only the wage costs of the person hired calculated over a period of two years and the resulting intensity cannot exceed the applicable aid intensity in the area concerned. 3.6.2. Notified individual investment aid 104. For scenario 1 situations (investment decision) the Commission will verify whether the aid amount exceeds the minimum necessary to render the project sufficiently profitable, by using the method set out in paragraph 79. 105. In scenario 2 situations (location decision), for a location incentive, the Commission will compare the net present value of the investment for the target area with the net present value of the investment in the alternative location, by using the method set out in paragraph 80. 106. Calculations used for the analysis of the incentive effect can also be used to assess if the aid is proportionate. The Member State must demonstrate the proportionality on the basis of documentation such as that referred to in paragraph 72. 107. The aid intensity must not exceed the permissible adjusted aid intensity. 3.6.3. Operating aid schemes 108. The Member State must demonstrate that the level of the aid is proportionate to the problems that the aid is intended to address. 109. In particular, the following conditions must be fulfilled: (a) the aid must be determined in relation to a predefined set of eligible costs that are fully attributable to the problems that the aid is intended to address, as demonstrated by the Member State; (b) the aid must be limited to a certain proportion of those predefined set of eligible costs and must not exceed those costs; (c) the aid amount per beneficiary must be proportional to the level of the problems actually experienced by each beneficiary. 110. As regards aid to compensate for certain additional costs in the outermost regions, the eligible costs must be fully attributable to one or several of the permanent handicaps referred to in Article 349 of the Treaty. Those additional costs must exclude transport costs and any additional costs that may be attributable to other factors and must be quantified in relation to the level of costs incurred by similar undertakings established in other regions of the Member State concerned. 111. As regards aid to reduce certain specific difficulties faced by SMEs in ‘a’ areas, the level of the aid must be progressively reduced over the duration of the scheme45. 3.7. Avoidance of undue negative effects on competition and trade 112. For the aid to be compatible, the negative effects of the aid measure in terms of distortions of competition and impact on trade between Member States must be limited and outweighed by the positive effects in terms of contribution to the objective of common interest. Certain situations can be identified where the negative effects manifestly outweigh any positive effects, meaning that the aid cannot be found compatible with the internal market. 3.7.1. General considerations 113. Two main potential distortions of competition and trade may be caused by regional aid. These are product market distortions and location effects. Both types may lead to allocative inefficiencies (undermining the economic performance of the internal market) and to distributional concerns (distribution of economic activity across regions). 45

Including when operating aid schemes are notified to prolong existing aid measures.

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114. One potentially harmful effect of State aid is that it prevents the market mechanism from delivering efficient outcomes by rewarding the most efficient producers and putting pressure on the least inefficient to improve, restructure or exit the market. A substantial capacity expansion induced by State aid in an underperforming market might in particular unduly distort competition, as the creation or maintenance of overcapacity could lead to a squeeze on profit margins, a reduction of competitors’ investments or even the exit of competitors from the market. This might lead to a situation where competitors that would otherwise be able to stay on the market are forced out of the market. It may also prevent undertakings from entering or expanding in the market and it may weaken incentives for competitors to innovate. This results in inefficient market structures which are also harmful to consumers in the long run. Further, the availability of aid may induce complacent or unduly risky behaviour on the part of potential beneficiaries. The long term run effect on the overall performance of the sector is likely to be negative. 115. Aid may also have distortive effects in terms of increasing or maintaining substantial market power on the part of the beneficiary. Even where aid does not strengthen substantial market power directly, it may do so indirectly, by discouraging the expansion of existing competitors or inducing their exit or discouraging the entry of new competitors. 116. Apart from distortions on the product markets, regional aid by nature also affects the location of economic activity. Where one area attracts an investment due to the aid, another area loses out on that opportunity. These negative effects in the areas adversely affected by aid may be felt through lost economic activity and lost jobs including those at the level of subcontractors. It may also be felt in a loss of positive externalities (for example, clustering effect, knowledge spillovers, education and training, etc.). 117. The geographical specificity of regional aid distinguishes it from other forms of horizontal aid. It is a particular characteristic of regional aid that it is intended to influence the choice made by investors about where to locate investment projects. When regional aid off-sets the additional costs stemming from the regional handicaps and supports additional investment in assisted areas without attracting it away from other assisted areas, it contributes not only to the development of the region, but also to cohesion and ultimately benefits the whole Union. With regard to the potential negative location effects of regional aid, these are already limited to a certain degree by regional aid maps, which define exhaustively the areas where regional aid may be granted, taking account of the equity and cohesion policy objectives, and the maximum permissible aid intensities. However, an understanding of what would have happened in the absence of the aid remains important to appraise the actual impact of the aid in the cohesion objective. 3.7.2. Manifest negative effects 118. The Commission identifies a number of situations where the negative effects of the aid manifestly outweigh any positive effects, so that the aid cannot be declared compatible with the internal market. 119. The Commission establishes maximum aid intensities. These constitute a basic requirement for compatibility, the aim of which is to prevent the use of State aid for projects where the ratio between aid amount and eligible costs is considered very high and particularly likely to be distortive. In general, the greater the positive effects to which the aided project is likely to give rise and the higher the likely need for aid, the higher the cap on aid intensity will be. 120. For scenario 1 cases (investment decisions), where the creation of capacity by the project takes place in a market which is structurally in absolute decline, the Commission considers it to be a negative effect, which is unlikely to be compensated by any positive effect. 121. In scenario 2 cases (location decisions), where without aid the investment would have been located in a region with a regional aid intensity which is higher or the same as the target region this will constitute a negative effect that is unlikely to be compensated by any positive effect because it runs counter to the very rationale of regional aid46. 122. Where the beneficiary closes down the same or a similar activity in another area in the EEA and relocates that activity to the target area, if there is a causal link between the aid and the relocation, this will constitute a negative effect that is unlikely to be compensated by any positive elements. 123. When appraising notified measures, the Commission will request all necessary information to consider whether the State aid would result in a substantial loss of jobs in existing locations within the EEA.

46 For the purpose of this provision, the Commission will use the standard applicable aid ceiling in ‘c’ areas bordering ‘a’ areas regardless of the increased aid intensities in accordance with paragraph 176.

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3.7.3. Investment aid schemes 124. Investment aid schemes must not lead to significant distortions of competition and trade. In particular, even where distortions may be considered limited at an individual level (provided all conditions for investment aid are fulfilled), on a cumulative basis schemes might still lead to high levels of distortions. Such distortions might concern the output markets by creating or aggravating a situation of overcapacity or creating, increasing or maintaining the substantial market power of some recipients in a way that will negatively affect dynamic incentives. Aid available under schemes might also lead to a significant loss of economic activity in other areas of the EEA. In case of a scheme focussing on certain sectors, the risk of such distortions is even more pronounced. 125. Therefore, the Member State has to demonstrate that these negative effects will be limited to the minimum taking into account, for example, the size of the projects concerned, the individual and cumulative aid amounts, the expected beneficiaries as well as the characteristics of the targeted sectors. In order to enable the Commission to assess the likely negative effects, the Member State could submit any impact assessment at its disposal as well as ex-post evaluations carried out for similar predecessor schemes. 126. When awarding aid under a scheme to individual projects, the granting authority must verify and confirm that the aid does not result in the manifest negative effects described in paragraph 121. This verification can be based on the information received from the beneficiary when applying for aid and on the declaration made in the standard application form for aid where the alternative location in absence of aid should be indicated. 3.7.4. Notified individual investment aid 127. In appraising the negative effects of notified aid, the Commission distinguishes between the two counterfactual scenarios described in paragraphs 104 and 105 above. 3.7.4.1. Scenario 1 cases (investment decisions) 128. In scenario 1 cases, the Commission places particular emphasis on the negative effects linked with the build-up of overcapacity in declining industries, the prevention of exit, and the notion of substantial market power. These negative effects are described below in paragraphs 129 to 138 and must be counterbalanced with the positive effects of the aid. However, if it is established that the aid would result in the manifest negative effects described in paragraph 120 the aid cannot be found compatible with the internal market because it is unlikely to be compensated by any positive element. 129. In order to identify and assess the potential distortions of competition and trade, Member States should provide evidence permitting the Commission to identify the product markets concerned (that is to say, products affected by the change in behaviour of the aid beneficiary) and to identify the competitors and customers/consumers affected. 130. The Commission will use various criteria to assess these potential distortions, such as market structure of the product concerned, performance of the market (declining or growing market), process for selection of the aid beneficiary, entry and exit barriers, product differentiation. 131. A systematic reliance on State aid by an undertaking might indicate that the undertaking is not able to withstand competition on its own or that it enjoys undue advantages compared to its competitors. 132. The Commission distinguishes two main sources of potential negative effects on product markets: (a) cases of significant capacity expansion which leads to or deteriorates an existing situation of overcapacity, especially in a declining market; and (b) cases where the aid beneficiary holds substantial market power. 133. In order to evaluate whether the aid may serve to create or maintain inefficient market structures, the Commission will take into account the additional production capacity created by the project and whether the market is underperforming. 134. Where the market in question is growing, there is normally less reason to be concerned that the aid will negatively affect dynamic incentives or will unduly impede exit or entry. 135. More concern is warranted when markets are in decline. In this respect the Commission distinguishes between cases for which, from a long-term perspective, the relevant market is structurally in decline (that is to say, shows a negative growth rate), and cases for which the relevant market is in relative decline (that is to say, shows a positive growth rate, but does not exceed a benchmark growth rate). 136. Underperformance of the market will normally be measured compared to the EEA GDP over the last three years before the start of the project (benchmark rate); it can also be established on the basis of projected growth rates in the coming three to five years. Indicators may include the

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foreseeable future growth of the market concerned and the resulting expected capacity utilisation rates, as well as the likely impact of the capacity increase on competitors through its effects on prices and profit margins. 137. In certain cases, assessing the growth of the product market in the EEA may not be appropriate to entirely assess the effects of aid, in particular if the geographic market is worldwide. In such cases, the Commission will consider the effect of the aid on the market structures concerned, in particular, its potential to crowd out producers in the EEA. 138. In order to evaluate the existence of substantial market power, the Commission will take into account the position of the beneficiary over a period of time before receiving the aid and the expected market position after finalising the investment. The Commission will take account of market shares of the beneficiary, as well as of market shares of its competitors and other relevant factors, including, for example the market structure by looking at the concentration in the market, possible barriers to entry47, buyer power48 and barriers to expansion or exit. 3.7.4.2. Scenario 2 cases (location decisions) 139. If the counterfactual analysis suggests that without the aid the investment would have gone ahead in another location (scenario 2) which belongs to the same geographical market considering the product concerned, and if the aid is proportional, possible outcomes in terms of overcapacity or substantial market power would in principle be the same regardless of the aid. In such cases, the positive effects of the aid are likely to outweigh the limited negative effects on competition. However, where the alternative location is in the EEA, the Commission is particularly concerned with negative effects linked with the alternative location and therefore if the aid results in the manifest negative effects described in paragraphs 121 and 122 the aid cannot be found compatible with the internal market because it is unlikely to be compensated by any positive element. 3.7.5. Operating aid schemes 140. If the aid is necessary and proportional to achieve the common objective described in subsection 3.2.3, the negative effects of the aid are likely to be compensated by positive effects. However, in some cases, the aid may result in changes to the structure of the market or to the characteristics of a sector or industry which could significantly distort competition through barriers to market entry or exit, substitution effects, or displacement of trade flows. In those cases, the identified negative effects are unlikely to be compensated by any positive effects. 3.8. Transparency 141. Member States must publish on a central website, or on a single website retrieving information from several websites (for example, regional websites), at least the following information on the notified State aid measures: the text of the notified aid scheme and its implementing provisions, granting authority, individual beneficiaries, aid amount per beneficiary, and aid intensity. These requirements apply to individual aid granted under notified schemes and as well as for ad hoc aid. Such information must be published after the granting decision has been taken, must be kept for at least 10 years and must be available for the general public without restrictions49. 4. EVALUATION 142. To further ensure that distortions of competition and trade are limited, the Commission may require that certain schemes be subject to a time limitation (of normally four years or less) and to the evaluation referred to in paragraph 27. 143. Evaluations will be carried out for schemes where the potential distortions are particularly high, that is to say, that may restrict competition significantly, if their implementation is not reviewed in due time. 144. Given the objectives of the evaluation and in order not to impose disproportionate burden on Member States in respect of smaller aid amounts, this obligation may be imposed only for aid schemes with large aid budgets, containing novel characteristics or when significant market, 47 These entry barriers include legal barriers (in particular intellectual property rights), economies of scale and scope, access barriers to networks and infrastructure. Where the aid concerns a market where the aid beneficiary is an incumbent, possible barriers to entry may exacerbate the potential substantial market power wielded by the aid beneficiary and thus the possible negative effects of that market power. 48 Where there are strong buyers in the market, it is less likely that an aid beneficiary can increase prices. vis-a`-vis these strong buyers. 49 This information should be regularly updated (for example every six months) and should be available in non-proprietary formats.

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technology or regulatory changes are foreseen. The evaluation must be carried out by an expert independent from the State aid granting authority on the basis of a common methodology50 and must be made public. The evaluation must be submitted to the Commission in sufficient time to allow for the assessment of the possible prolongation of the aid scheme and in any case upon expiry of the scheme. The precise scope and the methodology of this evaluation to be carried out will be defined in the decision approving the aid scheme. Any subsequent aid measure with a similar objective must take into account the results of the evaluation. 5. REGIONAL AID MAPS 145. In this section, the Commission lays down the criteria for identifying the areas that fulfil the conditions of Article 107(3)(a) and (c) of the Treaty. The areas that fulfil these conditions and which a Member State wishes to designate as ‘a’ or ‘c’ areas must be identified in a regional aid map which must be notified to the Commission and approved by the Commission before regional aid can be awarded to undertakings located in the designated areas. The maps must also specify the maximum aid intensities applicable in these areas. 5.1. Population coverage eligible for regional aid 146. Given that the award of regional State aid derogates from the general prohibition of State aid laid down in Article 107(1) of the Treaty, the Commission considers that the combined population of ‘a’ and ‘c’ areas in the Union must be lower than that of the non-designated areas. The total coverage of those designated areas should therefore be less than 50 % of the Union’s population. 147. In the Guidelines on national regional aid for 2007–201351 the overall coverage of the ‘a’ and ‘c’ areas was set at 42 % of the EU-25 population (45,5 % of the EU-27 population). The Commission considers that this initial level of overall population coverage should be adapted to reflect the current difficult economic situation of many Member States. 148. Accordingly, the overall coverage ceiling of the ‘a’ and ‘c’ areas should be set at 46,53 % of the EU-27 population for the period 2014–202052. 5.2. The derogation in Article 107(3)(a) 149. Article 107(3)(a) of the Treaty provides that ‘aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation’ may be considered to be compatible with the internal market. According to the Court of Justice, ‘the use of the words “abnormally” and “serious” in Article (107)(3)(a) shows that the exemption concerns only areas where the economic situation is extremely unfavourable in relation to the [Union] as a whole’53. 150. The Commission considers that the conditions of Article 107(3)(a) of the Treaty are fulfilled in NUTS 2 regions54 that have a gross domestic product (GDP) per capita below or equal to 75 % of the Union’s average55. 151. Accordingly, a Member State may designate the following areas as ‘a’ areas: (a) NUTS 2 regions whose GDP per capita in purchasing power standards (PPS)56 is below or equal to 75 % of the EU-27 average (based on the average of the last three years for which Eurostat data are available57); 50

Such a common methodology may be provided by the Commission. OJ C 54, 4.3.2006, p. 13. 52 This ceiling is set using Eurostat population data for 2010. The ceiling will correspond to 47,00 % of the EU-28 population following the accession of Croatia to the Union. 53 Judgment of 14 October 1987 in Case 248/84 Germany v Commission (ECR 1987, p. 4036, paragraph 19); judgment of 14 January 1997 in Case C-169/95 Spain v Commission (ECR 1997, p. I-148, paragraph 15); and judgment of 7 March 2002 in Case C-310/99 Italy v Commission (ECR 2002, p. I-2289, paragraph 77). 54 Commission Regulation (EU) No 31/2011 of 17 January 2011 amending annexes to Regulation (EC) No 1059/2003 of the European Parliament and of the Council on the establishment of a common classification of territorial units for statistics (NUTS) (OJ L 13, 18.1.2011, p. 3). The data used in these guidelines are based on the NUTS 2010 nomenclature. 55 The reference to regions with a GDP per capita below 75 % of the [Community] average was introduced by the Commission communication on the method for the application of Article 92(3)(a) and (c) to regional aid (OJ C 212, 12.8.1988, p. 2). 56 In all subsequent references to GDP per capita, GDP is measured in PPS. 57 The data cover the period 2008–2010. In all subsequent references to GDP per capita in relation the EU-27 average, data are based on the average of Eurostat regional data for 2008–2010. 51

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(b) the outermost regions. 152. The eligible ‘a’ areas are set out by Member State in Annex I. 5.3. The derogation in Article 107(3)(c) 153. Article 107(3)(c) of the Treaty provides that ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’ may be considered to be compatible with the internal market. According to the Court of Justice, ‘[t]he exemption in Article (107)(3)(c) […] permits the development of certain areas without being restricted by the economic conditions laid down in Article (107)(3)(a), provided such aid “does not adversely affect trading conditions to an extent contrary to the common interest” ’. That provision gives the Commission power to authorise aid intended to further the economic development of areas of a Member State which are disadvantaged in relation to the national average’58. 154. The total coverage ceiling for ‘c’ areas in the Union (‘ “c” coverage’) is obtained by subtracting the population of the eligible ‘a’ areas in the Union from the overall coverage ceiling laid down in paragraph 148. 155. There are two categories of ‘c’ areas: (a) areas that fulfil certain pre-established conditions and that a Member State may therefore designate as ‘c’ areas without any further justification (‘predefined “c” areas’); (b) areas that a Member State may, at its own discretion, designate as ‘c’ areas provided that the Member State demonstrates that such areas fulfil certain socioeconomic criteria (‘nonpredefined “c” areas’). 5.3.1. Predefined ‘c’ areas 5.3.1.1. pecific allocation of ‘c’ coverage for predefined ‘c’ areas 156. The Commission considers that each Member State concerned must have sufficient ‘c’ coverage to be able to designate as ‘c’ areas the regions that were ‘a’ areas in the regional aid map during the period 2011–201359. 157. The Commission also considers that each Member State concerned must have sufficient ‘c’ coverage to be able to designate as ‘c’ areas the regions that have a low population density. 158. Accordingly, the following areas will be considered as predefined ‘c’ areas: (a) former ‘a’ areas: NUTS 2 regions that were designated as ‘a’ areas during the period 2011–201360; (b) sparsely populated areas: NUTS 2 regions with less than 8 inhabitants per km2 or NUTS 3 regions with less than 12,5 inhabitants per km2 (based on Eurostat data on population density for 2010). 159. The specific allocation of predefined ‘c’ coverage is set out by Member State in Annex I. This specific population allocation may only be used to designate predefined ‘c’ areas. 5.3.1.2. Designation of predefined ‘c’ areas 160. A Member State may designate as ‘c’ areas the predefined ‘c’ areas referred to in paragraph 158. 161. For sparsely populated areas, a Member State should in principle designate NUTS 2 regions with less than 8 inhabitants per km2 or NUTS 3 regions with less than 12,5 inhabitants per km2. However, a Member State may designate parts of NUTS 3 regions with less than 12,5 inhabitants per km2 or other contiguous areas adjacent to those NUTS 3 regions, provided that the areas designated have less than 12,5 inhabitants per km2 and that their designation does not exceed the specific allocation of ‘c’ coverage referred to in paragraph 160. 5.3.2. Non-predefined ‘c’ areas 5.3.2.1. Method for the allocation of non-predefined ‘c’ coverage among Member States 162. The total coverage ceiling for non-predefined ‘c’ areas in the Union is obtained by subtracting the population of the eligible ‘a’ areas and of the predefined ‘c’ areas from the overall coverage ceiling 58

Judgment of 14 October 1987 in Case 248/84 Germany v Commission (ECR 1987, p. 4036, paragraph 19). The list of ‘a’ areas was amended in 2011 (see Communication of the Commission on the review of the State aid status and the aid ceiling of the statistical effect regions for the period 1.1.2011–31.12.2013 (OJ C 222, 17.8.2010, p. 2)). 60 Considering that the former ‘a’ areas were designated on the basis of the NUTS 2 regions listed in NUTS 2003 nomenclature, only those regions that were ‘a’ areas in the period 2011–2013 can be designated as predefined ‘c’ areas, regardless of the changes brought by the NUTS 2006 nomenclature or by the NUTS 2010 nomenclature for those regions. 59

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laid down in paragraph 148. The non-predefined ‘c’ coverage is allocated among the Member States by applying the method set out in Annex II. 5.3.2.2. Safety net and minimum population coverage 163. To address the difficulties of Member States that have been particularly affected by the economic crisis, the Commission considers that the total coverage of each Member State that is benefitting from financial assistance under the facility providing medium-term financial assistance for non-euro-area Member States, as established by Council Regulation (EC) No 332/200261, the European Financial Stability Facility (EFSF)62, the European Financial Stabilisation Mechanism (EFSM)63 or the European Stability Mechanism (ESM)64 should not be reduced compared to the period 2007–2013. 164. To ensure continuity in the regional aid maps and a minimum scope of action for all Member States, the Commission considers that each Member State should not lose more than half of its total coverage compared to the period 2007–2013 and that each Member State should have a minimum population coverage. 165. Accordingly, by way of derogation from the overall coverage ceiling laid down in paragraph 148, the ‘c’ coverage for each Member State concerned is increased as necessary so that: (a) the total ‘a’ and ‘c’ coverage of each Member State, which, on the date of adoption of these guidelines, is benefitting from financial assistance under the facility providing medium-term financial assistance for non-euro-area Member States, the EFSF, the EFSM or the ESM is not reduced compared to the period 2007–2013; (b) the total ‘a’ and ‘c’ coverage of each Member State concerned is not reduced by more than 50 % compared to the period 2007–201365; (c) each Member State has a population coverage of at least 7,5 % of its national population66. 166. The non-predefined ‘c’ coverage, including the safety net and the minimum population coverage, is set out by Member State in Annex I. 5.3.2.3. Designation of non-predefined ‘c’ areas 167. The Commission considers that the criteria used by Member States for designating ‘c’ areas should reflect the diversity of situations in which the award of regional aid may be justified. The criteria should therefore address certain socioeconomic, geographical or structural problems likely to be encountered in ‘c’ areas and should provide sufficient safeguards that the award of regional State aid will not adversely affect trading conditions to an extent contrary to the common interest. 168. Accordingly, a Member State may designate as ‘c’ areas the non-predefined ‘c’ areas defined on the basis of the following criteria: (a) Criterion 1: contiguous areas of at least 100 000 inhabitants67 located in NUTS 2 or NUTS 3 regions that have: — a GDP per capita below or equal to the EU-27 average, or — an unemployment rate above or equal to 115 % of the national average68. (b) Criterion 2: NUTS 3 regions of less than 100 000 inhabitants that have: — a GDP per capita below or equal to the EU-27 average, or — an unemployment rate above or equal to 115 % of the national average. (c) Criterion 3: islands or contiguous areas characterised by similar geographical isolation (for example, peninsulas or mountain areas) that have: — a GDP per capita below or equal to the EU-27 average69, or 61 Council Regulation (EC) No 332/2002 of 18 February 2002 establishing a facility providing mediumterm financial assistance for Member States’ balances of payments (OJ L 53, 23.2.2002, p. 1). 62 See http://www.efsf.europa.eu/about/legal-documents/index.htm. 63 Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European Financial Stabilisation Mechanism (OJ L 118, 12.5.2010, p. 1). 64 Treaty establishing the European Stability Mechanism. 65 This element of the safety net applies to Cyprus and to Luxembourg. 66 This minimum population coverage applies to the Netherlands. 67 This population threshold will be reduced to 50 000 inhabitants for Member States that have a nonpredefined ‘c’ coverage of less than 1 million inhabitants or to 10 000 inhabitants for Member States whose national population is below 1 million inhabitants. 68 For unemployment, calculations should be based on regional data published by the national statistical office, using the average of the last three years for which such data are available (at the moment of the notification of the regional aid map). Except as otherwise indicated in these guidelines, the unemployment rate in relation to the national average is calculated on this basis. 69 To determine if such islands or contiguous areas have a GDP per capita below or equal to the EU-27 average, the Member State may refer to data provided by its national statistical office or other recognised sources.

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— an unemployment rate above or equal to 115 % of the national average70, or — less than 5 000 inhabitants. (d) Criterion 4: NUTS 3 regions, or parts of NUTS 3 regions that form contiguous areas, that are adjacent to an ‘a’ area or that share a land border with a country outside the EEA or the European Free Trade Association (EFTA). (e) Criterion 5: contiguous areas of at least 50 000 inhabitants71 that are undergoing major structural change or are in serious relative decline, provided that such areas are not located in NUTS 3 regions or contiguous areas that fulfil the conditions to be designated as predefined areas or under Criteria 1 to 472. 169. For the purpose of applying the criteria set out in paragraph 168, the notion of contiguous areas refers to whole local administrative unit 2 (LAU 2)73 areas or to a group of whole LAU 2 areas74. A group of LAU 2 areas will be considered to form a contiguous area if each of those areas in the group shares an administrative border with another area in the group75. 170. Compliance with the population coverage allowed for each Member State will be determined on the basis of the most recent data on the total resident population of the areas concerned, as published by the national statistical office. 5.4. Maximum aid intensities applicable to regional investment aid 171. The Commission considers that the maximum aid intensities applicable to regional investment aid must take into account the nature and scope of the disparities between the levels of development of the different regions in the Union. The aid intensities should therefore be higher in ‘a’ areas than in ‘c’ areas. 5.4.1. Maximum aid intensities in ‘a’ areas 172. The aid intensity in ‘a’ areas must not exceed: (a) 50 % GGE in NUTS 2 regions whose GDP per capita is below or equal to 45 % of the EU-27 average; (b) 35 % GGE in NUTS 2 regions whose GDP per capita is between or equal to 45 % and 60 % of the EU-27 average; (c) 25 % GGE in NUTS 2 regions with a GDP per capita above 60 % of the EU-27 average. 173. The maximum aid intensities laid down in paragraph 172 may be increased by up to 20 percentage points in outermost regions that have a GDP per capita below or equal to 75 % of the EU-27 average or by up to 10 percentage points in other outermost regions. 5.4.2. Maximum aid intensities in ‘c’ areas 174. The aid intensity must not exceed: (a) 15 % GGE in sparsely populated areas and in areas (NUTS 3 regions or parts of NUTS 3 regions) that share a land border with a country outside the EEA or the EFTA; 70 To determine if such islands or contiguous areas have an unemployment rate above or equal to 115 % of the national average, the MemberStatemay refer to data provided by its national statistical office or other recognised sources. 71 This population threshold will be reduced to 25 000 inhabitants for Member States that have a nonpredefined ‘c’ coverage of less than 1 million inhabitants, to 10 000 inhabitants for Member States whose total population is below 1 million inhabitants, or to 5 000 inhabitants for islands or contiguous areas characterised by similar geographical isolation. 72 For the purpose of applying Criterion 5, the Member State must demonstrate that the applicable conditions are fulfilled by comparing the areas concerned with the situation of other areas in the same MemberStateor in other Member States on the basis of socioeconomic indicators concerning structural business statistics, labour markets, household accounts, education, or other similar indicators. For this purpose, the MemberStatemay refer to data provided by its national statistical office or other recognised sources. 73 The Member State may refer to LAU 1 areas in place of LAU 2 areas if those LAU 1 areas have a smaller population than the LAU 2 area which they form part of. 74 The Member State may nevertheless designate parts of an LAU 2 area (or LAU 1 area), provided that the population of the LAU area concerned exceeds the minimum population required for contiguous areas under Criterion 1 or 5 (including the reduced population thresholds for those criteria) and that the population of the parts of that LAU area is at least 50 % of the minimum population required under the applicable criterion. 75 In the case of islands, administrative borders include maritime borders with other administrative units of the MemberStateconcerned.

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(b) 10 % GGE in non-predefined ‘c’ areas. 175. In the former ‘a’ areas the aid intensity of 10 % GGE may be increased by up to 5 percentage points from 1 July 2014 to 31 December 2017. 176. If a ‘c’ area is adjacent to an ‘a’ area, the maximum aid intensity in the NUTS 3 regions or parts of NUTS 3 regions within that ‘c’ area which are adjacent to the ‘a’ area may be increased as necessary so that the difference in aid intensity between the two areas does not exceed 15 percentage points. 5.4.3. Increased aid intensities for SMEs 177. The maximum aid intensities laid down in subsections 5.4.1 and 5.4.2 may be increased by up to 20 percentage points for small enterprises or by up to 10 percentage points for medium-sized enterprises76. 5.5. Notification and declaration of compatibility 178. Following the publication of these guidelines in the Official Journal of the European Union, each Member State should notify to the Commission a single regional aid map applicable from 1 July 2014 to 31 December 2020. Each notification should include the information specified in the form in Annex III. 179. The Commission will examine each notified regional aid map on the basis of these guidelines and will adopt a decision approving the regional aid map for the Member State concerned. Each regional aid map will be published in the Official Journal of the European Union and will constitute an integral part of these guidelines. 5.6. Amendments 5.6.1. Population reserve 180. On its own initiative, a Member State may decide to establish a reserve of national population coverage consisting of the difference between the population coverage ceiling for that Member State, as allocated by the Commission77, and the coverage used for the ‘a’ and ‘c’ areas designated in its regional aid map. 181. If a Member State has decided to establish such a reserve, it may, at any time, use the reserve to add new ‘c’ areas in its map until its national coverage ceiling is reached. For this purpose, the Member State may refer to the most recent socioeconomic data provided by Eurostat or by its national statistical office or other recognised sources. The population of the ‘c’ areas concerned should be calculated on the basis of the population data used for establishing the initial map. 182. The Member State must notify the Commission each time it intends to use its population reserve to add new ‘c’ areas prior to putting into effect such amendments. 5.6.2. Mid-term review 183. The Commission will establish in June 201678, whether any NUTS 2 region79, which is not listed in Annex I to these guidelines as an ‘a’ area, has a GDP per capita below 75 % of the EU-28 average, and will publish a communication on the results of this analysis. The Commission will establish at that moment whether these identified areas may become eligible for regional aid under Article 107(3)(a) of the Treaty and the level of the aid intensity corresponding to their GDP per capita. If these identified areas are designated either as pre-defined ‘c’ areas or as non-predefined ‘c’ areas in the national regional aid map approved by the Commission in accordance with these guidelines, the percentage of the specific population allocation for ‘c’ areas indicated in Annex I will be adjusted accordingly. The Commission will publish the amendments to Annex I. A Member State may, within the limit of its adjusted specific allocation for ‘c’ areas80, amend the list of ‘c’ areas contained in its regional aid map for the period from 1 January 2017 to 31 December 2020. These amendments may not exceed 50 % of each Member State’s adjusted ‘c’ coverage. 184. For the purpose of amending the list of ‘c’ areas, the Member State may refer to data on GDP per capita and unemployment rate provided by Eurostat or by its national statistical office or other 76

The increased aid intensities for SMEs will not apply to aid awarded for large investment projects. See Annex I. For the purpose of this provision, the Commission will use the most recent GDP per capita data published by Eurostat at NUTS 2 level on the basis of three-year average. 79 Defined on the basis of the NUTS nomenclature in force at the time of the review. 80 The adjusted population ceiling will be calculated on the basis of the population data used for establishing its initial map. 77 78

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recognised sources, using the average of the last three years for which such data are available (at the moment of the notification of the amended map). The population of the ‘c’ areas concerned should be calculated on the basis of the population data used for establishing the initial map. 185. The Member State must notify the amendments to its map resulting from the inclusion of additional ‘a’ areas and from the exchange of ‘c’ areas to the Commission prior to putting them into effect and by 1 September 2016 at the latest. 6. APPLICABILITY OF REGIONAL AID RULES 186. The Commission extends the guidelines on national regional aid for 2007–2013 81 and the Communication concerning the criteria for an in-depth assessment of regional aid to large investment projects82 until 30 June 2014. 187. The regional aid maps approved on the basis of the guidelines on national regional aid for 2007– 2013 expire on 31 December 2013. The transition period of six months laid down in Article 44(3) of the general block exemption regulation (GBER)83 therefore does not apply to regional aid schemes implemented under the GBER. To grant regional aid after 31 December 2013 on the basis of existing block exempted schemes, Member States are invited to notify the prolongation of the regional aid maps in due time to allow the Commission to approve a prolongation of those maps before 31 December 2013. In general, the schemes approved on the basis of the regional aid guidelines 2007–2013 expire at the end of 2013 as stated in the corresponding Commission decision. Any prolongation of such schemes must be notified to the Commission in due time. 188. The Commission will apply the principles set out in these guidelines for assessing the compatibility of all regional aid intended to be awarded after 30 June 2014. Regional aid awarded unlawfully or regional aid intended to be awarded after 31 December 2013 and before 1 July 2014 will be assessed in accordance with the guidelines on national regional aid for 2007–2013. 189. Since they must be consistent with the regional aid map, notifications of regional aid schemes or of aid measures intended to be awarded after 30 June 2014, cannot be considered complete until the Commission has adopted a decision approving the regional aid map for the Member State concerned in accordance with the arrangements described in subsection 5.5. Accordingly, the Commission will in principle not examine notifications of regional aid schemes which are intended to apply after 30 June 2014 or notifications of individual aid intended to be awarded after that date before it has adopted a decision approving the regional aid map for the Member State concerned. 190. The Commission considers that the implementation of these guidelines will lead to substantial changes in the rules applicable to regional aid in the Union. Furthermore, in the light of the changed economic and social conditions in the Union, it appears necessary to review the continuing justification for and effectiveness of all regional aid schemes, including both investment aid and operating aid schemes. 191. For these reasons, the Commission proposes the following appropriate measures to Member States pursuant to Article 108(1) of the Treaty: (a) Member States must limit the application of all existing regional aid schemes which are not covered under a block exemption regulation and of all regional aid map to aid intended to be awarded on or before 30 June 2014; (b) Member States must amend other existing horizontal aid schemes providing specific treatment for aid to projects in assisted areas in order to ensure that aid to be awarded after 30 June 2014 complies with the regional aid map applicable on the date the aid is awarded; (c) Member States should confirm their acceptance of the proposals above by 31 December 2013. 7. REPORTING AND MONITORING 192. In accordance with Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty and Commission Regulation (EC) No 794/ 2004 of 21 April 2004 implementing Regulation (EC) No 659/1999, Member States must submit annual reports to the Commission. 193. Member States shall transmit to the Commission information on each individual aid exceeding EUR 3 million granted under a scheme, in the format laid down in Annex VI, within 20 working days from the day on which the aid is granted. 81

OJ C 54, 4.3.2006, p. 13. OJ C 223, 16.9.2009, p. 3. 83 Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation) (OJ L 214, 9.8.2008, p. 3). 82

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12 Art. 13–16

IV

194. Member States must maintain detailed records regarding all aid measures. Such records must contain all information necessary to establish that the conditions regarding eligible costs and maximum aid intensities have been fulfilled. These records must be maintained for 10 years from the date of award of the aid and must be provided to the Commission upon request. 8. REVISION 195. The Commission may decide to amend these guidelines at any time if this should be necessary for reasons associated with competition policy or to take account of other Union policies and international commitments or for any other justified reason. ANNEX I–III [….] ANNEX IV Definition of the steel sector For the purpose of these guidelines, ‘steel sector’ means all activities related to the production of one or more of the following products: (a) pig iron and ferro-alloys: pig iron for steelmaking, foundry and other pig iron, spiegeleisen and high-carbon ferro-manganese, not including other ferro-alloys; (b) crude and semi-finished products of iron, ordinary steel or special steel: liquid steel cast or not cast into ingots, including ingots for forging semi-finished products: blooms, billets and slabs; sheet bars and tinplate bars; hot-rolled wide coils, with the exception of production of liquid steel for castings from small and medium-sized foundries; (c) hot finished products of iron, ordinary steel or special steel: rails, sleepers, fishplates, soleplates, joists, heavy sections 80 mm and over, sheet piling, bars and sections of less than 80 mm and flats of less than 150 mm, wire rod, tube rounds and squares, hot-rolled hoop and strip (including tube strip), hot-rolled sheet (coated or uncoated), plates and sheets of 3 mm thickness and over, universal plates of 150 mm and over, with the exception of wire and wire products, bright bars and iron castings; (d) cold finished products: tinplate, terneplate, blackplate, galvanised sheets, other coated sheets, coldrolled sheets, electrical sheets and strip for tinplate, cold-rolled plate, in coil and in strip; (e) tubes: all seamless steel tubes, welded steel tubes with a diameter of over 406,4 mm. Definition of the synthetic fibres sector For the purpose of these guidelines, ‘synthetic fibres sector’ means: (a) extrusion/texturisation of all generic types of fibre and yarn based on polyester, polyamide, acrylic or polypropylene, irrespective of their end-uses; or (b) polymerisation (including polycondensation) where it is integrated with extrusion in terms of the machinery used; or (c) any ancillary process linked to the contemporaneous installation of extrusion/texturisation capacity by the prospective beneficiary or by another company in the group to which it belongs and which, in the specific business activity concerned, is normally integrated with such capacity in terms of the machinery used. ANNEX V–IV [….]

Pre Synopses of General Block Exemption Regulations and Guidelines on regional State aid 3-16 GBER II are an enhancement of the previous regulation in Articles 13 and 14 12 VO 800/2008 (GBER I). The same applies to the guidelines of regional State Aid for 2014-2020 (RAG 2014). They are an enhancement of the guidelines of regional State Aid for 2007–2013 (RAG 2007). For this reason, the new to the old rules are commentarial contrasted. The regional State aid law is within the State aid rules a seIfcontained field of law and it is often subject to own rules. Therefore, the commenting Knoblich

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synopsis of the provisions contains not only Articles 13, 14 GBER I and Articles 13–16 GBER II, but in addition to that these rules of the general block exemption regulations, which are helpful to understand the specific regional State aid rules. To deepen the understanding a detailed annotation of the former regulations is added, tracing the development of the regional State aid rules (para. 1–35), describing the guidelines for regional State aid (RAG) as a discretionary scheme which are aimed at the generalized compensation for regional disadvantages (para. 45–49), presenting the area of applicability, in particular the a) – and c) – areas as well as their identification (para. 50–82), and dealing with the regional aid maps. The added annotation contains furthermore a derivation of the State aid regulations for large investment projects, the synopsis is based on and it contains a commentary of the regulations about the in indepth assessment of regional aid to large investment projects, the set of rules that almost Iiterally found its way in the new RAG 2014 (para. 280–462).

D. Synopsis of the General Block Exemption Regulation 2008 and 20141 I. GBER I to GBER II 13

COMMISSION REGULATION (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation) – (GBER I) OJ L 214/3

COMMISSION REGULATION (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (GBER II) OJ L 187/1

Article 1 para. 1 lit. a) lit. b) lit. c) lit. d) lit. e)

Article 1 para. 1 lit. a) lit. b)2 3 deleted lit. c) lit. b)4

1 This overview takes into account, in particular, the Guidelines on national regional aid for 2007-2013, OJ C 54, 4 March 2006, the Commission Regulation (EC) No 800/2008 of 6 August 2008, declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation, GBER I), OJ L 214 of 9 August 2008, p. 3, the Guidelines on national regional aid for 2014-2020, OJ C 209 of 23 July 2013, p. 1 and the Commission Regulation of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (General Block Exemption Regulation, GBER II), OJ L 187/1. 2 Amended. 3 With the GBER II the Commission abandoned specific meaures for women. Accordingly Article 16 GBER I was deleted; see fn. 22. 4 Amended.

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Commission Regulation (EC) No 800/2008 lit. f) lit. g) lit. h) lit. i) para. 2 lit a) lit b) para. 3 lit a) lit. b) lit. c) lit. d) lit. e) lit. f) lit. g) para. 4 sentence 1 sentence 2 para. 5 para. 6 lit. a) lit. b) lit. c) para. 7 sentence 1 lit. a) – c) sentence 2 Article 2 No. 1 No. 2 No. 3 lit. a) lit. b) No. 4 No. 5 No. 6 No. 7 No. 8 No. 9 No. 10 sentence 1 sentence 2 No. 11 No. 12 No. 13

IV

Commission Regulation (EU) No 651/2014 lit. b)5 lit. d) lit. e) lit. f) para. 2 lit. c) lit. d) para. 3 sentence 1 lit. a)6 lit. b)7 lit. c) lit. d)8 lit. e)9 lit. e)10 lit. e)11 Article 13 lit. b) 1st part 2nd part12 13 deleted Article 1 para. 4 lit. a) lit. b) lit. c) Article 2 No. 18 lit. a) – c) Article 2 No. 18 lit. a) and b) Article 2 No. 1 No. 15 No. 14 i) No. 14 ii) No. 17 No. 26 Article 5 para. 1 Article 2 No. 2 No. 24 No. 27 No. 29 deleted14 No. 30 No. 52 No. 3215

5

Amended. Amended. 7 Amended. 8 Amended; as for regional aid in conjunction with Article 13 lit. a) GBER II. 9 In conjunction with Article 13 lit. a) GBER II. 10 In conjunction with Article 13 lit. a) GBER II. 11 In conjunction with Article 13 lit. a) GBER II. 12 Expanded by broadband infrastructures and processing and marketing of agricultural products. 13 Essentially replaced by provisions concerning incentive effect in Article 6 para. 3 GBER II. 14 The exclusion of the transport sector from regional aid is to be found only in Article 13 lit. a) GBER II. 15 Mentioned in Article 2 No. 32 last part, but no longer defined. 6

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Commission Regulation (EC) No 800/2008 No. No. No. No. No.

No. No. No. No. No. No. No.

No. No. No. No.

No.

14 15 lit. a) – c) 16 17 18 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) 19 20 lit. a lit. b) 21 22 lit. a) lit. b) lit. c) 23 24 25 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) 26 27 28 lit. a) and b) 29 lit. a) lit. b) lit. c) lit. d) lit. e) 30 lit. a) lit. b) lit. c)

Commission Regulation (EU) No 651/2014 No. 62 No. 31 deleted16 No. 4117 No. 4 lit. a) lit. c)18 lit. d) lit. e) lit. f) lit. g) No. 99 lit. a) No. 3 lit. a) lit. b)19 No. 10020 No. 1121 deleted deleted No. 10 No. 8 No. 47 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) No. 21 No. 66, 71 deleted22 No. 43 lit. a) lit. b) lit. c) lit. d) lit. e) No. 44 lit. a) lit. b) lit. c)

16 Definition deleted; the compatibility of investment aid for SMEs with the internal market is regulated in Article 17 GBER II. Pursuant to Article 32 to 35 GBER II, aid for the employment without further approval by the Commission is compatible with the internal market only in cases of the employment of disadvantaged workes or workers with disabilities. 17 With significant amendments. 18 Amended. 19 Amended. 20 Amended. 21 Definition with a reference to Regulation (EU) No 1379/2013 of 11 December 2013. 22 By adopting the GBER II the Commission abandoned specific measures for women. Accordingly, Article 16 GBER I was deleted; cf. fn. 3.

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Commission Regulation (EU) No 651/2014

Article 3 para. 1 – para. 3

Article 323

Article 4 para. 1 sentence 1

Article 2 No. 22;24 Article 7 para. 1 sentence 1 Article 7 para. 2 para. 3 sentence 1 para. 3 sentence 3 para. 4 para. 1 sentence 2

sentence 2 sentence 3 sentence 4 para. 2 para. 3

IV

Article 5 para. 1 sentence 1 sentence 2 sentence 2 lit. a) lit. b) lit. c) lit. c) section i) ii) lit. d) para. 2 lit. a) lit. b) para. 3

Article 5 para. 1 para. 2 para. 2 lit. a) lit. b) lit. c) lit. c) ii) i)25 lit. d) lit. e), g), h) and lit. i)26 lit. f) lit. j) 1st part; Article 7 para. 5 and 6

Article 6 para. 1 sentence 1 para. 1 sentence 1 lit. a) lit. b) lit. c) lit. d) lit. e) lit. e) section i)

Article 4 para. 1 para. 1 lit. c)27 lit. s)28 lit. d) lit. e) lit. i) lit. i) section i) 1st part, vi)29 lit. i) section ii) 1st part, vi)27 lit. i) section iii) 1st part, vi)27 lit. i) section iv)

ii) iii) iv)

23 Amended. The need to express reference, so far laid down in Article 3 para. 1, para. 2 and para. 3 GBER I, has been deleted in Article 3 GBER II. 24 Definition of the gross grant equivalent (GGE). 25 Amended. 26 Substantiates the so far unspecific general provision on equity injection in Article 5 para. 2 lit. a) GBER I. 27 Amended, specifically without employment aid. 28 Amended, in particular doubling the notification threshold to 15 Mio. EUR per undertaking and activity. 29 For feasibility studies Article 4 para. 1 lit. i) section vi) provides a single maximum aid of 7,5 Mio EUR per study regardless the stage of the research.

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Commission Regulation (EC) No 800/2008

Commission Regulation (EU) No 651/2014 lit. l)30 lit. n) lit. o) lit. p) lit. q) lit. i) section i) 2nd part, ii) 2nd part and iii) 2nd part

lit. f) lit. g) lit. h) lit. i) lit. j) sentence 2 sentence 3

deleted31

para. 2 Article 7 para. 1 1st part para. 1 2nd part para. 2 para. 3 para. 4 para. 5 lit. a) lit. b)

Article 8 para. 1 para. 2 para. 3

lit. a), Article 2 No. 2032 Article 8 para. 1 para. 233 para. 3 lit. a) para. 3 lit. b), para. 5 and para. 234 para. 6 para. 435 para. 4, Article 22 para. 5 in conjunction with Article 2 No. 8036 Article 6 para. 1 para. 237 para. 338

30 In particular this also includes aid for SMEs to cover the costs of intellectual property rights, Article 28 para. 2 lit. a). 31 Pursuant to Article 4 para. 1 lit. i), the lower threshold value must be applied if the predominant purpose (above 50%) of the project cannot be established. 32 The mechanism laid down in Article 2 No. 20 GBER II is, in the end, identical with the mechanism provided for by Article 6 para. 2 GBER I. 33 For the first time, a provision of a regulation by the GD Competition clearly distinguishes as a legal consequence between funding which has gone through the budgets of the member States and funding granted by the Union directly i.e. without having had contact with the Member States’ budgets. 34 Article 8 para. 2 referring to ‘other Union funding’. 35 With substantial modifications; in particular, the requirement of a three years time limit after receipt of a risk capital aid, within which the aid, except of research, development and innovation aid, has been deleted, Article 8 Para. 3 lit. b), Para. 4 S. 1 GBER II. 36 Article 8 Para. 4 GBER II deletes the provision concerning aid to young innovative enterprises (in the meaning of Article 35 GBER I) in Article 7 Para. 5 lit. b) GBER I essentially. On the other hand, Article 22 para. 5 GBER II offers these enterprises a doubling of the maximum aid, which might also effect the cumulation provisions in Article 8 Para. 4 GBER II. 37 With further adaptions. 38 Whereas Article 8 para 3 GBER I foresaw individual aid, i.e. aid granted ad-hoc or on the basis of an aid scheme (Article 2 No. 3 GBER I), Article 6 para. 3 GBER II, leaving the substantive content otherwise untouched, now provides only for ad-hoc aid and no longer individual aid (Article 2 No. 14 GBER II). Cf. also that the previous regulation had bee deleted in Article 1 para. 5 GBER I.

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Commission Regulation (EC) No 800/2008 lit. lit. lit. lit. lit.

Commission Regulation (EU) No 651/2014 lit. b) lit. b) lit. b) lit. b) lit. a)

a) b) c) d) e)

1. 1. 2. 3.

para. 4

para. 4

lit. a) lit. b) para. 5 sentence 1 sentence 2 sentence 3 sentence 4 para. 6

lit. a) lit. b)40 para. 5 lit. d) lit. c) lit. e) lit. b)

Article 9 para. 1 sentence 1 and 2 sentence 3 sentence 4 para. 2 para. 3 para. 4 Article 10 para. 1 para. 2 sentence para. 2 sentence para. 3 sentence para. 3 sentence para. 3 sentence

1 and 2 3 and 4 1 2 3

IV

Tiret39 Tiret39 Tiret39 Tiret39

deleted41 Article 11 lit. a) deleted Article 11 lit. a), Article 9 para. 5 lit. b), para. 1 lit. a)42 Article 11 lit. a), Article 9 para. 5 lit. a), para. 1 lit. b)43 deleted44 Article 11 lit. a)45 Article 12 sentence 146 sentence 1 sentence 2 sentence 3 deleted Article 1047

39 The wording of the introductory sentence of Article 6 para. 3 lit. b) GBER II makes clear that for regional aid it is not necessary to examine these criteria. Insofar, the wording in Article 8 para. 3 GBER I is nonspecific. 40 Article 6 para. 4 lit. b) 2nd part GBER II specifies the provision of Article 8 para. 4 sentence 2 GBER I fiscal successor scheme. 41 The substantive content of Article 8 para. 6 GBER I now follows implicitly from Article 6 paras. 2 and 3 GBER II. 42 It is now both the task of the Commission and also of the Member States to publish summary information in the Internet. The Commission publishes on its website. 43 The Member State concerned publishes the full text of each aid measure on an elaborate State aid website. The Commission publishes on its own website the links to the State aid websites of the Member States. Pursuant to Article 9 Para. 6 GBER II the time limit for the installation of theses member States’ websites is two years. 44 As it is the case in the context of Article 3 GBER II, here, in the context of the transparency rules, the need to express reference is deleted too. 45 The provisions of the Articles 9 and 11 GBER II do without the distinction between aid schemes, grant of the aid on on the basis of an aid scheme and ad-hoc aid, as laid down in Article 9 GBER I. 46 The duty of the Commission, as laid down in Article 10 para. 1 GBER I, to regularly monitor aid measures of which it has been informed has been deleted by GBER II and replaced by a right to monitor. 47 While Article 10 para. 3 sentences 2 and 3 GBER I still provided for a procedural requirement to sanction the failure to comply with the loss of the exemptiom, Article 10 GBER II now provides for substantive requirements to withdraw legal benefits of the exemption.

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Commission Regulation (EU) No 651/2014

Article 11 sentence 1 sentence 2

Article 11 lit. b) deleted48

Article 12 para. 1 sentence 1 lit. a)

Article 14 para. 4 para. 4 lit. a), para. 3, Article 2 No. 49 lit. a) para. 6 sentence 3 para. 6 sentence 6 para. 6 sentence 7 para. 8 para. 8 lit. a) lit. b) lit. c) lit. d) para. 9 para. 9 lit. b)49 para. 9 lit. a) 1st part50 para. 9 lit. c)

lit. b) sentence 1 sentence 2 sentence 2 para. 2 lit. a) lit. b) lit. c) lit. d) para. 3 lit. a) lit. b) lit. c) Article 13 para. 1 sentence 1 sentence 2 para. 2 sentence 1 sentence 2 sentence 3 para. 3 para. 4 para. 5 para. 6 sentence 1 sentence 2 sentence 3 para. 7 sentence 1 sentence 2 sentence 3

Article 14 para. 1 deleted51 Article 14 para. 2, Article 2 No. 27 para. 5 sentence 1 sentence 2 para. 12 sentence 1 deleted52 para. 4, 12 sentence 2 para. 14 sentence 1 sentence 2 deleted53 para. 6 sentence 3, 4 deleted54, Article 14 para. 13 para. 6 sentence 2 lit. b)

48 The information about the full text of the aid measure or the link providing access to the full text has been communicated to the Commission in the context of the summary information according to Article 11 lit. a) GBER II. 49 Pursuant to the new provision in the GBER II, the position must not only be created within three years but actually filled. 50 Article 14 Para. 9 lit. a) 2nd part provides an explanatory calculation rule linking the number of jobs with the number of employees. This link requires to account the number of employees on basis of fulltime equivalents, Article 2 No. 32 GBER II. 51 The determination does not depend on whether the aid has been grantes ad-hoc or on basis of an aid scheme. 52 Article 13 para. 4 provided the option to grant a SMEs bonuses of 10% for medium-sized or 20% for small enterprises. At the same time, the provision excluded SMEs from this bonus if the invested amount exeeded 50 Mio. EUR (Article 2 No. 12 GBER I) or if they belonged to the transport sector. 53 Article 13 para. 6 sentence 3 GBER I was purely declaratory. 54 The ruling in Article 13 para. 7 sentence 2 GBER I, according to which the costs of the purchase shall be added to the investments costs, has been made obsolete by Article 14 para. 13 GBER II stipulating that all investments made in a NUTS-3 region shall be considered to be part of a single investment project.

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Commission Regulation (EC) No 800/2008 sentence sentence sentence sentence sentence

4 5 6 7 8

para. 8 para. 9 para. 10 Article 14 para. 1 para. 2 para. 3 sentence 1 sentence 2 para. 4 sentence 1 sentence 2 para. 5 para. 6

Commission Regulation (EU) No 651/2014 para. 6 sentence 2 lit. a) para. 6 sentence 1 para. 6 sentence 5 deleted55 para. 8 sentence 2 para. 4 lit. b) Article 13 lit. b) 2nd part56 Article 4 para. 2, 14 para. 13 sentence 157 Article 22 para. 1 para. 2 sentence 1 1st part para. 3 lit. c), 5 deleted58 deleted59 deleted60 para. 2 sentence 1 2nd part, sentence 2, para. 3 1st part61 deleted, siehe aber Article 13 lit. d)62

55 As Article 13 para. 7 sentence 7 GBER I is complementary to Article 13 para. 7 sentence 8 GBER I it has no stand-alone regulatory content. 56 The special provisions pursuant to Article 13 para. 9 lit. a) and b) GBER I have been deleted. Investment aid for processing and marketing of agricultural products is considered equivalent with general investment aid, Article 13 lit. b) 2nd part GBER II. 57 The relevant geographical scope for a single investment project is now the common NUTS-3 region. By accepting this regulation, the Commission renounced its previous view, which it had developed since 1998, saying that the test to consider several part-investments as a single investment depends on whether the various investment parts are considered severable or not: para. 7.2. sentence 3 Multisectoral Framework on regional aid for large investment projects, OJ C 107 of 7.4.98 p. 7; para. 49 sentence 2–5 Multisectoral Framework on regional aid for large investment projects, OJ C 70 of 19.3.2001, p. 8; para. 60 sentence 2, fn 55, Block exemption Regulation on regional investment aid-RRIA recital 15 and Article 2 para. 1 lit g) Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid and most recently Article 13 para. 10 GBER I. 58 Article 22 GBER II abandons an annual maximum aid as provided for by Article 14 para. 3 sentence 2 GBER I. 59 By abandonning a percentage intensity of maximum aid, the aid for start-ups in the meaning of Article 22 GBER II is, in principle, identical with de-minimis aid for start-ups. 60 Additionally, Article 22 GBER II abandons a further differentiation of the assisted areas, as contained in Article 14 para. 4 sentence 2 GBER I, pursuant to Article 107 para. 3 lit. a) AEUV on the basis of GDP below or above 60% of the average GDP as well as the population density and number of population. 61 The notion ‘start-up aid’ in Article 22 para. 3 1st part GBER II essentially comprises the costs mentioned in Article 14 para. 5 GBER I. 62 In the context of a clear reduction of the maximum aid from 2 Mio. EUR to 0.8 Mio. EUR Gross Grant Equivalent (GGE) for a newly created enterprise in a development area according to Article 107 para. 3 lit. a) TFEU, the distortion of competition has been reduced. This reduction is meant to prevent the trade from being affected by subsidising the re-opening of an enterprise closed within the previous 12 months by the entrepreneur in the same or an adjacent market. For general regional investment aid according to chapter III, section I, sub-section A GBER II, Article 13 lit. d) GBER II provides for a similar provision, however, going beyond the previous regulation in Article 14 para. 6 GBER I and extended to two years.

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Commission Regulation (EU) No 651/2014

II. GBER II to GBER I 14

COMMISSION REGULATION (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty (GBER II) OJ L 187/1

COMMISSION REGULATION (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation) – (GBER I) OJ L 214/3

Article 1 para. 1 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) lit. g) lit. h) lit. i) lit. j) lit. k) lit. l) para. 2 lit a) lit b) lit. c) lit. d) para. 3 sentence 1 lit a) lit. b) lit. c) lit. d) lit. e)

Article 1 para. 1 lit. a) lit. b), e), f) lit. d) lit. g) lit. h) lit. i) new new new new new new new new para. 2 lit a) lit b) para. 3 lit a) lit. b) lit. c) lit. d) lit. e), f), g) without further reference new para. 6 lit a) lit. b) lit. c) new new new

sentence 2 para. 4 lit. a) lit. b) lit. c) para. 5 lit. a) lit. b) lit. c) Article 2 No. 1 No. 2 No. 3 lit. a) lit. b) No. 4 lit. a)

482

Article 2 No. 1 No. 7 No. 20 lit. a) No. 20 lit. b) No. 18 lit. a)

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lit. b) lit. c) lit. d) lit. e) lit. f) lit. g)

new

No. 5 No. 6 lit. a) lit. b) lit. c) lit. d) No. 7 No. 8 No. 9 No. 10 No. 11 No. 12 No. 13 No. 14 section i) section ii) No. 15 No. 16 No. 17 No. 18 lit. a)

new new new new new new

lit. b) lit. c) lit. d) lit. e) No. 19 No. 20 No. No. No. No. No. No. No.

21 2263 23 24 25 26 27

No. 28 No. 29

IV

No. 18 lit. b) lit. c) lit. d) lit. e) lit. f)

No. 24 new No. 23 No. 22 lit. a)64 new new No. 3 lit. a) lit. b) No. 2 new No. 4 Article 1 para. 7 sentence 1 lit. a), sentence 2 Article 1 para. 7 sentence 1 lit. b), sentence 2 Article 1 para. 7 sentence 1 lit. c) new new new Article 6 para. 2 and para. 67 sentence 1, 2 RAG 2007 No. 26 Article 4 para. 1 sentence 1 new No. 8 new No. 5 No. 9, Article 13 para. 2 sentence 1 new No. 10 sentence 1

63

Contains a definition of the gross grant equivalent. Article 2 No. 11 GBER II, now, refers to Regulation (EU) No 1379/2013 of the European Parliament and of the Council of 11 December 2013. 64

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Commission Regulation (EU) No 651/2014 No. No. No. No. No. No. No. No. No. No. No. No. No. No.

No. No. No.

30 31 32 33 34 35 36 37 38 39 40 41 42 sentence 1 sentence 2 43 lit. a) lit. b) lit. c) lit. d) lit. e) 44 lit. a) lit. b) lit. c) 45 lit. a) lit. b) lit. c) 46

No. 47 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) No. 48 No. 49 lit. a) lit. b) No. 50 No. 51 lit. a) lit. b) No. 52 No. 53 No. 54 65 66

484

Commission Regulation (EC) No 800/2008 No. 11 No. 15 lit. a) – c) new65 new new new new new new new new No. 1766, para. 33 RAG 2007 para. 76 sentence 1 RAG 2007 new No. 29 lit. a) lit. b) lit. c) lit. d) lit. e) No. 30 lit. a) lit. b) lit. c) new new new new No. 25 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) new, cf. para. 30 lit. b), 80 2. Tiret sent. 2 RAG 2007 para 34 sent. 1 RAG 2007 para. 35 and fn. 37 RAG 2007 new para. 34 sent. 1 1. and 3. Tiret RAG 2007 para 35 RAG 2007 para. 60 sent 1, 67 sent. 3 and fn.54 RAG 2007; para. 20 lit. l) RAG 2014 new new

Further developed from Article 2 No. 13 GBER I, cf. fn. 15 above. Compared with Article 2 No. 17 GBER I, Article 2 No. 41 GBER II has been amended substantially.

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Commission Regulation (EC) No 800/2008 para. 76 sent. 4, 80 1. Tiret and 2. Tiret sent. 2 RAG 2007 new new new new new new Article 2 No. 14 new new new

No. 55 No. No. No. No. No. No. No. No. No. No.

IV

56 57 58 59 60 61 62 63 64 65

Article 3

Article 3 para. 1 – 367

Article 4 para. 1 para. 1 lit. a)68 lit. b) lit. c)69 lit. d) lit. e) lit. f) lit. g) lit. h) lit. i)70 lit. i) section i) 1st part71 lit. i) section i) 2nd part lit. i) section ii) 1st part72

Article 6 para. 1 para. 2 new para. 1 sentence 1 lit. a) lit. c) lit. d) new new new lit. e) lit. e) section i)

lit. i) section ii) 2nd part lit. i) section iii) 1st part73

sent. 2 sentence 1 lit. e) section iii)

sentence 2 sentence 1 lit. e) section ii)

67 The imperative to express reference, so far laid down in Article 3 para. 1, para. 2 and para. 3 GBER I, has been deleted in Article 3 GBER II. 68 The mechanism laid down in Article 2 No. 20 GBER II is, eventually, identical with the mechanism provided for by Article 6 para. 2 GBER I. 69 Amended, in particular without employment aid. 70 Pursuant to Article 4 para. 1 lit. i) the lower threshold value must be applied if the predominant purpose (above 50%) of the project cannot be established. Hence Article 6 para. 1 sentence 3 GBER I was deleted. 71 For feasibility studies, Article 4 para. 1 lit. i) section vi) provides a single maximum aid of 7,5 Mio EUR per study regardless the stage of the research. Apart from that, the notification threshold per undertaking and basic research project has been doubled to EUR 7.5 Mio. 72 Amended, in particular doubling the notification threshold to EUR 20 Mio. per undertaking and activity. 73 Amended, in particular doubling the notification threshold to EUR 15 Mio. per undertaking and activity.

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Art. 13–16 14

Commission Regulation (EU) No 651/2014

Commission Regulation (EU) No 651/2014

Commission Regulation (EC) No 800/2008 sent. 2

lit. i) section iii) 2nd part lit. i) section iv)

sentence 1 lit. e) section iv)

lit. i) section v) lit. i) section vi)

new

lit. j) lit. k) lit. l)74 lit. m) lit. n) lit. o) lit. p) lit. q) lit. r) lit. s)75 lit. t) lit. u) lit. v) lit. w) lit. x) lit. y) lit. z) lit. aa) lit. bb) lit. cc)

new new

para. 276 Article 5 para. 1 para. 2 para. 2 lit. a) lit. b) lit. c) lit. c) i)77 ii) lit. d)

sentence 1 lit. e) section i) – iii) lit. f) new lit. g) lit. h) lit. i) lit. j) new lit. b) new new new new new new new new new new Article 13 para. 10; No. 60 sentence 2, fn. 55 RAG 2007 Article 5 para. 1 sentence 1 sentence 2 sentence 2 lit. a) lit. b) lit. c) lit. c) section ii) i) lit. d)

74 In particular, this also includes aid for SMEs to cover the costs of intellectual property rights, Article 28 para. 2 lit. a) GBER II. 75 Amended, in particular doubling the notification threshold to EUR 15 Mio. per undertaking and activity. 76 This rule, so far applied only in the context of regional aid, is, due to the GBER II, now generally applicable. As to the history of this provision see fn 57 above and the comments on Articles 13 and 14 GBER I (see below annotation para. 350–371). 77 Amended.

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Commission Regulation (EC) No 800/2008 para. 2 lit. a)78 lit. b) para. 2 lit. a)79 para. 2 lit. a)80 para. 2 lit. a)81 para. 3 sentence 1 para. 1 S. 2 lit. c) clause. i) 1st part 1. Alt.82

lit. e) lit. f) lit. g) lit. h) lit. i) lit. j) 1st part 2nd part Article 6 para. 1 para. 283 para. 3 lit. a) lit. b) 1. Tiret lit. b) 2. Tiret lit. b) 3. Tiret para. 4 lit. a) lit. b) para. 5 lit. a) lit. b) lit. c) lit. d) lit. e) lit. f) lit. g) lit. h)

IV

Article 8 para. 1 para. 284 para. 385 lit. e)86 lit. a) and b)87 lit. c)87 lit. d)87 para. 4 lit. a) lit. b)88 new para. 5 sentence 489 sentence 2 sentence 1 sentence 3 new new new

78 The previous general rule finds special expression in Article 5 para. 2 lit e) GBER II for regional urban development aid. 79 The previous general rule finds special expression in Article 5 para. 2 lit e) GBER for start-up aid in the meaning of Article 22 GBER II. 80 The previous general rule finds special expression in Article 5 para. 2 lit e) GBER II for energy efficiency projects in the meaning of Article 5 para. 2 lit. e) GBER II. 81 The previous general rule finds special expression in Article 5 para. 2 lit e) GBER II for operating aid for the reproduction of renewable electricity in the meaning of Article 42 GBER II. 82 Substantiating the general rule of reimbursable advances. 83 The regulatory content of Article 8 para. 6 GBER I implicitly follows from the provisions of Article 6 paras. 2 and 3 GBER II. 84 In its essence, the regulatory content of Article 8 para. 2 GBER I was the same, however less complex. 85 Whereas Article 8 para 3 GBER I foresaw individual aid, i.e. aid granted ad-hoc or on the basis of an aid scheme (Article 2 No. 3 GBER I), Article 6 para. 3 GBER II, leaving the substantive content otherwise untouched, now provides only for ad-hoc aid and no longer individual aid (Article 2 No. 14 GBER II). Cf. also that the previous regulation had bee deleted in Article 1 para. 5 GBER I. 86 Article 6 para. 3 lit. a) GBER II substantiates the criterion “as such” in Article 8 para. 3 lit. e) GBER I by using the wording “not have been sufficiently profitable in the area”. 87 The wording of the introductory sentence of Article 6 para. 3 lit b) GBER II makes clear that these criteria must not be examined. Insofar, the wording of Article 8 para. 3 GBER I was unclear. 88 The provision of Article 6 para. 4 lit. B) 2nd part GBER II substantiates Article 8 para. 4 sentence 2 GBER I concerning tax successor schemes. 89 Article 8 para. 5 sentence 4 GBER I, however, covers only risk financing. Article 6 para. 5 lit. b) GBER II, on the other hand, covers also SME aid for start-ups according to Article 22 GBER II.

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Art. 13–16 14

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Commission Regulation (EU) No 651/2014

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Article 7 para. 1 sentence 1 sentence 2 para. 2 para. 3 sentence 1 para. 3 sentence 2 para. 3 sentence 3 para. 4 para. 5 para. 6

Article 4 para. 1 sentence 1 para. 3 para. 1 sentence 2 sentence 3 new90 sentence 4 para. 2 new91 new92

Article 8 para. 1 para. 293 para. 3 lit. a) para. 3 lit. b) para. 4 sentence 1

Article 7 para. 1 1st part para. 1 2nd part94 para. 2 para. 3 2nd part95 para. 5 sentence 1 and lit. a), b) 2nd part96 new97 para. 3 1st part para. 4

para. 4 sentence 2 para. 5 para. 6

90 Previously, No. 10 of the form for summary information for aid for large investment projects, as annex II to the reporting obligations pursuant to Article 9 para. 4 GBER I, indirectly stipulated a discounting requirement for eligible costs. 91 Article 7 para. 5 GBER II grants an aid bonus of 10% for generally repayable advances, i.e. advances repayable depending on the success of an action, on maximum aid intensities provided for in chapter III GBER II. That requires that the success of an action is based on a reasonable and prudent hypothesis and, in addition, that it is provided that the advances will be repaid with an interest rate at least equal to the discount rate applicable at the moment the aid is granted. Insofar the current view of the Commission not to grant a bonus on repayable advances, as laid down in recital 22 GBER I, has been changed. 92 Article 7 para. 6 GBER II is a reverse exception of Article 7 para. 5 GBER II charged against regional aid. 93 For the first time, a provision of a regulation by the GD Competition clearly distinguishes as a legal consequence between funding which has gone through the budgets of the member States and funding granted by the Union directly i.e. without having had contact with the Member States’ budgets. As to this: see also recital 26 GBER II. 94 For the first time, a provision of a regulation by the GD Competition clearly distinguishes as a legal consequence between funding which has gone through the budgets of the member States and funding granted by the Union directly i.e. without having had contact with the Member States’ budgets. As to this: see also recital 26 GBER II. 95 The negation, contained in Article 8 para. 3 lit. b) GBER II but missing in Article 7 para. 3 2nd part GBER I, is already provided for in Article 7 para. 3 1st part GBER I. 96 With substantial modifications; in particular, the requirement of a three years time limit after receipt of a risk capital aid, within which the aid, except of research, development and innovation aid, has been deleted, Article 8 Para. 3 lit. b), Para. 4 S. 1 GBER II. In addition, the provision has been widened to cover aid for SME start-ups (Article 22 GBER II) and aid for alternative trading platforms specialised in SMEs. Article 8 para. 4 GBER II, in principle, has deleted Article 7 para. 5 lit. b) GBER I for young innovative enterprises. However, Article 22 para. 5 GBER II offers to these enterprises a doubling of the maximum aid having effect on the cumulation rules in Article 8 para. 4 GBER II. 97 It has become possible now to cumulate aid for non eligible costs and aid for non eligible costs. In the past, the quantification of costs at least in one instance was required, see Article 7 para. 5 GBER I.

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Article 9 para. 1 para. 1 sentence 1 lit. a) lit. b) lit. c) sentence 2 sentence 3 para. 2 para. 3 para. 4 para. 5 lit. a) lit. b) para. 6

Article 9 para. 2 sentence 198 new99 para. 2 sentence 1 and 3100 new101 new new new102 new new new para. 1 sentence 4 new103

Article 10 sentence 1 sentence 2

Article 10 para. 3 sentence 3104 new105

Article 11 lit. a)

Article 9 para. 1 sentence 1 and 2, para. 4106 Article 11

lit. b) Article 12 sentence 1 sentence 2 sentence 3

IV

Article 10 para. 2 sentence 1 and 2 1st part107 para. 2 sentence 3 and 4 para. 3 sentence 1

98 It is now the task not only of the Commission but also of the Member States to publish the summary report on the internet. Therefore, the Member States publish the full text of the aid measure and the summary report according to Article 11 lit. a) GBER II on a comprehensive aid-website. The Commission publishes on ist own website the relevant links to the Member States aid websites. Article 9 para. 6 GBER II stipulates a time period of two years for the Member States to install the websites. 99 Pursuant to Article 9 para. 1 sentence 2 and para. 2 sentence 4 GBER I, there was no obligation of the Member States to publish the summary report on a national or regional website. 100 As already provided in the general exemption requirements in Article 3 GBER II, the need to express reference has been deleted in the context of the tranparecy rules. 101 This is a provision which the Commission has already proposed in No. 20 of its Notice on a simplified procedure for treatment of certain types of State aid, OJ C. 136 of 16 June 2009, p. 3. 102 In respect to regulations pursuant to Article 16 GBER II (aid for regional urban development) and 21 GBER II (aid for risk capital), the duty to publish information on individual aid of more than 500,000 EUR can be waived for SMEs which have not yet started comercial activities, Article 9 para. 2 fn. 50 GBER II. 103 The two years period is of little relevance for the Commission itself: The information about the full text of the aid measure or the link providing access to the full text has been communicated to the Commission in the context of the summary information according to Article 11 lit. a) GBER II. 104 While Article 10 para. 3 sentences 2 and 3 GBER I still provided for a procedural requirement to sanction the failure to comply with the loss of the exemption, Article 10 GBER II now provides for substantive requirements to withdraw legal benefits of the exemption. 105 Article 10 sentence 2 GBER II corresponds to the principle of proportionality. 106 The differentiation between aid scheme and granting of aid based on an aid scheme or ad hoc, as laid down in Article 9 para. 1 sentence 1 and para. 4 GBER I, is no longer uphold in Articles 9 and 11 GBER II. 107 The Commission’s duty to regularly monitor aid measures of which it has been informed (Article 10 pra. 1 GBER I) has been deleted in GBER II and replaced by a right to monitor.

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Art. 13–16 14

Commission Regulation (EU) No 651/2014

Commission Regulation (EU) No 651/2014 Article 13 lit. a) lit. b) 1st part lit. b) 2nd part lit. c) lit. d) lit. e) Article 14 para. 1 para. 2 para. 3 para. 4 lit. a) lit. b) lit. c)

Commission Regulation (EC) No 800/2008 Article 1 para. 3 lit. e), d), f) and g), Article 2 No. 10108 para. 4 sentence 1 para. 4 sentence 2109 110 new Article 14 para. 6, 16 para. 6111 new112 Article 13 para. 1 sentence 1113 para. 2 sentence 1 1. part114 115 new Article 12 para. 1 sentence 1 lit. a) 1. part Article 13 para. 5, 8 para. 5 2. part

108 With this provision the Commission expands measures in the transport sector, which are excluded from regional aid, beyond the scope of Article 2 No. 10 sentence 2, second part GBER I and applies them also on the creation of transport infrastructures as well as on the entire energy sector which means also on the promotion of energy infrastructures. 109 Article 13 lit. b) 2nd part GBER II admits further restrictable economic sectors, other than tourism. These are regulations directed to promote the creation of broadband infrastructures and the processing and marketing of agricultural products. The special provisions laid down in Article 13 para. 9 lit. a) and b) GBER I have been deleted. Article 13 lit. b) second part GBER II equates the promotion of investments in the processing and marketing of agricultural products and the general promotion of investments. 110 These aid measures are operation aid and by no means investment aid, cf. especially No. 81 Regional Guidelines 2006. The products referred to in Article 13 lit. c) GBER II are products from production sites for which there is actually no alternative, i.e. agricultural and fishing products or natural resources. 111 Recital 43 sentences 5 and 6 as well as Article 14 para. 6 and Article 16 para. 6 GBER I refer only to the closing down and investment aid for the re-opening of newly created small enterprises and enterprises created by female entrepreneurs. Now, Article 13 lit. d) GBER II extends this provision to all beneficiaries and extends the relevant period of time from one to two years. 112 In view of regional aid, the GBER I, in principle, excluded operation aid from exemption. Solely as an exception, operation aid was permitted according to Articles 14 and 16 GBER I (aid for newly established small enterprises and enterprises created by female entrepreneurs), Article 15 GBER II. With Article 15 GBER II this principle has come to an end. Accordingly, a new and specific regulation to restrict operation aid was needed. Article 13 lit. e is close to No. 78 Regional Guideline 2006 and adopts No. 17 Regional Guidelines 2013. 113 The determination is made irrespective of whether the aid is granted ad hoc or based on an aid scheme; cf. Article 13 para. 1 sentence 2 GBER I. 114 The further provision concerning regional aid maps in Article 13 para. 2 sentence 1 GBER I is now laid down in Article 2 No. 27 GBER II. 115 The general limitation of the admissibility of regional investment aid for large enterprises, i.e. non-SMEs (Article 2 No. 8 GBER I, Article 2 No. 25 GBER II), to assisted areas in the meaning of Article 107 para. 3 lit. a) TFEU (A-areas) is new in the context of an exemption regulation. In C-areas aid may be granted to large enterprises only for initial investments in favour of a new economic activity in the meaning of Article 2 No. 51 GBER II in the area concerned, i.e. in the same NUTS-3 region. This requires, firstly, the setting up of a new establishment or, secondly, the diversification of the activity of an establishment which is neither the same or similar to the activity so far or, thirdly, the acquisition by a third party not related to the seller of an establishment that has closed or would have closed had it not been purchased, under the condition that the new activity to be performed by the acquired establishment is not the same as or similar to the that performed prior to the acquisition.

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para. 5 sentence 1

para. 2 S. 2, Article 12 para. 2 lit. d) S. 2 para. 2 sentence 3 para. 7 sentence 5 sentence 4 sentence 3 sentence 1, Article 12 para. 1 S. 1 lit. b) S. 1 sentence 1 2. part sentence 6 Article 12 para. 1 sentence 1 lit. b) sentence 2 para. 1 sentence 2 new116 Article 12 para. 2 lit. a) sentence 2 lit. b) lit. c) lit. d) sentence 2 Article 13 para. 7 sentence 8117 Article 12 para. 3 lit. b) new118 Article 12 para. 3 lit. a)119 lit. c) new120 new121 Article 13 para. 3122 para. 5 last part

para. para. para. para.

sentence 6 sentence 6 sentence 6 sentence 6 sentence

2 1 2 lit. a) 2 lit. b) 3

para. 6 sentence 4 para. 6 sentence 5 para. 6 sentence 6 para. 6 sentence 7 para. 7 para. 8 sentence 1 lit. a) lit. b) lit. c) lit. d) para. 8 sentence 2 para. 9 lit. a) 1st part para. 9 lit. a) 2nd part para. 9 lit. b) para. 9 lit. c) para. 10 para. 11 para. 12 sentence 1 para. 12 sentence 2

116

With this provision Nos. 96 and 97 Regional Guidelines 2013 have been adopted. Since Article 13 para. 7 sentence 7 GBER I is complementary to Article 13 para. 7 sentence 8 GBER I, it has no regulatory content of ist own. Hence, this provision has been deleted in the GBER II. 118 Article 14 para. 9 lit. a) second part provides for an explanatory calculation rule linking the number of jobs to the number of employees. This linkage presupposes that the number of employees is accounted on basis of full time equivalents, Article 2 No. 32 GBER II. 119 Pursuant to Article 12 para. 3 lit. a) GBER I this position had only to be created within three years after the completion of the investment. According to the new rules, i.e. Article 14 pra. 9 lit b) GBER II, the position has actually to be filled within three years after the investment was made. 120 This regulation is an adoption of No. 12 Regional Guidelines 2013. The competitive selection process in the meaning of Article 1para. 10 lit. c) has to comply with No. 78 lit. c) and d) of the Commission Communication “EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks”, OJ C 25 of 26 January 2013 p. 1 (Broadband Guidelines). 121 Herein No. 13 Regional Guidelines 2013 has been adopted. Research infrastructure in the meaning of that provision is defined as an establishment in the meaning of the Council Regulation (EC) No. 723/ 2009 of 25 June 2009 on the Community legal framework for a European Research Infrastructure Consortium (ERIC) (OJ L 206 of 8 August 2009, p. 1). 122 Article 13 para. 4 GBER I provided for the opportunity to grant to medium-sized enterprises a SME-bonus of 10% and to small enterprises a SME-bonus of 20%. The same time, this provision excluded SMEs from that bonus if the total investment was more than 50 Mio. EUR (Article 2 No. 12 GBER I) or made in the transport sector. This opportunity to grant auch a SME-bonus has been deleted in GBER II. 117

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IV

Art. 13–16 14

Commission Regulation (EU) No 651/2014

Commission Regulation (EU) No 651/2014 para. para. para. para.

12 13 13 14

sentence 3 sentence 1 sentence 2 sentence 1 sentence 2

para. 15

Commission Regulation (EC) No 800/2008 Article Article Article Article

6 13 6 13

para. 2123 para. 10124 para. 2125 para. 6 sentence 1 sentence 2126

new127

Article 15

new128

Article 16

new129

Article 22 para. 1 para. 2 sentence 1 sentence 2 para. 3 lit. a)

Article 14 para. 1130 para. 2, 5 2nd part para. 5 2nd part new131

123 Pursuant to Article 12 sentence 3 in conjunction with Article 2 No 20 GBER II, it seems that regional aid is available also for investment projects with an eligible investment volume of more than 100 Mio. EUR. However, Article 4 para. 1 lit a) GBER II, as previously Article 6 para. 2 GBER I, provides an exemption for aid only up to and not going beyond the amount that equals an investment volume of 100 Mio. EUR. 124 The relevant geographical scope for a single investment project is now the common NUTS-3 region. By accepting this regulation, the Commission renounced its previous view, which it had developed since 1998, saying that the test to consider several part-investments as a single investment depends on whether the various investment parts are considered severable or not: marginNo 7.2. sentence 3 Multisectoral Framework on regional aid for large investment projects, OJ C 107 of 7.4.98 p.7, marginNo 49 sentence 25 Multisectoral Framework on regional aid for large investment projects, OJ C 70 of 19.3.2001, p.8, marginNo 60 sentence 2, fn 55, recital 15 and Article 2 para. 1 lit g) Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid ( ) and most recently Article 13 para. 10 GBER I. However, the Commission makes clear that an artificial splitting up of aid projects is no longer permissible, Arricle 4 para. 2 GBER II. By that, it reiterates the provision laid down in Article 13 para. 10 first part. Article 14 para. 13 GBER II stipulates that all investments within one NUTS-3 region have to be added up; hence, Article 13 para. 7 sentence 2 providing that acquisition costs and other investment costs have to be added up has become 125 This provision emphasizes once again that for the calculation of the maximum subsidy value the total aid granted for a single investment project is decisive, i.e. the aid possibly provided for several subprojects in the same NUTS-3 region. By that it corresponds to the notion “from all sources” in Article 6 para. 2 GBER I. 126 Considering the fact that a general SME-bonus is no longer permissible, the maximum aid intensity of 75% might be exceeded within the scope of the GBER II only for investments made wih regard to SMEs in outermost regions. Apart from that, the GBER II provides that in case of an own contribution of less than 25% the aid has to be reduced in order to meet this ratio of 25%. The further regulation in Article 13 para. 6 sentence 3 GBER I was purely declaratory and has thus been deleted in the GBER II. 127 With this provision No. 93 Regional Guidelines 2013 has been adopted. 128 This provision goes back to considerations in No. 80 and 81 Regional Guidelines 2006. Especially the rules on direct costs for operation and transport in Regional Guidelines 2013 do not provide for similar provisions. 129 This provision, aiming at the economic, social and environmental challenges in urban areas, is totally new. As to this see in particular recital 38 GBER II. 130 Insofar, like with aid measures pursuant to Article 14 GBER I, the aid is considered an operating aid. 131 By determinating the maximum aid intensity in cases of granting of loans, the Commission has taken from the Member States the power to calculate the grant equivalents and to define the conversion factors. In relation between a non-repayable grant and a loan at market interest rates this factor is 2.5. Accordingly, the Gross Grant Equivalent (GGE) of a non-repayable grant of 400 TEUR equals the grant of a loan of 1 Mio. EUR at market interest rates with a duration of 10 years. Is the duration period only

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15 Art. 13–16

IV

Commission Regulation (EC) No 800/2008 new132

lit. b) lit. c)

para. 3 lit. a), b) new133 new134

para. 4 para. 5

new135

Article 56

E. Synopsis of Guidelines on regional State aid for 2007 and 2014136 I. RAG 2007 to RAG 2014 Guidelines on national regional aid for 2007–2013 (Regional Aid Guidelines 2007 – RAG 2007) (OJ 2006 C 54/13) Para. 1 sent. 1

15

Guidelines on regional State aid for 2014–2020 (Regional Aid Guidelines 2014 – RAG 2014) (OJ 2013 C 209/1) Para. 1 sent. 1

five years the factors has doubled to 5; in this case the loan at market interest rate could be as much as 2 Mio. EUR. 132 For guarantees with premiums, which are not conform with market conditions, the conversion factor for the Gross Grant Equivalent (GGE) between a non-repayable grant and a guarantee with a duration of 10 years and a maximum credit coverage of 80% amounts to 3.75. For a guarantee period of only 5 years the conversion factor woud be 7.5. This means that for a GGE of one million EUR a guarantee for 3.75 Mio. EUR could be granted for the duration of 10 years limited, however, to a maximum of 80% of the credit guaranteed. Accordingly, the maximum guarantee for a credt with a 10 years duration is 4.6875 Mio. EUR. In case of a GGE of one Mio. EUR and a duration of only 5 years, the credit guaranteed with 80% is doubled up to 9.375 Mio. EUR. 133 Insofar this is a cumulation rule solely based on calculation considering all the mentioned aid instruments with their weighted GGE as equivalent and therefore interchangable. 134 Article 2 No. 80 GBER II provides for a definition of “innovative”. The provision contained in Article 35 GBER I has been abandoned. Despite the doubling of the GGE pursuant to Article 22 para. 5 GBER II the maximum subsidy value for innovative enterprises is still below the values granted to newly set up small enterprises. 135 This provision serves the sole purpose both to relieve the Commission of the duty to notify to the Member States and to make further decisions on the basis of its own excessive aid control policy. Article 2 No 33 GBER II gives a more detailed definition of the notion “dedicated infrastructure” in Article 56 para. 7 GBER II. 136 This synopsis is based on the guidelines on national regional aid for 2007–2013, OJ C 54/13 dated 4th of March 2006 (RAG 2007), the Commission Regulation (EC) No. 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty, OJ L 214/3 dated 9th of August 2008 (GBER I), the Guidelines on regional State aid for 2014–2020, OJ C 209/1 dated 23rd of July 2013 (RAG 2014), and the Commission Regulation (EU) No. No 651/2014 dated 17th of June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ L 187/1 dated 26th of June 2014 (GBER II) as well as Commission Communication concerning the criteria for an in-depth assessment of regional aid to large investment projects, OJ C 223/3 dated 16th of September 2009 (Assessment Communication).

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Art. 13–16 15

Commission Regulation (EU) No 651/2014

Guidelines on national regional aid for 2007–2013 sent. 2 clause 1 sent. 2 clause 2 sent. 3 sent. 4 2 sent. 1 sent. 2 clause 1 clause 2 3 sent. 1 sent. 2 4 sent. 1 sent. 2 sent. 3 5 sent. 1 sent. 2 sent. 3 sent. 4 6 sent. 1 sent. 2 7 sent. 1 sent. 2 8 sent. 1 sent. 2 sent. 3 sent. 4 sent. 5 sent. 6 sent. 7 9 10 sent. 1 sent. 2 sent. 3

Guidelines on regional State aid for 2014–2020 sent. 2 deleted deleted137 deleted 30 4 sent. 1 4 sent. 2 3 sent. 1 deleted 2 deleted deleted 5 sent. 1, 25, 26 sent. 2 lit. b), c) sent. 2 sent. 4 sent. 5, 26 sent. 2 lit. f) 6 sent. 2, 43 sent. 2 sent. 3 deleted deleted 8 sent. 2, 10 sent. 1138 10 sent. 1, fn. 11 sent. 3 sent. 1139 9 9 9 18 8 sent. 1140 deleted 53141

137 The until now predominant idea of cohesion (paras. 1 sent. 3; 2 sent. 1; 3; 10 sent. 3 RAG 2007) has faded in the RAG 2014. Merely the expression “inclusive growth in a competitive internal market” in para. 7 lit. a) RAG 2014 lets it shine through, which is again complemented by “objectives of common interest” in paras. 8 sent. 1; 30 RAG 2013. 138 In contrast to para. 8 sent. 1 RAG 2007 the new RAG 2014 do not particularly exclude the coal industry. However, it is caught by the Guidelines on State aid for environmental protection and energy 2014–2020 (OJ C 200/1 dated 28th of June 2014) and this way excluded from the scope of the RAG 2014, para. 11, fn. 14 RAG 2014. 139 Covered are the transport and shipbuilding sectors, para. 8 sent. 4 fn. 9 RAG 2007. 140 The old provision in para. 8 sent. 1 RAG 2007 is replaced by a new one (also para. 8 sent. 1 RAG 2014) heading in a quite different direction: It focuses on the effectiveness of public spending and oversteps State aid law’s competence to only avoid distortion of competition (ineffective public spending barely distorts competition, otherwise those aids would be effective). Furthermore, the new provision discusses objectives of common interest and a more stringent assessment of the incentive effect. 141 The RAG 2014 do not contain express provisions on ad hoc State aids anymore, para. 21 fn. 23 RAG 2014. They are exempted by Art. 3 and 6(3) GBER II. However, they are mentioned in para. 20 lit. b), g), 42 fn. 33, 55, 69 fn. 37, 92 and 141 RAG 2014. Where Member States want to grant individual aid to single firms or confine aid to one area of activity para. 53 RAG 2014 still obliges to demonstrate that the

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Guidelines on national regional aid for 2007–2013 sent. 4 11 Para. 12 13 sent. sent. sent. 14 15 sent. sent. 16 sent. sent. sent. 17 18 19 20 21 sent. sent. 22 23 24 sent. sent. sent.

1 2 3 1 2 1 2 3

1 2 1 2 3

15 Art. 13–16

IV

Guidelines on regional State aid for 2014–2020 deleted 21 Para. 146 deleted 147 sent. 1 deleted142 164143 149 sent. 1 sent. 2 150, 151 lit. a)144 151 lit. a)145 deleted146 20 lit. p)147, fn. 21, 151 lit. b) 148 deleted deleted12 156 fn. 59, 175149 153 sent. 2 sent. 3 deleted 148, 154, 157 162 deleted deleted

project contributes towards a coherent regional development strategy and will not unduly distort competition (formerly laid down in para. 10 sent. 3 RAG 2007). 142 Without the former safety net in para. 14 RAG 2007 the limit for overall population coverage was 45,5 % in the EU-27 including Bulgaria and Romania (para. 13 sent. 3, fn. 15 RAG 2007). 143 Para. 14 fn. 16 RAG 2007 corresponds to para. 147 sent. 2 in conjunction with fn. 52 RAG 2014. Because of the former safety net the actual eligible population coverage already increased during the last subsidy period to 46,6 % in the EU-27. This value still was slightly higher than the current value of 46,53 % in the EU-27 – regardless of the rhetoric amendments to the population ceiling in para. 147 sent. 2 RAG 2014. The Commission has, thus, simply integrated the hitherto used safety net into the value. The new safety net does not increase – other than the old one – the overall population ceiling. 144 Para. 16 sent. 1 fn. 18 RAG 2007 is now found in para. 150 sent. 1 fn. 54 RAG 2014. Para. 16 sent. 1 fn. 19 RAG 2007 reveals DG Competitions’s attitude to sail in the wake of the structural fund support taking the regional aid guidelines 1988 (OJ C 212/2 dated 12th of August 1988) as a basis (see also annotation to para. 16 sent. 3 RAG 2007). 145 Para. 16 sent. 2 fn. 20 RAG 2007 corresponds to para. 151 lit. a) fn. 56 RAG 2014. 146 Para. 150 fn. 55 referring to the RAG 1988 replaces the provision that declares goal 1 regions identical to convergence region with regard to structural funds support and supported regions according to Art. 107(3) lit. a) TFEU as declared by EJC, judgement of 14th of October 1987, case 248/84 (ECR 1987, 4036). The relevant time period for determining the average GDP formerly set out in para. 16 sent. 3 fn. 21 RAG 2007 is now laid down in para. 151 lit. a) fn. 57 RAG 2014. It comprises the period from 2008 to 2010. 147 Para. 20 lit. p) RAG 2014 has also found its way into Art. 107(3) lit. a) second clause. 148 Regions affected by statistical effects are since the 1 st of January 2011 either regarded as genuine assisted areas within the meaning of Art. 107(3) lit. a) TFEU as long as they meet the relevant criteria (GDP per capita below 75 % of the EU-25’s average GDP). If they do not meet these criteria they may still fall under Art. 107(3) lit. c) TFEU (para. 20 RAG 2007). For the new aid period para. 156 fn. 59 RAG 2014 determines the status of those regions formerly affected by statistical effects. 149 See fn. 32 referring to para. 46 RAG 2007.

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Guidelines on national regional aid for 2007–2013 25 sent. sent. sent. 26 27 28 29 30 sent. sent.

1 2 3

1 2 lit. a) lit. b) sent. 1 sent. 2 lit. c) lit. d) lit. e) lit. f) lit. g) lit. h)

31 32 33 34 sent. 1 1. 2. 3. 4. sent. sent. sent. sent.

2 3 4 5

35 36 37 sent. sent. 38 sent. sent.

1 2 1 2

indent indent indent indent

Guidelines on regional State aid for 2014–2020 155 lit. a), 156150 155 lit. a), 156 158 lit. a) 157, 158 lit. b) 155 lit. b), 162, 166 164, 165 lit. b) 152, 159, 166 167, 25, 26 sent. 2 lit. a) 168 158 lit. a), 160 20 lit. w) y), 161 sent. 1, 160, 162, 158 lit. b) 20 lit. y), 160, 161 sent. 2, 168 lit. a), 169 168 lit. b) 168 lit. c) 1st and 2nd indent, 169 168 lit. c) 3rd indent, 169 168 lit. d), 169 168 lit. e), fn. 72; 169 deleted151 170 Para. 20 lit. e), 34 20 lit. e), h) sub-lit. a) 20 lit. h) sub-lit. a) 1. indent 2. indent 3. indent 4. indent 20 lit. x) 99 sent. 1, 2 20 lit. j) 36 fn. 30 sent. 2 20 lit. h) sub-lit. b) sent. 1, 2152 20 lit. e), k)153 57 sent. 1 57 sent. 3 60, 61 26 sent. 2 lit. d); 64; 20 lit. v) sent. 1, 2 clause 2; 69 sent. 1154

150 The new term of ‘predefined “c” areas’ corresponds to the former term of ‘economic development’ regions formerly used in para. 25 fn. 27 RAG 2007 and moreover also covers regions with low population density, para. 158 RAG 2014. 151 Localised regional disparities can only be addressed by para. 168 lit. e) fn. 71 RAG 2014. 152 Para. 20 lit. h) sublit. b) sent. 2 RAG 2014 corresponds to para. 35 fn. 37 RAG 2007. 153 The generation of new jobs was defined in para. 36 fn. 38 RAG 2007. Now this definition – although slightly altered – can be found in para. 20 lit. k) RAG 2014. 154 Starting works prematurely never prejudiced subsidies under the old guidelines (para. 38 sent. 2 and fn. 39 RAG 2007). Paras. 64, 69 sent. 1 RAG 2014 now only allow that for aid schemes. The “start of the

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Guidelines on national regional aid for 2007–2013 sent. 3 sent. 4 sent. 5 39 40 sent. sent. sent. sent. 41 sent. sent. sent. sent. sent. sent. sent. sent. 42 sent. sent. 43

1 2 3 4 1 2 3 4 5 6 7 8 1 2

15 Art. 13–16

IV

Guidelines on regional State aid for 2014–2020 deleted155 69 sent. 1 fn. 37 65 38156 36 and fn. 30 sent. 1157 37 sent. 1 37 sent. 2 36, 37 sent. 3 deleted158 20 lit. m)159 20 lit. f) clause 1 deleted160 20 lit. f) clause 2, lit. d),161 90 sent. 1 162 deleted deleted163 deleted164 Para. 171 sent. 1, 20 lit. a), 26 sent. 2 lit. e) 171 sent. 2, 20 lit. a) deleted165

work” was described in para. 38 sent. 2 fn. 40 RAG 2007, now the definition is laid down in para. 20 lit. v sent. 1 RAG 2014. 155 The obligation to cite the relevant Regulation in the aid scheme – as it is in other provisions such as Art. 3 and 9 GBER 2008 – is no longer applicable. The special reference to tax aid schemes in para. 38 sent. 3 fn. 41 RAG 2007 is therefore obsolete. 156 Para. 39 fn. 42 RAG 2007 explained under which circumstances a financial contribution was free of any public support. Under that provision de minimis aid, which according to Art. 2(1) Reg. 69/2001 (OJ L 10/30 dated 13th of January 2001), Art. 2(1) Reg. 1998/2006 (OJ L 379/5 dated 28 th of December 2006) – now Art. 3(1) Reg. 1407/2013 (OJ L 352/1 dated 24th of December 2013) – is deemed to not constitute aid in the sense of Art. 107(1) TFEU, was public support in the sense of para. 39. This can now be found in para. 38 fn. 32 RAG 2014. At the same time para. 38 fn. 31 RAG 2014 now contains a clarification for the case that the share of financial support exceeds 75 %. In this case the required share of autonomous funding amounts to the difference between the share of public support and the supported sum of investment. 157 The permission to substitute out-dated plants without prejudicing the level of support in para. 36 fn. 30 sent. 1 RAG 2014 was formerly found in para. 40 sent. 1 fn. 43 RAG 2007. 158 Para. 41 sent. 1 RAG 2007 is a shortened version of para. 41 sent. 3–8 RAG 2007 and, thus, redundant. 159 With para. 41 sent. 2 RAG 2007 the Commission gave up its former practice to determine aid in the form of net grant equivalent (NGE) (para. 41 fn. 44 RAG 2007) after the Court of First Instance issued its judgement in the Alzetta case (T-298/97) on the 15th of June 2000. Thus, this provision is no longer necessary and has been adopted merely in the definition of maximum aid intensity in para. 20 lit. m) RAG 2014. 160 Para. 20 lit. f) RAG 2014 does not require a calculation of the gross grant equivalent (GGE) at the time of the award of the aid any more. 161 The until now undefined term ‘time of grant’ (para. 41 sent. 5, 6 RAG 2007) is now defined in para. 20 lit. d) RAG 2014 as ‘date of award of the aid’. 162 This provision is obsolete because the relevant date is always the date of award of the aid. 163 This provision became obsolete with the Communication from the Commission on the revision of the method for setting the reference and discount rates (OJ C 14/6 dated 19 th of January 2008). 164 See above fn. 163. 165 This provision was induced by the EU’s enlargement to the east in 2004 that let the EU-25’s GDP per capita in power purchasing standard as calculated by EUROSTAT fall considerably in contrast to the

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Guidelines on regional State aid for 2014–2020 172, 20 lit. a) 172 lit. c)166 172 lit. b)167 172 lit. a) 173

44 1. indent 2. indent 3. indent 45 46 47 sent. sent. 48 49 50 51 52 sent. sent. 53 sent. sent. 54 sent. sent. 55 sent. sent. 56 sent. sent.

1 2

1 2 1 2 1 2 1 2 1 2 1. indent 2. indent

deleted168 174 lit. b), 20 lit. a) 174 lit. b), 20 lit. a) 176169 176 clause 1, 174 lit. a), b); 20 lit. a) 177, 20 lit. u),170 87 sent. 1 Para. 20 lit. e), x)171 95 99 sent. 1172 sent. 2 98 lit. b) lit. a) 94 99 sent. 3 100 sent. 2 100 sent. 1 101 sent. 1 101 sent. 2 sent. 2 lit. a) lit. b)

former EU-25’s. This statistical effect on hitherto assisted regions that resulted from the accession of a great number of economically weak regions lead to the introduction of ‘statistical effect regions’ in paras. 18–20 RAG 2007, see also para. 156 fn. 59 RAG 2014. 166 These RAG reduced the maximum aid intensity by 5 percentage points from 30 % GGE to 25 % GGE. 167 These RAG reduced the maximum aid intensity by 5 percentage points from 40 % GGE to 35 % GGE. For the rest, this percentage only applies to a GDP per capita above 45 % of the EU-27’s average. Up to and including 45 % the maximum aid intensity still is 50 % GGE, para. 172 lit. a) RAG 2014 as well as French version of para. 172 lit. b) RAG 2014. 168 From paras. 20, 46 RAG 2007 concerning the former statistical effect regions para. 175 RAG 2014 has now been developed. This provision has the same theoretical background as the former paras. 20 and 46: It bases on the idea to only provide half a period of security to assisted regions and then subject them to a mid-term-evaluation. 169 Para. 47 fn. 45 RAG 2007 corresponds to para. 176 RAG 2014. 170 The source found in para. 20 lit. u) fn. 22 RAG 2014 refers to the same SME Recommendation that is annexed to the Regulations mentioned in para. 49 fn. 46 RAG 2007. The reference in para. 49 fn. 47 RAG 2007 (‘These bonuses do not apply to aid awarded in the transport sector.’) is redundant as para. 10 sent. 1 RAG 2014 excludes the transport sector. Aids to large investment projects are nevertheless exempt from SME bonuses, para. 67 sent. 1 fn. 61 sent. 2; para. 60 sent. 1 RAG 2007 on the one hand and para. 177 fn. 76; para. 20 lit. l) RAG 2014 on the other hand. 171 Para. 50 fn. 48 RAG 2007 is not applicable any more with respect to para. 10 sent. 1 RAG 2014 excluding the transport sector. 172 Para. 52 sent. 1 fn. 49 RAG 2007 corresponds to para. 99 sent. 4 RAG 2014. Para. 52 sent. 1 fn. 50 equals paras. 20 lit. e), 90 sent. 2, and 103 RAG 2014.

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Guidelines on national regional aid for 2007–2013

IV

Guidelines on regional State aid for 2014–2020 lit. c) 102 103 sent. 1173 20 lit. k) 103 sent. 2 clause 1 clause 2

3. indent 4. indent 57 58 59 sent. 1 sent. 2 Para. 60 sent. 1 sent. 2 61 62 63 64 sent. 1 sent. 2 65 66 67 sent. 1

15 Art. 13–16

Para. 20 lit. l) lit. t),174 89 sent. 1 90 sent. 2, 91 deleted175 188 sent. 1161 23 clause 1 fn. 25, 20 lit. n) 20 lit. n) 193176 194177 86178

173

The definition of wage costs is found in para. 57 fn. 51 RAG 2007 and in para. 20 lit. z) RAG 2014. Para. 60 sent. 2 fn. 55 RAG 2007 explaining the concept of a single investment project has been replaced by a whole different approach. Until now it has been the goal to detect an economically indivisible project first and foremost through actual physical links (i. e. pipelines, cableways, direct rail connections or belt conveyers) and proximity. In the course of time and with every new provision the Commission has been trying to focus on spatial scope defined as spatial proximity. Coming from the concept of an overall project in the automobile industry with the plant being grouped around its suppliers, it was held to suffice for them being in the same municipality or even five or more kilometers apart. For the time being, this development of an ever wider definition of a single investment project culminates in para. 20 lit. t) RAG 2014: To constitute a single large investment project it is sufficient that an undertaking belonging to the same group of companies has invested during the last three years in the same NUTS 3 region as the applicant. In this case, the respective investment sums of the two undertakings are reckoned so that the maximum aid rates are determined on the basis of the added, possibly adjusted investment sum according to para. 20 lit. c) RAG 2014. 175 Paras. 62, 63 RAG 2007 referred to the preceding provisions in the multisectoral framework on regional aid 1998 (OJ C 107/7 dated 7th of April 1998) and of 2002 (OJ C 70/8 dated 19th of March 2002, amended by OJ C 263/1 dated 1st of November 2003). Those already expired with the implementation of the RAG 2007. Paras. 62 and 63 RAG 2007 are therefore outdated and not applicable. 176 Para. 65 RAG 2007 deals with cases in which individual non-notifiable aid has been granted to large investments (projects with an investment volume of up to 100 million EUR) on the basis of an existing aid scheme. In those cases Member States had to send a notice to the Commission based on a particular form which the Commission then would publish through its websites. Up to this level of investment Art. 6(2) GBER I and Art. 4(1) lit. a) GBER II declare adjusted regional aid within the meaning of Art. 6(2) GBER I and Art. 2 No. 20 GBER II to be compatible with the internal market. They, thus, do not fall within the scope of the RAG 2014 in the first place. Aids exceeding that volume have to be notified in any case (para. 23 clause 1 RAG 2014). Now, the Commission has not, however, repealed those notification duties, but tightened them: According to para. 192 RAG 2014 all individual aids above 3 million EUR have to be notified within 20 working days of award. 177 The Commission has also tightened its reporting and monitoring framework: In the future, Member States have to maintain detailed records of all aid measures for ten years. 178 Para. 86 RAG 2014 prominently states that aids to large investment projects (i. e. above 50 million EUR, see para. 20 lit. l) RAG 2014) have to be cut down (see already para. 67 sent. 1 clause 1 RAG 2007). Para 67 sent. 1 clause 2 RAG 2007 presents the abstract result of the calculation procedure laid down in para. 67 sent. 2 RAG 2007 in a manner broadly understandable. This table, first included in para. 21 of the multisectoral framework on regional aid 2002, marked the starting point of a transparent reduction mechanism that was subsequently transformed into a formula (para. 22 of the framework) and is still 174

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Guidelines on national regional aid for 2007–2013

Guidelines on regional State aid for 2014–2020 20 lit. c) 20 lit. l), 112 88 sent. 2, 79, 80, 130179 132 lit a), 138 sent. 1 132 lit. b), 133, 136 clause 1, 138 sent. 1

sent. 2 sent. 3 68 sent. 1 lit. a) lit. b) 69 sent. 1 sent. 2 sent. 3 70 sent. 1 sent. 2 71 1. indent 2. indent 72 73 74 75

deleted165 deleted165 138 sent. 2, 130 125, 129165 125, 137 sent. 1165 Para. 92 clause 1 clause 2 91180 4 sent. 2 92 clause 2181 deleted182

valid today. Para. 20 lit. c) RAG 2014 exclusively incorporates this formula. The calculation procedure itself has been regarded dispensable with the view to streamlining the provisions. Para. 67 sent. 1 fn. 61 RAG 2007 (excluding SME bonuses for large investment projects) corresponds to para. 87 sent. 2 RAG 2014. 179 Paras. 68–70 RAG 2007 contained provisions for aids corresponding to an investment amount of more than 100 million EUR. The Commission requested for an assessment of market power depending on whether the aid beneficiary accounted for a share on the relevant product market exceeding 25 % and on whether the aid increased production capacity exceeds 5% of the relevant product market (para. 68 lit. a) RAG 2007). Member States were allowed to prove that although the relevant market shares were met the undertaking had no relevant market power. This was the case with real innovations: In such cases the undertaking accounted for 100 % of the overall turnover on the relevant product markets without holding a dominant market position within the meaning of Art. 102 TFEU (para. 70 sent. 1 fn. 65 RAG 2007). The market power assessment has been quite difficult for the Commission and afflicted with uncertainties for all participants; that especially held true for cases in which the Commission assumed a dominant position, the consequences of which should, however, not be a simple prohibition of aid. Thus, the Commission changed its assessment modalities and introduced ‘Guidance for the in-depth assessment of regional aid to large investment projects’ (OJ C 223/3 dated 16th of September 2009). Those criteria are now to be assessed in all cases, independent of an undertakings market power (see e. g. paras. 40, 41, 42, 48, 50, 51 RAG 2014). For investment aid schemes a comparable provision is found in para. 125 sent. 1 RAG 2014. 180 Particularly para. 72 fn. 67 RAG 2007 corresponds to para. 91 RAG 2014. However, para. 91 clause 2 RAG 2013 obliges the initially occupied granting authority to calculate the maximum level of aid for the project in advance. 181 With the inapplicable obligation to cite the relevant Regulation in the aid scheme the RAG 2014 also dispensed with the obligation to explicitly include provisions on aid cumulation in the national aid schemes. Those were designed to inform potential aid applicants that a cumulation of aids granted on the basis of different aid schemes was only possible to the extent the RAG allowed. In return, the granting authority initially occupied with the project has to calculate the maximum level of aid in advance. 182 The inadmissibility of circumventing the RAG’s aid amounts through de minimis aids is already laid down in Art. 2 para. 5 Reg. 1998/2006 (OJ L 379/5 dated 28th of December 2006), Art. 5 para. 2 sent. 1 Reg. 1407/2013 (OJ L 352/1 dated 24th of December 2013). This provision is, thus, dispensable; the legal concept echoes in para. 107 RAG 2014. According to this provisions the aid intensity must not exceed the allowed adjusted intensity of aid.

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Guidelines on national regional aid for 2007–2013 76 sent. 1 sent. 2 sent. 3 sent. 4 77 78 sent. 1 sent. 2 sent. 3 79 80 1. indent 2. indent 81 82 sent. 1 sent. 2 83 84 85 86 87 88 89 90 91

IV

15 Art. 13–16

Guidelines on regional State aid for 2014–2020 Para. 16 sent. 1 clause 1, 20 lit. q) 16 sent. 1 clause 2, sent. 2 clause 1, 44 44, 56 sent. 1, 108 16 sent. 2 clause 2 109 lit. a), b) clause 1; 45 sent. 2 17 17 140 sent. 2, 3 111, 142183 45 46, 76, 161 sent. 1 16 sent. 2 clause 2184 43, 76 deleted185 192 deleted186 deleted172 deleted172 deleted172 deleted172 deleted172 deleted172 deleted172

183 The principle of degression also applies if aid schemes prolonging existing schemes or new operating aid schemes supposed to substitute old ones are notified: para. 79 fn. 73 RAG 2007, para. 111 fn. 45 RAG 2014. Para. 142 RAG 2014 allows for time limits of aid schemes apart from operating aid. 184 Para. 81 RAG 2007 in its entirety exclusively addressed operating aids compensating for the addition cost of transport in the outermost regions and low population density regions. Those provisions are now in a more general manner integrated into the provision ‘additional costs to pursue an economic activity in an outermost regions or to prevent or reduce depopulation in very sparsely populated areas’ (para. 16 sent. 2 clause 2 RAG 2014). As it already has been the case until now operating aid schemes are not limited to SME. Companies only have to meet the requirements of an SME if operating aids shall be granted to alleviate particular difficulties of SME in general ‘a’ areas. 185 Resulting from para. 107 sent. 3 first indent RAG 2007 and para. 191 lit. a) RAG 2014, the Commission requires regional aids to be limited to the temporal validity of the guidelines in any case. In addition to that, the Commission has bound its approval upon the approval of the regional aid maps, para. 187 sent. 4 RAG 2014. Thus, this provision is dispensable. 186 The section on aids for newly created small enterprises has been deleted without replacement. The Commission had granted newly created enterprises particularly wide option for operating aids, which in general could be seen as expansive de minimis aids of 2 million EUR in ‘a’ areas and 1 million EUR in ‘c’ areas. The RAG 2014 as well as the GBER II have abandoned this form of aid. The GBER I allowed in addition to aids to newly created small enterprises (Art. 14 GBER I) particularly for aids to enterprises newly created by women (Art. 16 GBER I). With Art. 22 the new GBER provide for a substitution – however, with limited grant equivalents. The aid amount has been reduced from 2 million EUR to 0.8 million EUR. Those aids are deemed to be compatible with the internal market. Those cases need not be covered by the RAG 2014 anymore as the RAG only cover notifiable aid (para. 21 RAG 2014). Those provisions were now dispensable.

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Guidelines on national regional aid for 2007–2013 92 93 94 95 96 sent. 1 sent. 2 sent. 3 97 98 sent. 1 sent. 2 99 100 sent. 1 sent. 2 101 sent. 1 sent. 2 sent. 3 102 sent. 1 sent. 2 103 sent. 1 sent. 2 104 sent. 1

Guidelines on regional State aid for 2014–2020 deleted187 deleted188 deleted189 deleted190 Para. 20 lit. r), 145 sent. 2, 3 deleted191 deleted192 179 sent. 2 187 sent. 2193 194 deleted 84 lit. a), 145 sent. 2 Annex III No. 1195 178 sent. 1 179 sent. 1 145 sent. 2, 179 sent. 2 179 sent. 2 145 sent. 2, 3; 178 sent. 2 178 sent. 2196 150, 151, 152197 167, 178 sent. 2 178 sent. 1

187 This provision was designed to alleviate the reduction of aid intensities for ‘a’ areas resulting from their altered calculation on the basis of gross grant equivalent (GGE) instead of the former net grant equivalent (NGE) in para. 41 fn. 44 RAG 2007. This provision, thus, becomes dispensable. 188 This provision was designed to alleviate the reduction of aid intensities for former ‘a’ areas (today: predefined ‘c’ areas, para. 156, 158 lit. a) RAG 2014) resulting from their altered calculation on the basis of gross grant equivalent (GGE) instead of the former net grant equivalent (NGE) in para. 41 fn. 44 RAG 2007. This provision, thus, becomes dispensable. 189 The Commission has done away with the generous interim arrangement for operating aid lasting for two years as it has with all other interim arrangements. 190 The continuity coverage originally contained additional assisted areas population coverage that were not credited against Member States’ general population coverage in assisted ‘c’ areas. It was designed to not jeopardise the attained progress through a sudden rupture in aid opportunities. This possibility has been abandoned in the current aid period. The additional population coverage could only be called on in the years 2007 and 2008. 191 The RAG 2014 do not include provisions covering newly created small enterprises anymore. A provision in context with the regional aid maps is, thus, also dispensable. 192 Regional operating aids always have to be notified as long as Art. 15 GBER II does not exempt them. 193 Art. 2 No. 9, 13(2) and (9), 44(3) GBER I as well as Art. 2 No. 27, Art. 14(12), Art. 58(4) GBER II refer to the relevant regional aid maps. At the time the RAG 2007 entered into force there were neither exempting Regulations for regional aid nor a general block exemption Regulation. Para. 187 sent. 2 RAG 2014 clarifies that an exempting Regulation, for regional aids, also requires for a valid regional aid map. 194 A repetition of other Regulations is dispensable. 195 That the RAG simply allow for a certain maximum amounts of aid to be granted and does not dictate a certain amount goes without saying. Annex II No. 1 clause 2 RAG 2014 also embodies this. 196 With para. 178 sent. 2 and Annex III RAG 2014 Member States have received precise templates which data they are expected to submit. 197 Paras. 150, 151, 152 RAG 2014 show that ‘a’ areas are charted “exogenically” on the NUTS II level, which relieve Member States from justifying the designation of those areas. The inclusion of statistical effect areas has become obsolete with those areas phasing out with the RAG 2007.

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Guidelines on national regional aid for 2007–2013 sent. sent. sent. sent. sent. 105 sent. sent. 106 sent. sent. sent. 107 sent. sent. sent.

sent. 108 sent. sent. sent. sent. sent. 109

2 3 4 5 6 1 2 1 2 3 1 2 3 1. indent 2. indent 3. indent 4 1 2 3 4 5

15 Art. 13–16

IV

Guidelines on regional State aid for 2014–2020 183 sent. 1, 2198 183 sent. 5, 185 183 sent. 6 deleted199 180, 181 sent. 1, 182 Para. 188 sent. 1 sent. 2 189 sent. 1200 sent. 2 deleted201 190 sent. 1 190 sent. 2 191 191 lit. a) deleted202 191 lit. b) 191 lit. c) deleted203 26 lit. g) 141 sent. 1 clause 1204 141 sent. 1 clause 1 sent. 3205 195

198 Para. 104 sent. 2 RAG 2007 called for the mid-term review of ‘a’ areas. This resulted from the additional category of “statistical regions” (para. 18–20 RAG 2007). Para. 183 sent. 1, 2 RAG 2014, however, call for the status of a ‘c’ areas to be reviewed in order to possibly designate new ‘a’ areas. This is the reverse approach, but certainly the more promising one. 199 Due to missing temporary arrangements para. 104 sent. 5 RAG 2007 has become obsolete in the new aid period. For former temporary arrangements see paras. 92–95 RAG 2007. 200 Ad hoc aids granted in the interest of regional development are also regional aids. The distinction the Commission formerly made between ad hoc aids and regional aids has been overcome. Therefore it is not necessary to list ad hoc aids in para. 189 sent. 1 RAG 2014. This, however, leaves the substantive content untouched. 201 The provisions governing newly created small enterprises have been abandoned in the RAG 2014. Thus, a provision in the context of regional aid maps is obsolete. 202 The Community framework for State aid for environmental protection (OJ C 37/3 dated 3 rd of February 2001) has been replaced by Artt. 36–49 GBER 2014 and the Community Guidelines on State aid for environmental protection (OJ C82/1 dated 1st of April 2008) – now replaced by the Guidelines on State aid for environmental protection and energy 2014–2020 (OJ C 200/1 dated 28 th of June 2014). Thus, this provision is also outdated and dispensable. 203 This was a mere opinion, but no legal statement. The text, thus, was dispensable. 204 The note to the linked websites can now be found in para. 141 sent. 1 clause 1 RAG 2014: “retrieving information from several websites”. 205 The new provision in para. 141 sent. 3 RAG 2014 is diametrically opposed to its predecessor: Whereas para. 108 sent. 5 RAG 2007 made the aid condition upon its publication and excluded any costs hitherto incurred from assistance, the new para. 141 sent. 3 RAG 2014 requires publication after the aid has been granted. This may, however, merely by an abbreviated wording. The provision could also intend that merely the granting authority, the aid recipient, the amount of aid, and the aid intensity have to be published after the granting of the aid, whereas the intended aid scheme nevertheless has to be published beforehand. Incidentally, this provision substitutes the obligation to cite formerly laid down in para. 38 sent. 3 RAG 2007.

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II. RAG 2014 to RAG 2014 16

Guidelines on regional State aid for 2014–2020 (Regional aid Guidelines 2014 – RAG 2014) OJ 2013 C 209/1 Para. 1 sent. 1 sent. 2 2 3 sent. 1 sent. 2 clause 1 clause 2 4 sent. 1 sent. 2 5 sent. 1 sent. 2 sent. 3 sent. 4 sent. 5 6 sent. 1 sent. 2 sent. 3 7 8 sent. 1 sent. 2

Guidelines on national regional aid for 2007–2013 (Regional aid Guidelines 2007 – RAG 2007) OJ 2006 C 54/13 Para. 1 sent. 1206 sent. 2 clause 2 4 sent. 1 3 sent. 1 new new 2 sent. 2 clause 1 clause 2; 73 5 sent. 1 sent. 2 new207 5 sent. 3 5 sent. 4208 new209 6 sent. 1 sent. 2 new210 new211 8 sent. 1

206 The terms ‘a’ area and ‘c’ area used in para. 1 fn. 1 are defined in para. 150, 151 RAG 2014 and para. 153, 154 RAG 2014, respectively. 207 Regarding large investment projects, a similar conclusion was already drawn in para. 68 clause 2 RAG 2007 as well as in para. 4 and para. 7 sent. 4 of the Communication from the Commission concerning the criteria for an in-depth assessment of regional aid to large investment projects (OJ 2009 C 223/3; “the Assessment Communication”). Para. 5 sent. 3 fn. 4 RAG 2014 corresponds to para. 5 sent. 3 fn. 5 RAG 2007. 208 Para. 5 sent. 5 fn. 5 RAG 2014 corresponds to para. 5 sent. 4 fn. 6 RAG 2007. 209 See also para. 14 sent. 1 and para. 21 sent. 2 of the Assessment Communication. 210 Considering this purpose of State aid Modernisation (“SAM”), the principle of cohesion, which was embodied in para 2. sent. 1 and para. 3 RAG 2007, has become less important although it is still mentioned in provisions like para. 26 lit. b), para. 30 sent. 2 and para. 117 sent. 3 RAG 2014. 211 The European Commission’s concept to improve the effectiveness of public spending is unlawful and violates fundamental principles of State aid law. State aid law does not serve a fiscal purpose, but is an instrument of competition policy alone. In the context of State aid law, it is therefore irrelevant if state resources are spent efficiently. State aid law only has to answer the question if public spending distorts competition. An entirely inefficient aid programme may lead to a significant waste of public money, but may have no effect on competition. State aid law does not serve the public budget. Thus, all considerations of the European Commission to improve the effectiveness of public spending, e. g. through focussing State aid on goals of common interest, assessing the incentive effect more restrictively, or limiting State aid to the necessary minimum, must be considered unlawful. The relevant standard for assessing State aid can only be its effect on competition, see also German Bundesrat, Decision of 23 September 2005, BR-Drs. 509/05 regarding the State Aid Action Plan (“SAAP”) as well as German Bundesrat, Decision of 6 July 2012, BR-Drs. 277/12 and the corresponding answer of the European Commission of 26 March 2013.

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Guidelines on regional State aid for 2014–2020 Para. 9 10 sent. 1 sent. 2 sent. 3 11 12 13 14 15

16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 Para. 8 sent. 5–7 sent. 1212, 2213, 4214; 50 fn. 48 sent. 3 new new215 new216 new217 new218 new219

212 Deviating from para. 8 sent. 1 RAG 2007, para. 10 sent. 1 RAG 2014 does not expressly exclude the coal industry. According to para. 13 of the Guidelines on State aid for environmental protection and energy 2014–2020 (OJ 2014 C 200/1), this sector is now considered being part of the energy industry and thus excluded from RAG 2014 according to para. 11. fn. 14 RAG 2014. 213 Para. 10 sent. 1 fn. 11 RAG 2014 corresponds to para. 8 sent. 2 RAG 2007. In addition, para. 10 sent. 1 RAG 2014 also excludes aquaculture from the scope of application of RAG 2014. 214 Deviating from para. 8 sent. 4 fn. 9 RAG 2007, the RAG 2014 also cover shipbuilding according to para. 10 sent. 1 fn. 9 RAG 2014. The transport sector, which has already been excluded from the application of the RAG 2007 according to para. 8 sent. 4 clause 9 RAG 2007, remains excluded according to para. 10 sent. 1 clause 2 RAG 2014. It is defined in more detail in para. 10 sent. 1 clause 2 fn. 12 RAG 2014. Particularly, it includes the transport of passengers or freight by inland waterway. 215 The exclusion of airports and the energy sector is new. It is based on the European Commission’s altered understanding of support for infrastructure investments. 216 This provision has no precedent in previous RAG. In order to promote the development of broadband networks, the Commission deviates from its general restrictive approach and expressly allows regional investment aid for this particular infrastructure. 217 Research infrastructures are treated in the same way as broadband networks, see the previous footnote. In this regard as well, the Commission has modified its former approach (see for example para. 2 RAG 2007), and now allows regional investment aid for research, development and innovation as long as it is limited to necessary infrastructure. 218 This provision describes in five sentences four particular strengths of large undertakings, i. e. undertakings that do not meet the criteria of the Commission’s Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (“the SME Recommendation”). With this illustration, the Commission contradicts its previous argumentation: before the RAG 2014 were adopted, the Commission considered large undertakings the benchmark, see for example section 4.1.2, para. 42, 43, 44 RAG 2007. SMEs were considered disadvantaged and could be supported with additional bonuses, see para. 49 RAG 2007. Such bonuses can still be granted to SMEs according to para 87 sent. 1, 177 RAG 2014, but other undertakings are now generally considered worthy for aid. This can be derived primarily from para. 15 RAG 2014. According to this provision, the Commission doubts that regional aid for large undertakings has an incentive effect. 219 Together with para. 14 RAG 2014, this provision shows the Commission’s distrust against large undertakings. The Commission questions the incentive effect of regional aid for large undertakings, and restricts their eligibility for aid in “c areas” to only a few enumerated cases: initial investments that create new economic activities in these areas; and the diversification of existing establishments into new products or new process innovations. A definition of eligible initial investments in favour of new economic activity can be found in para. 20 lit. i) RAG 2014. This definition is more restrictive than previous definitions; for example, it does not cover growth investments or fundamental changes of the production process. The previously universal definition of initial investments can still be found in para. 20 lit. h) RAG 2014. It should be noted in this context that the relationship between para. 15, alt. 2 RAG 2014 (diversification) and para. 20 lit. i) sub-lit. a) tiret 2 RAG 2014 and para. 24 RAG 2014 is ambiguous. Diversification as it is defined in para. 20 lit. i) RAG 2014 includes the development of new products, which is also addressed in para. 15 alt. 2 RAG 2014. Although an incentive effect is presumed for these cases according to para. 15 RAG 2014, para. 24 RAG 2014 subjects them to the notification obligation pursuant to Art. 108(3) of the Treaty. On the other hand, initial investments of large undertakings in favour of new economic activity in “c areas” are exempted by Art. 14(3) sent. 3 GBER II. This includes diversification as addressed in para. 15, 20 lit. i) and 24 RAG 2014.

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16 sent. 1 sent. 2 17 18 19 Para. 20 lit. a) lit. b) lit. c) sent. 1 sent. 2 lit. d) lit. e) lit. f) lit. g) lit. h) lit. a) lit. b) sent. 1 sent. 2 lit. i) lit. a)

76 sent. 1 sent. 2 and 4, 81220 78 sent. 1, 2 9 new221 Para. 42–48 new222 67 sent. 2 clause 1 clause 2 41 sent. 5, 6223 33, 34, 36, 50, 52 sent. 1 fn. 50 41 sent. 3, 5224 new225 34 sent. 1 sent. 1 tiret 1–4 35 35 fn. 37 34 sent. 1 tiret 1 and 3226

220 Para. 81 RAG 2007 addressed operating aid for partly compensating additional transport costs in low population density regions or outermost regions. Under the RAG 2014, such aid can be exempted in accordance with the criteria laid down in para. 16 sent. 2 RAG 2014 to prevent or reduce depopulation in very sparsely populated areas. According to para. 20 lit. y) RAG 2014, very sparsely populated areas are NUTS 2 regions with less than 8 inhabitants per km2. This correspond to the previous definition of low population density regions in para. 30 sent. 2 lit. b) RAG 2007. For a further differentiation of these areas see para. 20 lit. w), y) RAG 2014. 221 Deviating from para. 12 of the Commission’s Notice “Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid” (OJ 2007 C 272/4, “the Recovery Notice”), the Commission is henceforth determined to take account of outstanding recovery orders following previous Commission decisions when assessing additional State aid. In this regard, the Commission relies on the Court of First Instance’s joint Cases T-244/93 and T-486/93 of 13 September 1995, [1995] ECR II-2265. In these cases, the Court only abstained from a subtraction because the new (lawful) aid was valued lower than the aid to be recovered. 222 The RAG 2007 did not contain a definition of ad hoc State aid. Such a definition could be found, however, already in Art. 2 para. 1 lit. d) of the Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid (OJ 2006 L 302/29, “Regional aid exemption Regulation”), Art. 2 No. 4 GBER I and Art. 2 No. 17 GBER II. 223 The “time of grant” (para. 41 sent. 5, 6 RAG 2007), which had not been defined so far, is now defined in para. 20 lit. d) RAG 2014 as the “date of award of the aid”. So far, this date has rarely been relevant. Instead, for individual aid that had to be notified, it was the date of the notification with the Commission that mattered, see para. 41 sent. 4 RAG 2007. 224 Para. 20 lit. d) RAG 2014 no longer requires that GGE for notifiable aid are to be calculated for the time of notification. 225 The RAG 2007 did not define individual aid. However, such a definition can be found in Art. 2 No 3 GBER I as well as in Art. 2 No 14 GBER II. 226 An initial investment in a favour of new economic activity (cf. Art. 2 No 51 GBER II) precludes extension investments or fundamental changes in the overall production process of an existing establishment from being eligible for aid under the RAG 2014. Moreover, according to the diversification requirement in para. 20 lit. i) sub-lit. a) tiret 2 RAG 2014, the new activity must not be the same or a similar activity to the activity previously performed in the establishment. This is determined according to para. 20 lit. s) RAG 2014 and means that the activity must not fall under the same four-digit numerical code of the NACE Rev. 2 statistical classification of economic activities. The use of the term “production”

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35227 34 sent. 4 36 fn. 38; 58 60 sent. 1; 67 sent. 3 and fn. 54 41 sent. 2 64 sent. 2 58 sent. 1 fn. 52228 17 76 sent. 1 34 sent. 4, fn. 36; 76 sent. 2 fn. 69; 77 fn. 71229 96 sent. 1 new230 60 49 38 38 new232 30

sent. sent. sent. sent.

2 fn. 55231 1 clause 1 fn. 46 2 fn. 40 2 fn. 40

sent. 2 lit. b) sent. 1, 80 tiret 2 sent. 2 34 sent. 2; 50 30 sent. 2 lit. b) sent. 1 clause 1 57 fn. 51

lit. x) lit. y) lit. z) Para. 21 22

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lit. b) lit. j) lit. k) lit. l) lit. m) lit. n) lit. o) lit. p) lit. q) sent. 1 sent. 2 lit. r) lit. s) lit. t) lit. u) lit. v) sent. 1 sent. 2 sent. 3 lit. w)

16 Art. 13–16

Para. 11233 8 sent. 1 clause 1234

(para. 20 lit. h) sub-lit. a), 15, 24 RAG 2014) instead of “activity” (para. 20 lit. i) sub-lit. a) tiret 2 RAG 2014) goes back to the system of classifying economic activities. 227 The acquisition of the assets belonging to an establishment that has closed or would have closed if it had not been purchased is likewise only considered an initial investment in favour of new economic activity if the requirements described in the previous footnote are met. 228 See also Art. 5 Annex of the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ 2003 L 124/36). 229 The definition corresponds to the definition in Art. 2 no. 42 sent. 2 GBER II. The RAG 2007 only listed some examples of operating aid in the mentioned footnotes 36, 69 and 71. 230 The four-digit numerical codes of the NACE Rev. 2 statistical classification of economic activities basically correspond to the German statistical classification of economic activities published by the German Federal Statistical Office (“Statistisches Bundesamt”). 231 The terms “single investment project” and “economic indivisibility” were so far interpreted on a factual basis i. e. taking into account the technical, functional and strategic links and the immediate geographical proximity of several investments. Following its decision Deutsche Solar in Freiberg of 16 July 2008, C 34/2008, ex N 170/2008, the Commission now abandons this approach. See also fn. 174 above. 232 The relevant point in time is the transfer of property, if construction or other important works are not conducted earlier. 233 This provision refers to the provisions of GBER I and GBER II. The announced exemption of ad hoc State aid (para. 21 fn. 23 RAG 2014) was implemented in Art. 3 GBER II in connection with the provisions in Chapter III of the GBER II. 234 The RAG 2014 are applicable to all State aid schemes and individual aid (based on schemes or ad hoc) that do not fall into the scope of an exemption regulation. Thus, the RAG 2014 only apply to notified and notifiable State aid.

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23 1. HS 2. HS 24 Para. 25 26 sent. 1 sent. 2 lit. a) lit. b)

64 sent. 1 new235 new236 Para. 30 sent. 1, 5 sent. 1237 new238 30 sent. 1239 5 sent. 1240

235 The phrase “same or similar activity” is defined in para. 20 lit. s) RAG 2014. Please refer to the annotations on this provision and para. 20 lit. i). The newly introduced para. 23 aims to prevent the promotion of relocation investments. 236 This corresponds to para. 15 clause 2 RAG 2014. According to this provision, the Commission holds the opinion that State aid to large undertakings in “c areas” do not have an incentive effect in the sense of para. 60 RAG 2014. The relationship between para. 15 alt. 2 RAG 2014 (diversification) and para. 20 lit. i) sub-lit a) tiret 2 and para. 24 RAG 2014, as well as between these provisions and Art. 14 para. 3 sent. 3 GBER II is ambiguous. 237 Art. 107 TFEU sets out the main elements for assessing the compatibility of State aid with the internal market. These do not foresee a balancing between positive and negative effects. Instead, it must be asked if competition is distorted and if trade between the Member States is affected. Furthermore, both effects must be appreciable. If competition and trade on the common market are not appreciably affected, a relevant criteria for illegal aid is missing. This is the dogmatic justification for deminimis grant; no official approval is required. The Commission’s approach, however, does not satisfy these principles of Art. 107 TFEU. The Commission seeks to assess less the effects of State aid on competition and trade, but rather its efficiency. Thus, it applies a fiscal perspective, which is not compatible with the nature of State aid law as an instrument of competition policy. Nothing else can be derived from Art. 107(3) TFEU. Art. 107(3) lit. c) and d) TFEU expressly state that State aid can be granted for certain purposes only if it does not adversely affect trading conditions (lit. c) or trading conditions and competition in the Union (lit. d) to an extent contrary to the common interest. Thus, it does not matter how positive and negative effects are weighed against each other. Instead, it must be assessed which distortion competition and trade can tolerate. Only after this question has been answered for the relevant sectors (possible different for different sectors), it can be determined if a particular aid appreciably distorts or threatens competition or trade. This requires an assessment of the concerned individual markets as it also had to be conducted according to previous frameworks like the Community Framework for State aid to the motor vehicle industry (OJ 1997 C 279/1), the Code on aid to the synthetic fibres industry (OJ 1996 C 94/11), or the Community guidelines on State aid to maritime transport (OJ 1997 C 205/5). However, in its new guidance, the Commission does not deal with this question, but resorts to an instrument that is not covered by the European State aid law: a comparison between positive and negative effects of State aid. Thus, the Commission imposes a construct of ideas which in its nucleus is incompatible with the European State aid law. Particularly with regard to State aid according to Art. 107(3) lit. a), b) and e) TFEU, there is no justification for the Commission’s new approach in the Treaty. In any case, regional aid must be targeted at compensating disadvantages, see e. g. para. 14 sent. 1, 16, 61 lit. b), 84 lit. a), 110, 117 sent. 3 or 153 sent. 3 RAG 2014. 238 With its State Aid Action Plan “Less and better targeted State aid: a roadmap for State aid reform 2005–2009” (COM[2005] 107 final), the Commission already tested a similar approach. For further information see in particular the statement of the German Bundesrat of 29 September 2005 (BR-Drs. 509/ 05) concerning the State aid Action Plan, and of 6 July 2012 (BR-Drs. 277/12) concerning the Commission’s Communication on EU State Aid Modernisation (SAM). The Commission’s reply to BRDrs. 277/12 of 26 March 2013 is also insightful. 239 All exemptions of Art. 107(3) are considered goals of common interest. 240 Until now, not a single case has emerged in which regional aid was justified with market failure. Already from a theoretical point of view, such a reasoning cannot be persuasive. If a region has fewer jobs or undertakings or if its GDP is lower than the average, this is primarily market-driven. Such disadvantages may be caused by a too small workforce, insufficient infrastructure, a lack of resources, or similar reasons. This, however, is market and not market failure. On the other hand, it is also a question of cohesion, which is rightly expressed in para. 26 sent. 2 lit. b alt. 2 RAG 2014.

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Para. 30 31 32 33 sent. 1

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Guidelines on national regional aid for 2007–2013 5 sent. 1241 38 sent. 1 42 sent. 1242 30 sent. 1, 68243 108 sent. 2

lit. c) lit. d) lit. e) lit. f) lit. g) 27 28 29

16 Art. 13–16

new244 new245 new111 Para. 2 sent. 1246 new247 new248 16 sent. 1 Assessment Communication249

241 The compatibility of State aid with the internal market is to be assessed according to the question “How much aid can be tolerated by the market until it is affected, i. e. distorted?”. In contrast, it is irrelevant if the aid is an effective instrument to achieve a certain goal. Furthermore, regional aid must always be targeted at compensating disadvantages. The aid is therefore by its nature limited to compensate a certain handicap at a certain location. It is also irrelevant what kind of State aid (e. g. grant, interest subsidy, load, guarantee) is granted. Every State aid can be converted to gross grant equivalents (GGE). Thus, they are interchangeable. 242 Regional aid is considered adequate if it does not contain more gross grant equivalents than are necessary for compensating regional disadvantages. 243 As already explained with regard to previous lit. of para. 26 sent. 2 RAG 2014, regional aid is always targeted at compensating regional disadvantages. Such disadvantages must not be over-compensated. There is no need for balancing the positive and negative effects of market intervention. Either, competition and trade can tolerate such intervention, or they cannot. It is not plausible that the same intervention distorts competition and trade in one case, but can be tolerated in another. Appropriate criteria therefore are “overproduction”, “structurally shrinking market” and the appreciability of competition and trade distortions. 244 This provision corresponds to para. 142 RAG 2014. With these provisions, the Commission again shortens the validity of approved State aid. It thus deviates from its prior approach to approve State aid for the whole term of the RAG, as far as the rules themselves remain unchanged. For a different approach see para. 175 RAG 2014. 245 Citing relevant cases of the ECJ, paras. 28 and 29 RAG 2014 recall the legal finding that State aid can only be considered compatible if it does not violate other provisions of the Treaty. 246 This declaration incorporates the now adopted strategy “Europe 2020”. 247 By demanding the integration of regional aid into the wider regional development strategy, the Commission opens the way for influencing the European State aid law through other policy areas. 248 One possibility for influencing the European State aid law through other policy areas is the creation of high-level “strategy shells” like the strategy “Europe 2020”. As can be seen from para. 33 RAG 2014, the Commission can use such loop ways to assume significant competences. For instance, State aid shall only be considered compatible with the internal market without major administrative burden if it is embedded in an operational programme funded by the Cohesion Fund. If this requirement is not met, however, the Member State has to overcome severe obstacles like proving the measure’s coherence, conducting evaluations and impact assessments, commissioning expert opinions and creating evaluation sheets for prioritising measures, and others. 249 For assessing large investment projects according to para. 68 RAG 2007, the Commission has issued its Communication concerning the criteria for an in-depth assessment of regional aid to large investment projects (OJ 2009 C 223/3, “the Assessment Communication”). This communication was designed for thoroughly assessing regional aid to large investment projects if the aid beneficiary accounts for more than 25 % of the sales of the product(s) concerned on the market(s) concerned, or the production capacity created by the project exceeds 5 % of the market, while the growth rate of the market concerned is below the EEA GDP growth rate, see para. 6 of the communication. Para. 33 sent. 1 RAG 2014 draws

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33 sent. 2 33 sent. 3 34 sent. 1 sent. 2 35 36 37 sent. 1 sent. 2 sent. 3 38 39

new250 33 33251 252 new 40 sent. sent. sent. sent. 39254 new255

1 and 4, 34 sent. 5253 2 3 4

elements from paras. 11 sent. 1, 12 sent. 2 and 50 sent. 2 of the Assessment Communication. The concept of joining regional policy through structural funds and state aid control has been abandoned already with the repeal of the Multisectoral framework on regional aid for large investment projects (OJ 2002 C 70/8) through the RAG 2007. According to para. 25 of the Multisectoral Framework 2002, it was possible to increase the maximum allowable aid intensity of major projects by the factor 1,15, if they were cofinanced at an amount of at least 10 % of the total public expenditure from structural funds resources. This option was dropped again with the RAG 2007. 250 With para. 33 RAG 2014, the Commission enabled itself to control Member States’ subsidy strategies through policy areas where it has a stronger role. Thus, the Commission can work towards aligning those strategies to its own (varying) policy goals without having to change the State aid law. See also para. 35 sent. 1 RAG 2014. For broadband network infrastructure the aid beneficiary must be selected on the basis of a competitive selection process in accordance paragraph 78(c) and (d) of EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks (OJ 2013 C 25/1 – Broadband Guidelines), para. 33 Fn. 28 RAG 2014. 251 Para. 34 sent. 2 RAG 2014 significantly restricts the eligibility of initial investments in “c areas” compared with previous provisions: for instance, large undertakings may only be supported if their initial investments are in favour of new activity in the sense of para. 20 lit. i) RAG 2014. Under the RAG 2014, however, large undertakings cannot receive aid for extending the capacity or fundamentally changing the overall production process of an existing establishment. The same rules are in force, if large undertakings apply for aid for acquiring assets directly linked to an establishment that has closed or would have closed if it had not been purchased, see annotation to para. 20 lit. i) RAG 2014. 252 This provision corresponds to para. 33 RAG 2014. Please see the annotation there. 253 It is self-evident that outdated or defective plant or equipment may be replaced during the three or five year minimum period. However, the economic activity in the region concerned may not be interrupted, see para. 40 sent. 1 fn. 43 RAG 2007 and para. 36 fn. 30 sent. 1 RAG 2014. Furthermore, the replacement of outdated or defective plants must not be supported with regional aid, see para. 34 sent. 5 RAG 2007 and para. 36 fn. 30 sent. 2 RAG 2014. Aid for such replacement would constitute operational aid, cf. para. 77 fn. 71 RAG 2007. 254 The 25 % own contribution requirement does not apply to investment aid granted for investments in outermost regions where the maximum aid intensities can exceed 75 % GGE and go up to 90 % for SMEs in accordance with para. 173 RAG 2014, see para. 38 fn. 31 RAG 2014. The provision provides clarification. Examples of public support that cannot be credited against the 25 % share are set out in para. 40 sent. 1 fn. 42 RAG 2007 and para. 38 fn. 32 RAG 2014. 255 This new provision is in itself illogical: State aid measures as such cannot cause environmental harm, this is utterly impossible. Environmental harm can only be caused by supported projects, i. e. buildings, production facilities and their operation. There is no plausible connection between environmental impact assessments and State aid, which is essentially a form of financing. Ensuring compliance with other legal frameworks relevant for the respective project is not a matter of State aid control. The financing body cannot be responsible for ensuring compliance with all kinds of legal frameworks. It is not a “superrevision authority”. If other bodies applied the same approach, e. g. approved environmental compatibility only if the financing had been demonstrated as well, the relevant parties would obstruct each other. Thus, the provision was phrased to broadly.

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Guidelines on regional State aid for 2014–2020 Para. 40 sent. 1 sent. 2 lit. a) lit. b) lit. c) lit. d) sent. 1 sent. 2 sent. 3 lit. e) lit. f) lit. g) 41 42 43 sent. 1 sent. 2

16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 Para. 14 sent. 1 Assessment Communication256 sent. 2 Assessment Communication257 tiret 1 Assessment Communication tiret 2 Assessment Communication tiret 3 Assessment Communication tiret 4 sent. 1 Assessment Communication sent. 2 Assessment Communication new258 5. Tiret Assessment Communication 6. Tiret Assessment Communication 7. Tiret Assessment Communication 15 sent. 2 Assessment Communication 12 sent. 2 Assessment Communication259 Para. 82 sent. 1260 6 sent. 1261

256 Para. 40 RAG 2014 extends the requirements of the Assessment Communication, which otherwise apply only to undertakings in the sense of para. 68 lit. a) and b) RAG 2007, to all notifiable individual investment aid irrespective of the beneficiary’s market position. 257 The criteria listed in para. 40 sent. 2 RAG 2014 basically correspond to those in para. 14 sent. 2 of the Assessment Communication (OJ 2009 C 223/3). 258 Para. 14 sent. 2 tiret 4 sent. 3 to 6 of the Assessment Communication contained a description of positive cluster effects: exchange of information, knowledge and ideas, a large pool of workers, safe access to legal and commercial services, an increased productivity and positive spillover effects. This description has been dropped from para. 40 sent. 2 lit. d sent. 3 RAG 2014 in favour of a more general statement. This creates leeway for approving State aid. 259 For ad hoc aid it must also be demonstrated that the project is coherent with the development strategy (e. g. the operational programme) of the area concerned and contributes towards this strategy. The new provisions relies on principles first set out in para. 12 sent. 2 of the Assessment Communication, but extends them by the element “is coherent with and contributs towards the development strategy of the area concerned”. The development strategy can be found either in the operational programme, which may have been approved by the Commission according to its structural funds policy, or in the national strategic reference framework, see para. 16 sent. 1 of the Assessment Communication. 260 The provision is inaccurate: clearly identifying the challenges facing an area will not lead to promoting the development of that area with operating aid schemes. A number of further elements are missing. Some of them are listed in para. 43. sent. 2 RAG 2014. Thus, para. 43 sent. 1 RAG 2014 does not have any legal effect by itself. 261 With regard to operating aid schemes, para. 43 sent. 2 RAG 2014 is closely related to the general provisions regarding operating aid in para. 6 sent. 1 RAG 2007 and para. 6 sent. 2 RAG 2014.

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Guidelines on national regional aid for 2007–2013 76 sent. 2 and 3262 80 1. Tiret 77 80 2. Tiret

44 45 sent. 1 sent. 2 46 Para. 47 sent. 1 sent. 2 sent. 3 48 sent. 1 sent. 2 49

new263 new264 new265 Para. 13 sent. 1266 sent. 3267 268 new

Para. 50 sent. 1 sent. 2

new269 Para. 18 sent. 1 Assessment Communication270

262

Para. 44 RAG 2014 restricts the eligibility of operating aid to support SMEs in “a areas”. With regard to para. 49 RAG 2014, para. 47 RAG 2014 is only relevant for non-designated areas. Thus, a respective analysis should be conducted before granting regional aid. 264 It is no indication of market failure if the market does not improve the regional economic structure. On the contrary, it is a classic market result that some regions perform better than others. It is therefore persuasive that regional aid has so far never been justified with market failure, see annotations to para. 26 sent. 2 RAG 2014. 265 The European State aid law, especially Art. 107 to 109 TFEU, does not serve the finance ministers. The law of subsidy control is a pure instrument of competition policy, as are antitrust law and merger control. State aid law is supposed to protect competition and trade in the internal market. It is not supposed to protect tax payers. “The purpose behind European State aid law is neither the protection of state resources nor their efficient use. To ensure the economical and efficient use of tax money is a highly significant duty of the Member States themselves, which has to be fulfilled through budget law and not through State aid control by the European Commission.”, No. 2 of the Decision of the German Bundesrat of 23 September 2005, BR-Drs. 509/05. 266 As it has already been mentioned with regard to paras. 26 sent. 2 lit. b), 47 sent. 2 RAG 2014, regional aid has not been justified with market failure so far. Even more, it seems almost impossible from a theoretical point of view to imagine a case, in which market failure could justify regional aid. The examples listed in para. 13 sent. 2 of the Assessment Communication, do not constitute specifically regional disadvantages, but could occur in any region: insufficient informations for example are not specifically for a certain region. 267 See above annotation to para. 26 sent. 2 lit. b) RAG 2014. 268 With para. 49 RAG 2014, the Commission confirms that the purpose behind State aid law is to ensure cohesion, i. e. to lump-sum compensate regional disadvantages. 269 Designated areas are always eligible for regional aid. Here, the goal is to globally compensate regional disadvantages. Regional aid can, however, also compensate regional disadvantages in nondesignated areas. Thus, para. 50 sent. 1 RAG 2014 is not so much an actual requirement, but an “anchor” for implementing further restrictions in the future. 270 As it has already been mentioned with regard to para. 26 sent. 2 lit. b), 47 and 48 RAG 2014, the decisive question is not “How much State aid is needed to achieve a certain goal?” but “How much State aid can be tolerated by the market before competition and trade are appreciably affected?”. Even more misguiding and therefore illegitimate is it to differentiate between different kinds of aid instruments on the basis of their nature. All State aid can be converted to gross grant equivalents (GGE). GGE provide a uniform standard for assessing the aid intensity of the respective instruments like direct subsidies, interest subsidies, loans, investments and guarantees. Only investment aid and operational aid have to be distinguished. Both are different kinds of aid instruments with very different purposes. Operational aid must be thoroughly assessed as regards their suitability for helping disadvantaged regions back on their feet. 263

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17 sent. 1 Assessment Communication sent. 2 Assessment Communication

sent. 2

sent. 55 56 sent. sent. 57 sent. sent.

2 1 2 1 2

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51 sent. 1

52 53 54 sent. 1

16 Art. 13–16

new271 10 sent. 3272 18 sent. 2 Assessment Communication new new273 76 sent. 3 new274 37 sent. 1 new275

271 Structural funds policy has become a bureaucratic and cumbersome aid instrument. This is illustrated by the fact that the EU needs to operate the so-called Technical Assistance, a special service that supports the Members States in administrating the complex system of structural funds, which primarily relies on EU money. With para. 25 of the Multisectoral Framework 2002 (OJ 2002 C 70/8), the European Commission once tried to align State aid law and structural funds policy, but remained unsuccessful. Member States like Germany as well as the affected undertakings did not make use of the possibility to increase the admissible aid intensity by the factor 1.15 through combining regional aid with additional funds from regional policy. Now, the Commission is again trying to shift the Member States towards such an alignment. At the same time, it is virtually excluding regional for non-designated areas. “A areas” an “c areas” are determined according to criteria similar to those laid out in the structural funds regulations, which basically leads to a parallel determination of structural funds areas and areas in the sense of Art. 107(3) lit a) and c) TFEU, respectively. 272 This provision has the same purpose as Art. 1 para. 4 sent. 1 GBER I and Art. 13 lit. b) GBER II. It is illustrated in recital 14 GBER I and recital 32 GBER II: “Where a regional aid scheme is targeted at a limited number of sectors of the economy, the objective and likely effects of the scheme may be sectorial rather than horizontal.”. 273 The differentiation between individual aid based upon aid schemes, and ad hoc aid granted without any statutory background (Art. 3 GBER II), which had already been given up to a great extent, is now strengthened again unnecessarily by this provision with regards to notifiable aid. In particular, the scope of State aid rules is widened to include certain kinds of ad hoc aid into the mix of eligible aid instruments. 274 Para. 56 sent. 2 RAG 2014 primarily refers to cases, which have so far been covered by para. 84 to 91 RAG 2007, i. e. operating aid for newly created small enterprises. Deviating from Art. 22 para. 3 lit. c) GBER I and Art. 22 para. 5 GBER II, which foresaw a maximum aid intensity for innovative enterprises of 0.8 million EUR (GGE) and 1.6 million EUR (GGE), respectively, para. 86 RAG 2007 allowed a maximum aid intensity of 2 million EUR (GGE) already for regular SMEs. Furthermore, para. 56 sent. 2 RAG 2014 was supposed to be modelled after para. 79 RAG 2007, i. e. support aid schemes that were designed with a time limitation and a declining scale (cf. the wording of para. 56 sent. 2 RAG 2014: “develop their business in a more efficient manner over time”. 275 As it has already been mentioned with regard to para. 50 sent. 2 RAG 2014 and as it is shown by para. 37 sent. 2 RAG 2007, State aid can be granted in different forms, but all of them are equivalent. The equivalence is reached through the uniform standard of aid intensity: gross grant equivalents (GGE). According to this standard, a grant of 1 EUR is worth a much higher GGE of 100 % compared to a loan in the same amount, which is worth much less depending on the credit-worthiness of the beneficiary (see Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ 2008 C 14/6), cf. Art. 22 GBER II: a direct grant of 0.4 million EUR is equivalent to a loan in the amount of 1 million EUR or a guarantee of 1.5 million EUR. Thus, the direct grant is valued with a GGE of 1 or 100 %, the loan with 0.4 or 40 %, and the guarantee with 0.266 or 26.67 %. Against this background, para. 57 sent. 2 RAG 2014 is not comprehensible. The provision can only refer to the respective level of GGE, not to different forms of State aid.

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sent. 3 58 59 Para. 60 61 lit. a) lit. b) 62 sent. 1 sent. 2 63 Para. 64 65

37 sent. 2276 new277 new278 Para. 38 sent. 1279 sent. 1; 22 Nr. 1 Assessment Communication280 sent. 1; 22 Nr. 2 Assessment Communication 21 sent. 2 Assessment Communication new281 new282 Para. 38 sent. 2 38 sent. 5

276 The remarks concerning para. 57 sent. 2 RAG 2014 are especially true also for para. 57 sent. 3 RAG 2013. The provision does not only contain a list of different forms of aid, in which it corresponds to para. 37 sent. 2 RAG 2007. In addition, it requires the Member States to demonstrate for the preferred form of aid why other forms of state aid are not appropriate although the Commission has the meaning, this form of aid is potentially less distortive. This disregards that the advantages and disadvantages of different forms of aid are accounted for through GGEs, and is therefore incompatible with the system of regional aid. 277 Regarding the alignment of structural funds policy and regional aid see annotation to para. 52 RAG 2014. 278 This provision is stating the obvious. 279 Para. 60 RAG 2014 advances the rather brief provision of para. 38 sent. 1 RAG 2007. 280 The two scenarios described in para. 61 have initially been presented by the Commission in para. 19 of its Guidance on the in-depth assessment of regional aid to large investment projects of 13 February 2009 and were later also included into para. 22 of the Assessment Communication (OJ 2009 C 223/3). Scenario 1 (investment decision), which is described in para. 61 lit. a) RAG 2014, is not so much concerned with the particular area, but is primarily targeted at incentivising an investment. The aid must therefore ensure that the beneficiary is incentivised to invest, and the investment must then actually take place in the concerned area. The investment may at the same time be a starting point or nucleus for a cluster, see para. 61 lit. a) fn. 35 RAG 2014. If the aid is primarily targeted at steering an investment to a certain area, i. e. if the undertaking is already determined to invest but indifferent as regards location, this is a matter of scenario 2 (location decision). 281 Para. 62 sent. 1 RAG 2014 describes a typical windfall profit: an undertaking is determined to invest to a certain extent in the concerned area with or without a subsidy. If the State aid is too small to incentivise a larger investment, it will be just as incompatible with the internal market as it will be if it is too large, i. e. constitutes an overcompensation. Thus, the Commission states for the first time in its RAG that aid can be incompatible with the internal market because its aid intensity is too low. 282 Para. 63 contains an exemption to the rules laid down in para. 62 RAG 2014 for the case that five requirements are met: first, the aid must be awarded through a cohesion policy funds; second, the aid must be targeted to a region according to Art. 107(3) lit. a) TFEU; third, the aid must support one or more investments necessary to achieve standards set by European Union law, e. g. with regard to emissions trading; fourth, it would not be sufficiently profitable for the beneficiary to invest in the concerned area in the absence of the aid; and fifth, an existing establishment would have to be closed because of the EU-legally necessary, but not sufficiently profitable investment. It is questionable, on the one hand, why the exemption does only apply to “a regions” but not to “c regions” and, on the other hand, why it was connected to the bureaucratic cohesions policy funds procedure. It seems likely that the provision is based on undue considerations, e. g. the hope to increase the acceptance of the cohesions policy instruments, see also the remarks to para. 26 sent. 2 lit. b), 47, 48, 50, 52 RAG 2014.

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23 sent. 1 and 2 Assessment Communication283 sent. 3 Assessment Communication284

67 sent. 1 68 Para. 69 sent. 1 sent. 2 sent. 3 70 71 sent. 1 sent. 2 72 sent. 1 sent. 2 73 sent. sent. sent. 74 sent.

1 2 3 1

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16 Art. 13–16

new285 new286 Para. 23 sent. 1 Assessment Communication; 38 sent. 2 fn. 39287 sent. 2 Assessment Communication sent. 3 Assessment Communication 24 Assessment Communication 25 sent. 1 Assessment Communication sent. 2 Assessment Communication 26 sent. 1 Assessment Communication sent. 2 Assessment Communication 27 Assessment Communication288 new289 new290 28 sent. 1, 2 Assessment Communication sent. 3 Assessment Communication

283 The provision extends the counterfactual analysis, which was originally limited to large investment projects of large undertakings with substantial market power according to para. 68 RAG 2007 and para. 23 of the Assessment Communication, to SME. 284 Deviating from para. 23 of the Assessment Communication, the description must now be given by using a standardized application form. Furthermore, it must be supported by documentary evidence. 285 SME, which were previously excused from the burden of conducting a contrafactual analysis but which now fall in the scope of para. 66 RAG 2014, are exempted from the obligation to provide documentary evidence for the analysis and its results by para. 67 sent. 2 RAG 2014. 286 Para. 68 RAG 2014 imposes a new assessment obligation on granting authorities. Furthermore, it defines the ambiguous legal term ‘credible’ with two other ambiguous legal terms, ‘genuine’ and ‘prevalent’. 287 Para. 69 sent. 1 RAG 2014 also applies to an assessment depending on approval by the Commission, as described in para. 38 sent. 2 fn. 39 RAG 2007. Furthermore, para. 69 sent. 1 fn. 37 RAG 2014 corresponds to para. 38 sent. 4 RAG 2007. 288 This provision specifies methods applied to the profitability assessment mentioned in para. 72 RAG 2014. 289 Para. 73 sent. 2 RAG 2014 stipulates that the profitability must be compared with the normal rates of return applied by the company in other investment projects. 290 Only if those specific rates of return are unknown, the profitability must be compared with the cost of capital of the company as a whole or with the rates of return commonly observed in the industry concerned.

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Para. 75 76

Para. 76 sent. 2291 sent. 3, 82 sent. 1292

Para. 77 78 sent. 1

Para. 29 Assessment Communication 33 sent. 1 Assessment Communication sent. 1 Assessment Communication293 32 Assessment Communication 36 Assessment Communication294 33 sent. 2 Assessment Communication sent. 1 Assessment Communication295 296 new new297 new298

sent. 2 79 80 sent. 1 sent. 2 sent. 3 81 82 83

291 Para. 75 RAG 2014 specifies the incentive effect for operating aid, as it was already laid down in para. 76 sent. 2 RAG 2007. For operating aid schemes see also para. 108–111 RAG 2014. 292 With para. 76 RAG 2014, the Commission basically requires the Member States to substantiate the existence of challenges similar to those in “a areas”, outermost regions or sparsely populated areas. For operating aid schemes see also para. 108–111 RAG 2014. 293 Para. 78 sent. 1 RAG 2014 applies to notified individual aid that has to be assessed by the Commission, whereas para. 78 sent. 2 RAG 2014 applies to aid for large undertakings that is granted on the basis of aid schemes and has to be assessed by the respective Member State. In both cases, the same principles of proportionality apply. 294 According to para. 36 of the Assessment Communication, the aid intensity must not be higher than the regional aid ceilings, including gradual decreases as laid down in para. 20 lit. c) RAG 2014 (para. 67 sent. 1 and 2 RAG 2007). Para. 80 RAG 2014 specifies this requirement by stipulating that the aid amount should not exceed the difference between the net present value of the investment in the target area with the net present value in the alternative location. Thus, if an investment at location A led to costs in the amount of 1, and an investment at location B led to costs in the amount of 3, the relevant basis is not the difference between both (= 2), but the total expenses at location A (= 1). 295 Only the net – net costs have to be taken into account, i. e. possible subsidies at location A as well as possible State aid at location B must be disregarded. Otherwise, a detrimental subsidy race could be triggered easily, see also para. 88 sent. 1 RAG 2014. 296 The maximum aid intensities are in principle determined in para. 172 (“a areas”) and para. 174 (“c areas”), respectively. 297 The maximum aid intensities are described in the RAG 2014 as well as in the regional aid maps according to para. 145 RAG 2014. The rule in para. 82 RAG 2014 reverses the prior approach: so far, large undertakings could be sure that aid was in line with the principle of proportionality in the meaning of adequateness if it did not exceed the respective aid ceilings. SME were granted a SME bonus due to their special situation. This is no longer the case. The maximum aid intensities are no longer determined for large undertakings, but shall now refer to SME according to para. 82 RAG 2014. Against this background, it is however difficult to make sense of para. 85 alt. 2, 87 sent. 1, 177 RAG 2014. 298 As can be derived from the term “maximum aid intensities”, these intensities at the same time determine the aid ceilings expressed in gross grant equivalents (GGE).

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Guidelines on regional State aid for 2014–2020 84 lit. a) lit. b) lit. c) 85 86 Para. 87 sent. 1 sent. 2 88 89 sent. 1 sent. 2 90 sent. 1 sent. 2 91 92 clause 1 clause 2

16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 99299 new300 new301 new302 67 sent. 1303 Para. 49304 67 fn. 61 sent. 2305 new306 60 sent. 2, 67 new307 41 sent. 5 41 sent. 1, 2 and 3, 61 61, 72 fn. 67 71 72, 74308

299 Thus, the RAG 2014 only stipulate that the regions according to Art. 107(3) lit. a) and c) TFEU are determined with regard to the same criteria as before, i. e. their social and economic state. 300 This consideration is also new: so far, maximum aid intensities were determined specifically with regard to large undertakings. Thus, the Commission for instance used the headline “Aid ceilings (maximum aid intensities) for aid to large companies” for section 4.1.2 RAG 2007. All further modifications, like SME bonuses or reductions for large investment projects, were applied to these maximum amounts. However, the Commission always considered large companies as the rule. As already mentioned with regards to para. 82 RAG 2014, it is difficult to make sense of paras. 85, alt. 2, 87 sent. 1, 177 RAG 2014. 301 The provision may be referring to the decrease of maximum aid intensities for investments in the amount of more than 50 million EUR, which is already known from the Multisectoral Framework 2002. If the Commission wanted to express something else, it should have been more specific. 302 With this provision, the Commission acknowledges for the first time that competition can be distorted to different extents. However, the provision does not define the limit of distortion, i. e. the level of distortion that can be tolerated by the market. It is not exactly plausible that the Commission assumes that a market can tolerate more or less distortion, depending on the size of the volume of the investment. 303 Para. 86 RAG 2014 provides a new legal foundation for the adjusted aid amount for large investment projects, which is otherwise stipulated in para. 20 lit. c) RAG 2014: so far, the purpose behind the adjustment was to assume that the lump-sum disadvantage compensation had an incentive effect even for large investment projects, see para. 12 of the Multisectoral Framework 2002. Now, the Commission refers to distortions of competition and trade as the relevant reasons behind the adjustment mechanism. It fails, however, to describe the necessary benchmarks. 304 Para. 87 sent. 1 RAG 2014 is further developed by para. 177 RAG 2014. 305 This rule can also be found in para. 177 fn. 76 RAG 2014. 306 Only the net – net costs must be taken into account, i. e. disregarding a possible subsidy at location A as well as a possible aid at location B. Otherwise, a detrimental subsidy race could be triggered, see also para. 80 sent. 3 RAG 2014. Moreover, the scenarios described in paras. 79 and 80 RAG 2014 and their assessments are also used for determining aid caps. 307 The provision refers to the requirements for determining single investment projects, i. e. investments that are to be considered uniform. Before the RAG 2014, the relevant standard was economic indivisibility, see para. 60 sent. 2 fn. 55 RAG 2007. Now, qualifying single investment projects is determined by a geographic element, see para. 20 lit. t) RAG 2014. For details regarding single investment projects see above, annotations to para. 20 lit. t) RAG 2014 and para. 60 sent. 2 RAG 2007. 308 See annotation to para. 74 RAG 2007.

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93 sent. 1 sent. 2 sent. 3 Para. 94 95 96 97 98 lit. a) lit. b) 99 sent. 1 sent. 2 sent. 3 sent. 4 100 sent. 1 sent. 2 101 sent. 1 sent. 2 lit. a) lit. b) lit. c) 102 103 sent. 1 sent. 2 clause 1 clause 2

new309 new310 new311 Para. 54 sent. 1 51 new312 new313 53 sent. 2 sent. 1 52 sent. 1; 34 sent. 3 34 sent. 3; 52 sent. 2 54 sent. 2 52 sent. 1 fn. 49 55 sent. 2 55 sent. 1 56 sent. 1 56 sent. 2 tiret 1 tiret 2 tiret 3 tiret 4 57, 52 sent. 1 fn. 50314 59 sent. 1 sent. 2

309 Para. 93 sent. 1 RAG 2014 is in essence a replication of para. 25 of the Multisectoral Framework 2002 (OJ 2002 C 70/8). Then already, the Commission unsuccessfully tried to increase the relevance of aid from the cumbersome and bureaucratic cohesion funds through an aid bonus (factor 1.15). Now, the use of cohesion funds money is incentivized by extending the aid intensity, which applies to the area where the initial investment is located, to all beneficiaries participating in the project. However, the Commission significantly tightened the conditions for those projects that do not make use of cohesion funds money, see annotation to paras. 33 sent. 1, 50 sent. 2 and 52 RAG 2014. 310 Para. 93 sent. 2 RAG 2014 contains a conflict rule in case where the initial investment is located in more than one area. 311 Restricting regional aid to such initial investments of large undertakings in “c areas” that are in favour of new activities or new products is in line with paras. 34 sent. 2, 20 lit. i) RAG 2014, see the annotations to these provisions above. 312 The same wording as para. 96 RAG 2014 is used now also in Art. 14(7) sent. 1 GBER II. The provision does not apply to large undertakings in “c areas”. A fundamental change in the production process is not an initial investment in favour of new economic activity in the sense of paras. 34 sent. 2, 20 lit. i) RAG 2014. The provision’s purpose is to protect undertakings from engaging themselves in a race for ever more investments and aid. Thus, in order to be eligible for aid, undertakings must invest an amount higher than what they have depreciated over the last three years in regard to the economic activity, which is to be modernized. In most cases, the undertakings concerned will be SMEs, which is why the provision envisages a timeframe of three years. 313 Para. 97 exhibits the same wording as now Art. 14(7) sent. 2 GBER II. If the production is diversified, at least 2/3 of the total investment costs must be spend for new, not reused assets in order to qualify for aid. The last accounting year before the start of the project serves as a benchmark for the calculation. This provision as well aims at preventing a race for ever more investments and aid. 314 Wage costs are defined in para. 57 fn. 51 RAG 2007 as well as in para. 20 lit. z) RAG 2014.

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Guidelines on regional State aid for 2014–2020 Para. 104 105 106 sent. 1 sent. 2 107

16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 Para. 32 Assessment Communication315 33 sent. 1, 2; 36 Assessment Communication316 24, 25 Assessment Communication317 26, 27, 28 Assessment Communication318 72 fn. 67, 75319

Para. 108 109 lit. a) lit. b) lit. c) 110 sent. 1 sent. 2 clause 1 sent. 2 clause 2 111

Para. 76 sent. 3 77 77320 new new321 new322 new323 79324

Para. 112 sent. 1 sent. 2 113 114 sent. 1 sent. 2

Para. 68 sub-sent. 3 new325 new326 new327 45 sent. 3 Assessment Communication

315

See also the annotations to para. 79 RAG 2014. See also the annotations to para. 80 RAG 2014. 317 The relevant terms are laid out in paras. 70 and 71 RAG 2014. 318 The respective provision can be found in paras. 72–74 RAG 2014. 319 Para. 107 RAG 2014 basically corresponds to paras. 89 sent. 1, 91, 92 clause 2, 103 sent. 2, 119 sent. 1 and 2, 172–177 RAG 2014. The repetitive declaration that permissible adjusted aid intensity must not be exceeded indicates a strong uncertainty of the Commission. 320 According to para. 77 RAG 2007, operating aid had to be limited to a certain share of eligible costs, which also allowed for a share of 100 %. This is exactly what is now stipulated in para. 109 lit. b) RAG 2014. Aid in excess of 100 % of the eligible costs is, however, not permissible. 321 This provision refers to the disadvantages listed in Art. 349 TFEU. 322 Operating aid for additional transport costs, which had been permissible according to para. 81 RAG 2007, is now expressly excluded. 323 The new rules stipulate for a cost comparison with similar undertakings in other areas of the same Member State. 324 Para. 111 fn. 45 RAG 2014 corresponds to para. 79 fn. 73 RAG 2007. 325 Para. 112 sent. 2 RAG 2014 only describes the opposite of the situation described in Para. 112 sent. 1 RAG 2014. 326 Para. 113 describes two scenarios that distort competition and trade: product market distortions and location effects. The first is rather intuitive. It is not comprehensible, however, why both scenarios are considered to induce allocation inefficiencies (defined in para. 113 sent. 2 RAG 2014 as undermining the economic performance of the internal market) and why the Commission assumes that location effects may lead to distributional concerns (i. e. problems with distributing economic activity across regions). 327 Para. 114 RAG 2014 considers the missing reward for the most efficient producers, as well as the missing pressure on the least efficient producers to improve, restructure or exit the market as potentially harmful effects of State aid. 316

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sent. 3

sent. 4 Assessment Communication sent. 5 Assessment Communication

sent. 4 sent. 5 sent. 6 115 sent. 1 sent. 2 116 sent. 1 sent. 2 sent. 3 sent. 4 117 sent. 1 sent. 2

new328 new329 42 sent. tion new330 new331 new332 50 sent. tion 51 sent. tion 50 sent. tion sent.

3 Assessment Communica-

6 Assessment Communica3 Assessment Communica1 Assessment Communica-

2 Assessment Communication sent. 3 Assessment Communication sent. 4 Assessment Communication 7 sent. 1 und 2 Assessment Communication333

sent. 3 sent. 4 sent. 5

328 According to para. 114 sent. 5 RAG 2014, another potentially harmful effect of State aid is that potential beneficiaries may engage in complacent or unduly risky behaviour. However, the Commission does not substantiate this assumption with evidence. 329 Based on its aforementioned assumptions, the Commission concludes that aid usually affects the performance of the economic sector concerned negatively, at least in the long-run. However, it does not substantiate this conclusion with facts from actual cases, either. Its considerations remain vague, although they are not completely implausible. 330 Para. 115 sent. 2 RAG 2014 transfers effects that are not expressly excluded from the indirect to the direct level of market power. Thus, the criteria becomes even more ambiguous. 331 It is not comprehensible from para. 116 sent. 1 RAG 2014, why regional aid by its nature should considered to negatively affect the location of economic activity. 332 Para. 116 sent. 2 RAG 2014 explains that where one area attracts an investment due to an aid, another area loses out on that opportunity. It is, however, not exactly comprehensible why this is considered a potentially harmful effect, since it is the primary goal of regional aid to guide investments to certain locations. Since the investment only occurs once, it is only natural and thus inherent to any regional aid that an investment in location A is no longer available for location B. Only relocation investments must be assessed differently: in such cases, an investment would normally occur at location A, but is instead guided to location B with the help of aid, whereas location A is closed. In this scenario it is self-evident that the aid for location A harms the competition. 333 The contrafactual analysis primarily serves the purpose of finding out what would have happened without the aid.

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Guidelines on regional State aid for 2014–2020 Para. 118 119 sent. 1 sent. 2 sent. 3 120 121 122 123 Para. 124 sent. 1 sent. 2 sent. 3

16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 Para. 44 sent. 4, 5, 53, 55 Assessment Communication334 36 Assessment Communication new335 new336 47 sent. 2 Assessment Communication 53 sent. 2 Assessment Communication 54 Assessment Communication 9 sent. 3 and 4 Assessment Communication337 Art. 107 Abs. 1 TFEU338 new339 Para. 68 lit. b)340

334 With para. 118 RAG 2014, the Commission simply points out that some effects of granting aid are more relevant than others. This can also be seen from paras. 44, 53 and 54 of the Assessment Communication. 335 The large amount of provisions, whose only purpose is to ensure that the maximum aid intensities are not exceeded, is questionable. Paras. 89 sent. 1, 91, 92 clause 2, 103 sent. 2, 107 and 172–177 RAG 2014 serve this purpose, as well. Para. 119 sent. 2 RAG 2014 stipulates again that observing the maximum aid intensities is a basic requirement for an aid to be considered compatible with the internal market, that it must be prevented that the ratio between the aid amount and eligible costs is to high, and that (if this rule is disregarded) the risk of distortions is particularly high. 336 Para. 119 sent. 3 RAG 2014 confirms that the permissible aid intensity will be the higher, i. e. the additional decreases will be the lower, the greater the positive effects of the project are and the higher the likely need for aid (i. e. the amount of aid needed for completing the project) is. 337 In para. 123 RAG 2014, the Commission explains that one purpose of gathering information is to assess the risk of substantial losses of jobs in existing locations, i. e. the risk of relocation investments. 338 Para. 124 sent. 1 RAG 2014 is a reformulation of the principles of Art. 107(1) TFEU. The provision is, however, less restrictive since it only excludes “significant” distortions of competition and trade. Yet, aid schemes as such are not able to distort competition or trade. Only the individual aid, which is actually granted, can cause this effect. It is therefore difficult to make sense of this provision. The same ambiguous wording can be found in para. 124 sent. 2 RAG 2014, as well. 339 This provision is a good example for the unpersuasive differentiation between individual aid and aid schemes: on the one hand, para. 124 sent. 2 RAG 2014 mentions a distortion of competition through aid schemes, but on the other hand it refers to individual investment aid. It is not clear, what risk is embodied in aid schemes. The Commission may ex ante approve aid schemes for a plurality of individual aid. In this regard, it may also determine the requirements for eligibility. With regard to this, the provision is not comprehensible. It is even more difficult to make sense of the Commission’s statement regarding cumulative effects. In this regard as well, it should be sufficient for the Commission to rely on the provisions concerning the maximum aid intensities, e. g. paras. 171–177, 21 lit. m) and 21 lit. c) RAG 2014. 340 This provision refers to existing market capacities. The same followed from para. 68 lit. b RAG 2007, but only for individual aid. Even more distinctly, the Commission emphasized this aspect in sections 3.2 to 3.6 of the Multisectoral Framework 1998.

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Guidelines on national regional aid for 2007–2013 51 sent. 1 Assessment Communication341

sent. 4 sent. 5 125 sent. 1 sent. 2 126 sent. 1 sent. 2

new342 70343 344 new new345 new346

Para. 127

Para. 32; 33 sent. 1, 2; 36 Assessment Communication347

Para. 128 sent. 1 sent. 2

Para. 39 Assessment Communication348 52 sent. 1 and 2 Assessment Communication349 47 sent. 2 Assessment Communication 70 sent. 1350

sent. 3 129

341 This provision is not specifically addressing aid that is granted on the basis of aid schemes. The specific relevance of this provision is therefore questionable. Para. 51 sent. 1 RAG 2014 contains the same statement also for aid that is not granted on the basis of an aid scheme, and simply refers to aid that supports investments. Moreover, it is the primary purpose of regional aid to guide investments. This follows already from scenario 2 described in para. 61 lit. b) RAG 2014. 342 If regional aid is granted for certain sectors, it can in general not be considered as constituting horizontal aid, which specifically supports a certain region, but must be considered as sectoral aid. These are subject to especially strict requirements, which is expressly rightly mentioned by the Commission in para. 124 sent. 5 RAG 2014. 343 Para. 125 sent. 1 RAG 2014 extends previous considerations of the Commission regarding aid for undertakings with strong market positions and aid for significant capacity extensions, which have been presented in para. 70 RAG 2007, to the assessment of aid schemes. See also para. 120 RAG 2014. 344 This newly introduced information requirement shows that the Commission so far did not possess reliable information on market compatible subsidies other than those concerning maximum aid intensities in areas according to Art. 107(3) lit. a) and c) TFEU, adjusted aid amounts according to para. 20 lit. c) RAG 2014, and SME bonuses according to para. 177 RAG 2014. Ex post evaluations by Member States therefore mean an incalculable risk for the approval of new regional aid schemes. 345 According to this provision, the aid granting authority must assess if, in absence of the aid, the investment had occurred in another area where a subsidy in the same or even a higher amount was permissible. If yes, the aid would be incompatible with the internal market. 346 This provision simplifies the granting authorities’ assessment by allowing them to rely on information received from the beneficiary. 347 These provisions apply to all kinds of notified individual aid including such granted on the basis of aid schemes as well as such granted as ad hoc aid. See also paras. 104, 105. 348 In addition to overcapacities and market power, which are already mentioned in para. 39 of the Assessment Communication, para. 128 sent. 1 RAG 2014 emphasises the prevention of market exists as a potentially harmful effect of regional aid. 349 Para. 128 sent. 2 RAG 2014 stipulates that it is not enough if the balancing delivers a neutral result – the positive effects must be prevail. Yet, the provision does not explain how the different criteria are to be valued against each other. 350 Deviating from para. 125 sent. 2 RAG 2014, this provision requires the Member States to submit evidence. Apart from this, the remarks to para. 125 sent. 2 RAG 2014 also apply here. In correspondence with para. 70 sent. 1 RAG 2007, this provision imposes on the Member States the burden to prove that the aid does not lead to negative effects regarding the criteria listed in para. 129 RAG 2014, i. e. products markets, competitors, customers/consumers.

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16 Art. 13–16

Guidelines on national regional aid for 2007–2013 sent. 1, 69 sent. 3351

130 131 132 lit. a) lit. b) 133

68 new352 68 68 68

134 135 sent. 1

new355 46 sent. 2 Assessment tion356 47 sent. 1 Assessment tion 48 sent. 1 Assessment tion357 48 sent. 3 Assessment tion358

sent. 2 136 sent. 1 clause 1 sent. 1 clause 2

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lit, b)353 lit. a)354 lit. b) and para. 46 sent. 1 Assessment Communication CommunicaCommunicaCommunicaCommunica-

351 In addition to the criteria already listed in para. 68 RAG 2007, para. 130 RAG 2014 mentions the additional criteria “process for selection of the aid beneficiary”, “entry and exit barriers” and “product differentiation”. As the Commission has already explained in para. 45 sent. 1 of the Assessment Communication, it is an indication for effective competition if inefficient undertakings are forced to exist the market. 352 This provision has been introduced to the RAG for the first time. It remains however unclear what is meant with “[a] systematic reliance on State aid”: if an undertaking invests in the expansion of capacities several times and uses regional aid for these investments, this can certainly not be considered a systematic reliance. This changes, however, if the undertaking constantly modifies its business model in order to ideally qualify for aid. 353 Deviating from para. 68 lit. b) RAG 2007, para. 132 lit. a) RAG 2014 does not provide for specific numbers. However, already the term “significant capacity expansion” indicates that the capacity on the relevant product market must be increased substantially. Significance requires a difference of at least 5 %. Thus, a significant capacity expansion can be acknowledge if the capacities has been increased by at least 5 %. This also corresponds to the value stipulated in para. 68 lit. b) RAG 2007 and in para. 46 sent. 2 of the Assessment Communication. 354 Something similar applies to para. 132 lit. b) RAG 2014. This provision refers to “substantial market power”. In correspondence with para. 68 lit. a) RAG 2007 and section 3.6 of the Multisectoral Framework 1998, substantial market power, which differs from capacity expansion in being a static parameter, can be acknowledged if the beneficiary accounts for more than 25 % (RAG 2007) or 40 % (Multisectoral Framework 1998) of the sales of the product(s) concerned on the market(s) concerned before or after the investment. Due to a lack of recent cases, it is not yet known, which parameters the Commission seeks to actually use in future. 355 With this provision, the Commission documents for the first time that there is less reason to be concerned that the aid will have negative effects if the market in question is growing. Yet, in previous cases, the Commission simply did not raise any objections, para. 46 sent. 2 of the Assessment Communication. 356 Whereas para. 46 sent. 2 of the Assessment Communication only considered additional capacity problematic if it is created in an underperforming market and if the additional capacity is more than five per cent of the market concerned, paras. 134, 135 sent. 1 RAG 2014 are much more restrictive, even in case of growing markets. Even more concern is warranted in case of declining markets. Thus, the Commission significantly tightened the rules in paras. 134, 135 RAG 2014 to the detriment of undertakings and aid granting Member States. 357 Deviating from para. 68 lit. b) RAG 2007 and para. 48 sent. 1 of the Assessment Communication, the relevant timeframe before the start of the project was reduced from five to three years according to para. 136 clause 1 RAG 2014. 358 Whereas the relevant forecasting horizon of three to five years had not been stipulated in the Assessment Communication, it corresponds however to requirements in section 5.4.2 of the standard

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sent. 2

48 sent. 4 Assessment Communication 70 sent. 2 and Para. 49 S. 1 Assessment Communication 49 sent. 2 Assessment Communication 68 lit a), b)359 43 sent. 3 Assessment Communication360

137 sent. 1 sent. 2 138 sent. 1 sent. 2 Para. 139 sent. 1 sent. 2 sent. 3 140 sent. 1 sent. 2 sent. 3

Para. 40 Assessment Communication new361 new362 new363 78 sent. 3364 365 new

notification form of the Multisectoral Framework 1998, section 5.3.2 of the standard notification form of the Multisectoral Framework 2002 (OJ 2002 C 70/8) and sections 4.3.3 and 4.5.3 of the standard form for notifying regional aid, Part III 5. of Commission Regulation No 1627/2006 of 24 October 2006 amending Regulation (EC) No 794/2004 as regards the standard forms for notification of aid, OJ 2006 L 302/10. 359 This corresponds to sections 4.3.3 and 4.53 of the standard form for notifying regional aid, Part III 5. of Commission Regulation No 1627/2006 of 24 October 2006 amending Regulation (EC) No 794/2004 as regards the standard forms for notification of aid, OJ 2006 L 302/10. 360 Instruktiv Illustrative: annotations 2–4 to para. 43 of the Assessment Communication, e. g. regarding the Herfindahl-Hirschman-Index (HHI). These are now missing. 361 Para. 139 sent. 2 RAG 2014 contains a positive assessment that had been missing in the Assessment Communication. 362 With para. 139 sent. 3 RAG 2014, the Commission provides for cases where its otherwise positive assessment is not justified: it considers aid to be incompatible with the internal market if, in absence of the aid, the investment had occurred in an alternative location in the EEA (see para. 121 RAG 2014) or if the investment is to be considered a relocation investment (see para. 122 RAG 2014). 363 Para. 140 RAG 2014 refers to aid schemes for operating aid. General provisions regarding operating aid can be found in paras. 43–46 RAG 2014. If an aid is necessary and proportionate must be assessed according to paras. 26 sent. 2 lit. e), 108, 109 RAG 2014. 364 Para. 78 sent. 3 RAG 2007 particularly excluded operating aid for promotion of exports. In para. 140 sent. 2 RAG 2014, these exclusions are formulated much broader: the operating aid may change the structure of the market or the characteristics of a sector or industry which could significantly distort competition through barriers to market entry or exit, substitution effects, or displacement of trade flows. Market entry barriers are explained in para. 138 sent. 2 fn. 47 RAG 2014. In particular, the Commission takes into account if the beneficiary is an established market player (“incumbent”). Where there are buyers in the market, which have a strong demand position, it is however much less likely that the beneficiary will be able to increase prices (see para. 138 sent. 2 fn. 48 RAG 2014), i. e. that the structure of the market will be changed. Yet, the Commission does not explain when such a change is to be acknowledged. The meaning of the ambiguous term “incumbent” remains unclear as well. 365 Para. 140 sent. 3 RAG 2014 stipulates that, if an aid scheme has the effects described in para. 140 sent. 2 RAG 2014, it must be considered incompatible with the internal market.

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Para. 141 sent. 1 sent. 2 sent. 3

Para. 108 sent. 3, 4366 new367 108 sent. 5368

Para. 142 143 144

new369 new370 new371

Para. 145 sent. 1 sent. 2 sent. 3

new372 Para. 96 sent. 1, 99, 102 sent. 1, 101 sent. 2 96 sent. 1, 102 sent. 1

Para. 146 sent. 1 sent. 2

Para. 12 new373

366 Adding to the previous provisions in para. 108 sent. 3 and 4 RAG 2007, the transparency provision in para. 141 RAG 2014 requires the Member States to also publish implementing provisions, the granting authority, the individual beneficiaries, the aid amount per beneficiary, and the aid intensity. Thus, transparency is also required for aid that does not need be notified individually. This also follows from para. 141 sent. 2 RAG 2014: accordingly, the provision applies to individual aid that is granted on the basis of notified (and approved) aid schemes as well as to ad hoc aid. 367 See the previous footnote first. Transparency for individual aid that is granted on the basis of exempted aid schemes is ensured by the provisions of GBER II. Para. 141 sent. 2 RAG 2014 does not differentiate between exempted and not exempted ad hoc aid. Thus, it must be assumed that all ad hoc aids must be published. 368 It is new, however, that all information must be updated regularly, i. e. approximately every six month, see para. 141 sent. 3 fn. 49 RAG 2014. 369 This provision is closely connected to para. 27 RAG 2014. Furthermore, it inherited the mandatory time limitation from para. 79 RAG 2007 and extends its scope from operating aid schemes to all kinds of aid schemes. 370 Para. 143 RAG 2014 describes what kinds of schemes have to be evaluated. However, the Commission uses so many ambiguous legal terms (“particularly”, “high”, “potential distortions”, “may restrict competition significantly”, “in due time”) that the provision is basically meaningless. 371 Para. 144 RAG 2014 describes the evaluation of aid schemes. Accordingly, the evaluation obligation can be imposed only for aid schemes with large aid budgets, containing novel characteristics. It can be derived from Art. 1(2) lit. a) GBER II that a large aid budget corresponds to an average annual State aid budget of more than 150 million EUR. In addition, the scheme must contain novel characteristics. Thus, schemes that were only remodelled do not need to be evaluated. Yet, the evaluation obligation can also be imposed if significant market, technology or regulatory changes are foreseen. If such changes are to be considered significant depends on their effect on competition. Thus, the provision does not address technical or legal developments without any effect on competition. The evaluation is carried out on the basis of a common procedure by an expert independent from the granting authority. The Commission may specify this procedure, see para. 144 sent. 2 fn. 50 RAG 2014. The provision further describes when the evaluation has to be submitted – at the latest upon expiry of the scheme to be evaluated – and determines that the Commission may define the precise scope and the methodology of this evaluation in its decision approving the scheme. The evaluation has to be taken into account in every assessment of every subsequent aid measure with a similar objective. Thus, as regards regional aid schemes, the evaluations must be taken into account for all investments because all regional aid schemes serve a similar purpose – the development of disadvantaged regions by globally compensating regional handicaps for investment. The same applies to operating aid schemes, if they are compared with each other. The main differentiation is thus between “investment aid” and “consumption aid”. 372 Para. 145 sent. 1 RAG 2014 has a descriptive nature. It basically corresponds to the headline of section 8 RAG 2007. 373 This provision only contains the arithmetical conclusion from para. 146 sent. 1 RAG 2014.

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Guidelines on national regional aid for 2007–2013 13 sent. 2, fn. 15374 14 fn. 16375 fn. 16376

147 sent. 1 sent. 2 148 Para. 149 sent. 1 sent. 2 150 151 lit. a) lit. b) 152

Para. 15 sent. 1 sent. 2377 16 sent. 1, 103 sent. 1378 16 sent. 1, 2, fn. 20, 103 sent. 1379 17380 29, 103 sent. 1

Para. 153 sent. 1 sent. 2 sent. 3

new381 Para. 21 sent. 1 sent. 2382

374 Para. 147 sent. 1 RAG 2014 recalls the Commission’s previous goal from the RAG 2007 to limit the overall coverage of the ‘a’ and ‘c’ areas to 42 % of the EU-25 population (45.5 % of the EU-27 population, i. e. after the accession of Bulgaria and Romania). 375 In para. 147 sent. 2 RAG 2014, the Commission declares that the level of overall population coverage should be adapted in order to reflect the currently difficult economic situation of many Member States. These Member States particularly include Greece, but also Cyprus, Italy, Spain and Portugal. However, the overall population coverage was already increased to actual 46.6 % (EU-27) through the socalled safety net according to para. 14 fn. 16 RAG 2007. Thus, this is the number the Commission’s considerations should be based upon, and not the smaller number of 45.5 %. 376 Disregarding the currently difficult economic situation of many Member States and its selfproclaimed goal to increase the overall population coverage, the Commission is actually working on decreasing this number: as has been described in the previous footnote, the overall population coverage according to the RAG 2007 was actually 46.6 % for the EU-27, para. 14 fn. 16 RAG 2007. In the current aid period, the coverage is only 46.53 % and thus not higher but lower than before. With the accession of Croatia on 1 July 2013, i. e. for a EU-28, the population coverage increases to 47 % because Croatia is considered an aid area, para. 148 fn. 52 RAG 2014. 377 The list of ECJ’s cases in para. 15 fn. 17 RAG 2007 was extended by two decisions: Spain/ Commission of 14. January 1997, C-169/95 and Italy/Commission of 7 March 2002, C-310/99. 378 The reference to the NUTS-Regulation in para. 16 sent. 1 fn. 18 RAG 2007 has been updated in para. 150 fn. 54 RAG 2014 and now refers to Commission Regulation (EU) No 31/2011 of 17 January 2011, OJ 2011 L 13/3. With its statement in para. 150 fn. 55 RAG 2014 recalling the introduction of the 75 % GDP requirement through the RAG 1988, the Directorate-General for Competition, deviating from para. 16 sent. 3 RAG 2007, tries to free itself from the boundaries of cohesion funds policy, see also the remarks to para. 16 sent. 3 RAG 2007. On the other hand, it makes the approval of aid dependent on the use of cohesion funds money, see paras. 32, 33, 42, 52, 58, 63 and 93 RAG 2014, see also the annotation to para. 52 RAG 2014. 379 Para. 151 lit. a) fn. 56 RAG 2014 corresponds to para. 16 sent. 2 fn. 20 RAG 2007. Para. 151 lit. a) fn. 57 RAG 2014 corresponds to para. 16 sent. 3 fn. 21 RAG 2007. 380 Outermost regions are mentioned in Art. 349 TFEU, see also para. 20 lit. p) fn. 21 RAG 2014 and the annotation to para. 17 RAG 2007. 381 This provision basically quotes Art. 107(3) lit. c) TFEU. It does not have an independent meaning. In the German version of the RAG 2014, the headline above para. 153 in section 5.3 was changed from “3.4. Freistellungsvoraussetzungen des Artikels 87 Absatz 3 Buchstabe c EG-Vertrag” (above para. 21 RAG 2007) to “5.3. Ausnahmeregelung nach Artikel 107 Absatz 3 Buchstabe c AEUV”. This indicates a more restrictive interpretation of the Treaty provision. The same follows from the deletion of para. 22 sent. 1 RAG 2007. 382 Para. 153 sent. 3 fn. 58 RAG 2014 quotes the ECJ’s judgement Germany/Commission of 14 October 1987, 248/84, ECR 1987, 4036 para. 19 and thus corresponds to para. 21 fn. 25 with reference to fn. 17 RAG 2007.

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Guidelines on national regional aid for 2007–2013 23383 25 sent. 1, 2384 27, 30 sent. 2 lit. c) – h), 31385

154 155 lit. a) lit. b) Para. 156 157 158 lit. a) lit. b) 159 160 161 sent. 1

16 Art. 13–16

Para. 25 sent. 1, 2386 26387 25 sent. 1, 2388 26, 30 sent. 2 lit. b) sent. 1, 2 tiret 2 29 30 sent. 2 lit. a), b) sent. 1, 2 tiret 2 30 sent. 2 lit. b) sent. 1, 80 tiret 2 sent. 2389 30 sent. 2 lit. b) sent. 2 1. – 3. tiret390 Para. 27 sent. 1 24, 27 sent. 2391 new392

383 In para. 154 RAG 2014, the Commission presents a new calculation method. Deviating from paras. 24–27 RAG 2007, it now seeks to determine the total coverage ceiling for ‘c’ areas first, and allocate it to the Member States afterwards. Previously, the Commission first did the central allocation, and then determined the coverage ceiling by subtracting the population for eligible ‘a’ areas and the population for eligible ‘c’ areas as determined in accordance with paras. 25 and 26 RAG 2007 from the overall coverage ceiling. The rest was then allocated to the Member States, para. 27 RAG 2007. 384 The new term “pre-defined ‘c’ area” corresponds to the previous term “economic development region” in para. 25 fn. 27 RAG 2007, but also includes sparsely populated areas, para. 158 RAG 2014. 385 “Not pre-defined ‘c’ areas” in the sense of para. 155 lit. b) RAG 2014 are ‘c’ areas that were assigned by the Member States on the basis of the coverage additionally allocated according to para. 30 lit. c) – h), 31 RAG 2007. 386 The list of ‘a’ areas has been amended as of 1 January 2011 due to the review of ‘statistical effect’ regions according to para. 20 sent. 1 RAG 2007. The amendment was published with the Commission’s Communication on the review of the State aid status and the aid ceiling of the statistical effect regions, OJ 2010 C 222/2, para. 156 fn. 59 RAG 2014. 387 Para. 26 fn. 29 RAG 2007 refers to para. 30 sent. 2 lit. b) RAG 2007 for the determination of ‘c’ areas. These provisions can now be found in paras. 158 lit. b) 161 RAG 2014. 388 The ‘statistical effect’ regions were considered as ‘a’ areas for the period of 1 January 2006 until 31 December 2010. Since 1 January 2011, i. e. after the review according to para. 20 RAG 2007, Germany has not designated any ‘statistical effect’ regions as ‘a’ areas. Thus, these areas can neither be considered “predefined ‘c’ areas”, para. 158 lit. a) fn. 60 RAG 2014. Annex I to the RAG 2014 however offered a way to correct the unfavourable effects of the previous delimitation of NUTS-2 areas in Brandenburg in the current aid period: it allows to designate the whole of the regions Brandenburg and Sachsen-Anhalt as “pre-defined ‘c’ areas” provided that the percentage of the national population available for nonpredefined ‘c’ areas is reduced accordingly. Germany made use of this option, see Commission Decision of 11 March 2014 (Germany), SA. 37423/2014, paras. 6, 15. 389 The term “sparsely populated areas” in paras. 16, 20 lit. w), y), 46, 156 lit. b), 157, 161, 169 fn. 73 and 174 lit. a) RAG 2014 corresponds to the term “low population density regions” in para. 26, 30 sent. 2 lit. b) sent. 1, sent. 2 tiret 3, 48, 81 tiret 2, 95 tiret 2 fn. 81 and 103 sent. 2 RAG 2007 as well as the term “least populated areas” in para. 76, 80 tiret 2 and 81 RAG 2007. For the calculation, para. 26 fn. 29 RAG 2007 refers to para. 30 sent. 2 lit. b) RAG 2007. 390 The reference in para. 161 sent. 2 RAG 2014 to para. 160 RAG 2014 is a mistake. Instead, the reference should point to 159 RAG 2014. 391 The calculation methods in Annex II RAG 2014 and Annex IV RAG 2007 are essentially the same. The underlying arithmetical formulas are identical. 392 This provision privileges Member States that benefitted from financial assistance during the financial crises (ESFS, EFSM or ESM). For these states, the total coverage is not reduced compared to

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164 165 lit. a) lit. b) lit. c) 166

14, 28393 new394 28395 new396 29397 30 sent. 1 clause 1, 103 sent. 2 clause 2, 103 sent. 2 30 sent. 2398 30 lit. c)399 30 lit. d) 30 lit. e), fn. 34 30 lit. f) 30 lit. g) 30 lit. h) sent. 1400 30 sent. 2 lit c), e) – h)401 32

Para. 167 sent. 1 sent. 2 168 lit. a) lit. b) lit. c) tiret 1 and 2 tiret 3 lit. d) lit. e) 169 170 Para. 171 sent. 1 sent. 2

Para. 42 sent. 1 sent. 2

the period 2007–2013. However, this does not mean that the previous delimitation of ‘a’ and ‘c’ areas may not be changed. Thus, adjustments in this regard remain possible. 393 Para. 164 RAG 2014 further stipulates that every Member State should have a minimum population coverage. The provision does, however, not define the coverage’s size. It is fixed in para. 165 lit. c) RAG 2014 to 7.5 % of the respective Member State’s national population. 394 This provision must be read together with para. 163 RAG 2014 concerning Member States that benefitted from financial assistance during the financial crises (ESFS, EFSM or ESM). 395 In the current aid period, Cyprus and Luxemburg benefit from this provision, para. 165 lit. b) fn. 65 RAG 2014. 396 This provision is new and solely benefits the Netherlands, para. 165 lit. c) fn. 66 RAG 2014. 397 The list in Annex I RAG 2014 essentially corresponds to the list in Annex V RAG 2007, albeit with somewhat other results. 398 Para. 168 RAG 2014 only applies to “not pre-defined ‘c’ areas”. Para. 30 sent. 2 RAG 2007 further applied to the former ‘a’ areas that are now considered “pre-defined ‘c’ areas” i. e. the “economic development regions”, para. 30 sent. 2 lit. a) RAG 2007, and “low population density regions”, para. 30 sent. 2 lit. b) sent. 1, sent. 2 tiret 2 RAG 2007. 399 The population thresholds will be reduced for small Member States to 50 000 inhabitants or even to 10 000 inhabitants, para. 168 lit. a) fn. 67 RAG 2014; para. 30 sent. 2 fn. 32 RAG 2007. This particularly benefits Cyprus and Luxemburg. The unemployment rate is calculated according to para. 168 lit. a) fn. 68 RAG 2014; para. 30 sent. 2 lit. c), d), e) RAG 2007. 400 The population threshold will be reduced for small Member States to 25 000, 10 000 or even 5 000 inhabitants, para. 168 lit. e) fn. 71 RAG 2014. The rule in para. 30 lit. h) sent. 2 RAG 2007 can now be found para. 168 lit. e) fn. 72 RAG 2014. 401 Para. 169 RAG 2014 defines the term “contiguous areas”. In this regard, the respective Member State may refer to LAU-2- or LAU-1-areas (LAU = local administrative unit), para. 169 fn. 73 RAG 2014. Furthermore, if the requirements of para. 168 fn. 74 RAG 2014 are met, the Member State may designate parts of an LAU-2-area (or LAU-1-area) as a ‘c’ area. This allows for a limited fine adjustment, even if it is now more restricted than previously according to para. 31 RAG 2007. Germany made use of this provision with regard to its regional aid map, see Commission Decision of 11 March 2014 (Germany), SA.37423/2014, paras. 22, 31. In case of islands, maritime borders with other administrative units are considered administrative borders as well, para. 169 fn. 75 RAG 2014.

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16 Art. 13–16

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Guidelines on national regional aid for 2007–2013 44 lit. c) lit. b)402 lit. a)403 45 48 case 1 and 3404 47, 48 case 2405 new406 48 case 2, 47 fn. 45407 49

Para. 178 sent. 1 sent. 2 179 sent. 1 sent. 2

Para. 100 sent. 2, 104 sent. 1 102, 103 sent. 2 101 sent. 1 97, 101 sent. 2, 3408

Para. 180

Para. 104 sent. 6409

402 Para. 172 lit. b) RAG 2014 now stipulates an aid intensity of only 35 % for NUTS-2 regions with a GDP per capita between 45 % and 60 % of the EU-27 average, whereas para. 44 tiret 2 RAG 2007 allowed for an aid intensity of 40 %. 403 Para. 172 lit. c) RAG 2014 now stipulates an aid intensity of only 25 % for NUTS-2 regions with a GDP per capita between 60 % and 75 % (para. 150 RAG 2014) of the EU-27 average, whereas para. 44 tiret 3 RAG 2007 allowed for an aid intensity of 30 %. 404 Para. 48 RAG 2007 referred to three cases: low population density regions according to para. 30 sent. 2 lit. b) RAG 2007, regions adjacent to an ‘a’ area according to para. 30 sent. 2 lit. g) alt. 1 RAG 2007 and regions at the external borders of the EEA or EFTA according to para. 30 sent. 2 lit. g) alt. 2 RAG 2007. These regions were eligible for an aid intensity of 15 %. Para. 174 lit. a) RAG 2014 applies to sparsely populated areas according to para. 158 lit. b) RAG 2014 and areas at the external border of the EEA or EFTA according to para. 168 lit. d) alt. 2 RAG 2014. These areas are still eligible for an aid intensity of 15 %, provided they are designated as ‘c’ areas. In this regard, it should be noted that sparsely populated areas are acknowledged in para. 158 lit. b) RAG 2014 as one of two “pre-defined ‘c’ areas”. The second group are former ‘a’ areas according to para. 158 lit. a) RAG 2014. Their aid intensity is to be determined according to para. 175 RAG 2014. 405 Para. 174 lit. b) RAG 2014 only applies to “not pre-defined ‘c’ areas”: “pre-defined ‘c’ areas” according to para. 158 lit. a) RAG 2014 (former ‘a’ areas) and para. 158 lit. b) RAG 2014 (sparsely populated areas) are already dealt with in paras. 175 and 174 lit. a) alt. 1 RAG 2014. Amongst the “not pre-defined ‘c’ areas”, areas at the external borders of the EEA or EFTA, para. 168 lit. d) alt. 2 RAG 2014 are already dealt with in para. 174 lit. a) alt 2. RAG 2014. As it was previously the case according to para. 47 sent. 2 RAG 2007, all other ‘c’ areas are only eligible for an aid intensity of 10 %, para. 174 lit. b) RAG 2014. The same applies to regions according to para. 168 lit. d) alt. 1 RAG 2014, i. e. regions adjacent to an ‘a’ area (see para. 48 alt. 2 RAG 2007); however, these areas are under certain conditions eligible for a higher aid intensity of up to 35 % (para. 176 RAG 2014). 406 This provision applies to previous ‘a’ areas i. e. the second category of “pre-defined ‘c’ areas” according to para. 158 lit. a) RAG 2014 (the aid intensity for the first category is determined according to para. 174 lit. a) alt. 1 RAG 2014). The provision was modelled after the previous provision regarding ‘statistical effect’ regions in para. 46, 20 RAG 2007. These regions as well were eligible for a higher aid intensity (5 percentage points) in the first half of the aid period, para. 46 RAG 2007. 407 Para. 176 RAG 2014 increases the aid intensity of ‘c’ areas adjacent to ‘a’ areas from 10 % to up to 35 % (50 % minus a maximum difference of 15 %). 408 As regards the qualification of regional aid maps see ECJ Judgement Germany/Commission of 18 June 2002, C-242/00; para. 97 fn. 83 RAG 2007. 409 According to para. 180 RAG 2014, the Member States may establish a reserve of national population coverage. This corresponds to para. 104 sent. 6. RAG 2007 as well as the Commission’s practice in the previous aid period, see N 343/2006 (France) of 7 March 2007, para. 182.

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181 sent. 1 sent. 2 sent. 3 182 183 sent. 1 sent. 2 sent. 3 sent. 4 sent. 5 sent. 6 184 sent. 1 sent. 2 185 Para. 186 187 sent. 1 sent. 2

104 sent. new410 new411 104 sent. 104 sent. new413 new414 new415 104 sent. 104 sent. new417 new418 104 sent.

6 6 2412

3416 4 3

new419 new420 para. 98 sent. 1421

410 This enables the Member States to base the delimitation or aid areas on developments that are foreseeable, but have not yet occurred. 411 This provision aims at making population data and overall population coverages of the Member States comparable. 412 As it was previously stipulated in para. 104 sent. 2 RAG 2007, the Commission has to conduct a mid-term review for the current aid period. It its review, the Commission will establish in favour of the Member States whether any NUTS 2 region can be designated an ‘a’ area because it GDP per capita dropped below 75 % of the EU-28 average. For the sake of continuity, the Commission will not conduct the assessment the other way round. 413 Para. 183 sent. 2 RAG 2014 is a consequence of para. 183 sent. 1 RAG 2014. 414 This provision stipulates that, if an ‘a’ area develops from a designated ‘c’ area, the population coverage numbers of the respective Member States are simply transferred from one category to the other, i. e. the EU-wide total population coverage is not changed. 415 These are consequences of para. 183 sent. 1–3 RAG 2014. 416 Para. 183 sent. 5 RAG 2014 invokes the impression that a Member State may only amend its list of ‘c’ areas if it designated a new ‘a’ area in course of the mid-term review. Considering that Member States may establish a reserve of national population coverage, this does not make sense. Instead, the Member States were supposed to gain s specific flexibility. It must thus be assumed that Member States may amend their lists irrespective of the mid-term review and its results. This would also correspond to the previous rule in para. 104 sent. 3 RAG 2007. Para. 183 sent. 6 RAG 2014, which stipulates that amendments may not exceed 50 % of each Member State’s adjusted ‘c’ coverage, corresponds to para. 104 sent. 4 RAG 2007. 417 Para. 184 sent. 1 RAG 2014 contains a similar provision for the amendment of ‘c’ areas as does para. 181 sent. 2 RAG 2014 for the addition of new ‘c’ areas from the Member State’s reserve according to para. 180 RAG 2014. 418 Para. 184 sent. 2 RAG 2014 serves the same purpose as para. 181 sent. 3 RAG 2014, see the annotation to para. 181 sent. 3 RAG 2014. 419 Considering the late publication of the RAG 2014 on 23 July 2013, it had to be expected that the Member States would not have had their regional aid maps approved by the end of 2013. In order to prevent an interruption of regional aid, the Commission decided to extend the previous Guidelines for six months until 30 June 2014. This date was also in line with the entry into force of the GBER II on 1 July 2014. 420 Para. 187 sent. 1 RAG 2014 refers to the known practice of the Commission to approve regional aid maps with an expiry date. For 2006 and 2007 decisions, this was 31 December 2014. 421 Art. 2 No 9, 13(2) and (9), 44(3) GBER I as well as Art. 2 No 27, 14(12), 58(4) GBER II require a valid regional aid map for the exemption of regional aid. Thus, in addition to the extension of the RAG 2007 for six months until 30 June 2014, the regional aid maps of the Member States had to be extended as

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Guidelines on national regional aid for 2007–2013 new422 new423 new424 105 sent. 1, 63425 sent. 2 106 sent. 1 sent. 2 107 sent. 1 sent. 2 sent. 3 sent. 3 tiret 1426 sent. 3 tiret 3 sent. 4

Para. 192 193 194

Para. 83427 65428 66

Para. 195

Para. 109

well. Considered the limited time frame of only six months and the unchanged application of the RAG 2007 for this period, the Commission could, however, have extended the regional aid maps on its own initiative without inviting the Member States to notify a prolongation. 422 This provision speaks for itself, see also the previous annotation. 423 Para. 187 sent. 4 RAG 2014 also only repeats a known fact which was in the commissions grip. 424 In this regard, the previous remarks regarding the extension of regional aid maps can also be applied to the extension of approved regional aid schemes. It was the Commission itself that failed to complete the RAG 2014 as early as it would have been necessary in order to ensure a smooth transition from one aid period to the next. 425 Para. 63 RAG 2007 still refers to the second Multisectoral Framework, OJ 2002 C 70/8. 426 With these appropriate provisions, the period of application of the RAG 2007 is limited to the beginning of the period of application of the RAG 2014. 427 The obligation to submits annual reports, which previously only applied to operating aid according to para. 83 RAG 2007, is now extended to all kinds of aid in para. 192 RAG 2014 in order to ensure a better adjustment with Regulations 659/1999 and 794/2004. 428 According to the previous rules, only aid for large investment projects, which had not to be notified, were to be reported. In Germany, for example, this would have been aid for investment projects with a capital expenditure exceeding 50 million EUR and with an amount of less than 22.5 million EUR in ‘a’ areas, and less than 11.25 million EUR in ‘c’ areas. Now, the Commission seeks to be informed about every aid exceeding an amount of 3 million EUR.

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F. Commentary on Articles 13 and 14 of Regulation 800/2008 (GBER I)* Article 13 Regional investment and employment aid 17

(1) Regional investment and employment aid schemes shall be compatible with the common market within the meaning of Article 87(3) of the Treaty and shall be exempt from the notification requirement of Article 88(3) of the Treaty, provided that the conditions laid down in this Article are fulfilled. (2) Ad hoc aid which is only used to supplement aid granted on the basis of regional investment and employment aid schemes and which does not exceed 50% of the total aid to be granted for the investment, shall be compatible with the common market within the meaning of Article 87(3) of the Treaty and shall be exempt from the notification requirement of Article 88(3) of the Treaty provided that the ad hoc aid awarded fulfils all the conditions of this Regulation. (3) The aid shall be granted in regions eligible for regional aid, as determined in the approved regional aid map for the Member State concerned for the period 20072013. The investment must be maintained in the recipient region for at least five years, or three years in the case of SMEs, after the whole investment has been completed. This shall not prevent the replacement of plant or equipment which has become out-dated due to rapid technological change, provided that the economic activity is retained in the region concerned for the minimum period. (4) The aid intensity in present gross grant equivalent shall not exceed the regional aid threshold which is in force at the time the aid is granted in the assisted region concerned. (5) With the exception of aid granted in favour of large investment projects and regional aid for the transport sector, the thresholds fixed in paragraph 3 may be increased by 20 percentage points for aid awarded to small enterprises and by 10 percentage points for aid awarded to medium-sized enterprises. (6) The thresholds fixed in paragraph 3 shall apply to the intensity of the aid calculated either as a percentage of the investment’s eligible tangible and intangible costs or as a percentage of the estimated wage costs of the person hired, calculated over a period of two years, for employment directly created by the investment project or a combination thereof, provided that the aid does not exceed the most favourable amount resulting from the application of either calculation. (7) Where the aid is calculated on the basis of tangible or intangible investment costs, or of acquisition costs in case of takeovers, the beneficiary must provide a financial contribution of at least 25% of the eligible costs, either through its own resources or by external financing, in a form which is free of any public support. However, where the maximum aid intensity approved under the national regional aid map for the Member State concerned, increased in accordance with paragraph 4, exceeds 75%, the financial contribution of the beneficiary is reduced accordingly. If the aid is calculated on the basis of tangible or intangible investment costs, the conditions set out in paragraph 7 shall also apply. In the case of acquisition of an establishment, only the costs of buying assets from third parties shall be taken into consideration, provided that the transaction has taken

*

See above nm. 12.

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place under market conditions. Where the acquisition is accompanied by other investment, the costs relating to the latter shall be added to the cost of the purchase. Costs related to the acquisition of assets under lease, other than land and buildings, shall be taken into consideration only if the lease takes the form of financial leasing and contains an obligation to purchase the asset at the expiry of the term of the lease. For the lease of land and buildings, the lease must continue for at least five years after the anticipated date of the completion of the investment project or three years in the case of SMEs. Except in the case of SMEs and takeovers, the assets acquired shall be new. In the case of takeovers, assets for the acquisition of which aid has already been granted prior to the purchase shall be deducted. For SMEs, the full costs of investments in intangible assets may also be taken into consideration. For large enterprises, such costs are eligible only up to a limit of 50% of the total eligible investment costs for the project. (8) Where the aid is calculated on the basis of wage costs, the employment shall be directly created by the investment project. (9) By way of derogation from paragraphs 3 and 4, the maximum aid intensities for investments in the processing and marketing of agricultural products may be set at: (a) 50% of eligible investments in regions eligible under Article 87(3)(a) of the Treaty and 40% of eligible investments in other regions eligible for regional aid, as determined in the regional aid map approved for the Member States concerned for the period 2007-2013, if the beneficiary is an SME; (b) 25% of eligible investments in regions eligible under Article 87(3)(a) of the Treaty and 20% of eligible investments in other regions eligible for regional aid, as determined in the regional aid map approved for the Member States concerned for the period 2007-2013, if the beneficiary has less than 750 employees and/or less than EUR 200 million turnover, calculated in accordance with Annex I to this Regulation. (10) In order to prevent a large investment being artificially divided into subprojects, a large investment project shall be considered to be a single investment project when the investment is undertaken within a period of three years by the same undertaking or undertakings and consists of fixed assets combined in an economically indivisible way.

Article 14 Aid for newly created small enterprises (1) Aid schemes in favour of newly created small enterprises shall be compatible with the common market within the meaning of Article 87(3) of the Treaty and shall be exempt from the notification requirement of Article 88(3) of the Treaty, provided that the conditions laid down in paragraphs 2, 3 and 4 of this Article are fulfilled. (2) The beneficiary shall be a small enterprise. (3) The aid amount shall not exceed: (a) EUR 2 million for small enterprises with their economic activity in regions eligible for the derogation provided for in Article 87(3)(a) of the Treaty; (b) EUR 1 million for small enterprises with their economic activity in regions eligible for the derogation provided for in Article 87(3)(c) of the Treaty. Annual amounts of aid per undertaking shall not exceed 33% of the amounts of aid laid down in points (a) and (b). (4) The aid intensity shall not exceed:

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(a) in regions covered by Article 87(3)(a) of the Treaty, 35% of eligible costs incurred in the first three years after the creation of the undertaking, and 25% in the two years thereafter; (b) in regions covered by Article 87(3)(c) of the Treaty, 25% of eligible costs incurred in the first three years after the creation of the undertaking, and 15% in the two years thereafter. These intensities may be increased by 5% in regions covered by Article 87(3)(a) of the Treaty with a gross domestic product (GDP) per capita of less than 60% of the EU-25 average, in regions with a population density of less than 12.5 inhabitants/km2 and in small islands with a population of less than 5000 inhabitants, and other communities of the same size suffering from similar isolation. (5) The eligible costs shall be legal, advisory, consultancy and administrative costs directly related to the creation of the small enterprise, as well as the following costs, insofar as they are actually incurred within the first five years after the creation of the undertaking: (a) interest on external finance and a dividend on own capital employed not exceeding the reference rate; (b) fees for renting production facilities/equipment; (c) energy, water, heating, taxes (other than VAT and corporate taxes on business income) and administrative charges; (d) depreciation, fees for leasing production facilities/equipment as well as wage costs, provided that the underlying investments or job creation and recruitment measures have not benefited from other aid. (6) Small enterprises controlled by shareholders of undertakings that have closed down in the previous 12 months cannot benefit from aid under this Article if the enterprises concerned are active in the same relevant market or in adjacent markets. Bibliography: Bacon/Wishlade, European Communitiy Law of State Aid, 2009; Borchardt, Die Ru¨ckfu¨hrung zu Unrecht gewa¨hrter staatlicher Beihilfen beim Verkauf von Vermo¨genswerten des Beihilfeempfa¨ngers durch den Insolvenzverwalter, ZIP 2001, 1301; Cavallo/Junginger-Dittel, The Multisectoral Framework 2002, Competition Policy Newsletter 1/2004, 78; Ehricke, Ru¨ckzahlung gemeinschaftsrechtswidriger Beihilfen in der Insolvenz des Beihilfeempfa¨ngers, ZIP 2001, 489; Fiebelkorn/Petzold, Durchfu¨hrungsverbot gema¨ß Article 88 III 3 EG, Ru¨ckforderungsverpflichtung und Nichtigkeitsfolge: Ist die BGHRechtsprechung praxisgerecht?, EuZW 2009, 323; Fisher, Statistical Methods for Research Workers, 1. Aufl. 1925; Helbling, Zur Bedeutung der US GAAP, Der Schweizer Treuha¨nder 2001, 763; Knoblich, Die Entwicklung des Regionalbeihilferechts und aktuelle Herausforderungen, in: Oberender, Der ‘more economic approach’ in der Beihilfenkontrolle, 85; Koenig/Heratsch, Staatliche und kommunale Bu¨rgschaften auf dem Pru¨fstand des EG-Beihilferechts – Neue Tendenzen, ZHR 169(2005), 77; Lang, Marktmacht und Marktmachtmessung im deutschen Großhandelsmarkt fu¨r Strom, 2007; Pechstein, EuZW 1999, 499., EuZW 2003, 447; Solte´sz, Hat sich das Europa¨ische Beihilferecht in der Krise bewa¨hrt?, in: Schwarze, Rechtsschutz und Wettbewerb in der neueren europa¨ischen Rechtsanwendung, 2010, 61;., Subventionskahlschlag oder Beihilfenkontrolle? – Der neue Multisektorale Regionalbeihilferahmen als europaweites Investitionshemmnis?, EWS 2004, 241; id./Marquier, Ku¨nstliche Aufteilung von Investitionsprojekten zur Umgehung der Beihilfekontrollen (?) – Das Beispiel des neuen Multisektoralen Rahmens, EuZW 2004, 587;./Scha¨dle, Zur Umgehung beihilferechtlicher Notifizierungspflichten – Aktuelle Entwicklungen bei der 3-Jahres-Regel, EuZW 2008, 134; Tetsch, Die Bund-La¨nder-Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur, 1996; Weitnauer, Der Unternehmenskauf nach neuem Kaufrecht, NJW 2002, 2511.

Content A. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Rationale and purpose of regional aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. State aid justification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Compensation for regional handicaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2. Incentive effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Relevant legislative acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 III. Genesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Support for coordination of the European Commission addressed to the Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2. Sectorial legislation on the specification of Treaty provisions . . . . . . 15 3. State Aid Action Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 B. Regional aid and European regional policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 C. The legal acts of regional state aid law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 I. Relationship between GBER I and RAG 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 1. Synopsis of Articles 12–14 GBER I and the corresponding provisions of the RAG 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2. Interdependence of GBER I and RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3. The RAG 2007 contain the legal basis for the application of the GBER I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 II. Regional aids according to the GBER I within the context of the regional guidelines 2007–2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2. Territorial scope – the national regional aid maps . . . . . . . . . . . . . . . . . . . 50 a) Eligible areas and the selection.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 aa) Brief overview of the process for the selection of eligible areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 bb) Determination of population coverage at Union level. . . . . . . 55 cc) Eligible areas under Article 107(3) lit. a TFEU, so-called a)regions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 dd) Regions affected by the statistical effect.. . . . . . . . . . . . . . . . . . . . . . . 61 ee) Assisted Areas Eligible under Article 107(3) lit. c TFEU, so-called c)-regions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 (1) Individual population ceiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (2) Selection of areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 b) The maximum rates (Subsidy Value Limits).. . . . . . . . . . . . . . . . . . . . . . 83 aa) a)-Assisted areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 bb) c)-Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 c) Approval of the Member States’ regional aid maps.. . . . . . . . . . . . . . 102 aa) Content of the regional aid maps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 bb) Scope of assessment in the course of the approval procedure for regional maps.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 cc) The Commission decision regarding the submitted regional aid maps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 dd) Legal effects of an approval of the regional aid map.. . . . . . . . 111 ee) The Member States’ margin of discretion. . . . . . . . . . . . . . . . . . . . . 114 3. The material scope of application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 a) Sectoral scope of application of RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . 119 b) The sectoral scope of application of the GBER I. . . . . . . . . . . . . . . . . . 120 c) Sectoral concentration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 d) Distinction between RAG 2007 and block exemption regulations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 aa) Para. 11 RAG 2007 as ‘changeover switching rule’. . . . . . . . . . 125 bb) Scope of GBER I.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 e) Undertakings in difficulty.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 aa) Rivalry between GBER I and rescue and restructuring guidelines (R&R Guidelines).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 bb) Adoption of the GBER I-criteria into the RAG 2007. . . . . . . . 137 cc) Rivalry between RAG 2007 and Rescue and Restructuring Guidelines (R&R Guidelines). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 dd) Possible options and margin of discretion.. . . . . . . . . . . . . . . . . . . . 139 ee) Legal validity of approved individual aid. . . . . . . . . . . . . . . . . . . . . . 141

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f) Ad hoc aids.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 g) Justifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 D. The incentive effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 I. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 II. Condensed overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 1. Basic general rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 a) Discretion-based aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 b) Aid based on legal aid scheme. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 c) The special case of the incentive effect in para. 68 RAG 2007. 156 III. In detail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 1. The incentive effect as part of the aid granting based on discretion of the granting authority (without a premature start of the project or activity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 a) The incentive effect in the course of the decision process based on RAG 2007.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 aa) Regional aid not requiring authorization. . . . . . . . . . . . . . . . . . . . . 164 bb) Regional aid requiring authorization. . . . . . . . . . . . . . . . . . . . . . . . . . 165 cc) Ad hoc aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 b) The incentive effect in the course of the decision process based on GBER I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 aa) Authorization requiring aid that are based on an exempted scheme.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 bb) Exempted aid based on an exempted aid scheme. . . . . . . . . . . 171 (1) SME within the meaning of Article 2 No. 7 GBER I. . . 172 (2) Large enterprises within the meaning of Article 2 No. 8 GBER I.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 (3) Critical reflection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 cc) Regional aid not based on an aid scheme (Regional ad hoc aid). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 (1) Non-exempt regional ad hoc aid.. . . . . . . . . . . . . . . . . . . . . . . . . . 180 (2) Exempt regional ad hoc aid.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 c) Critical reflection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 2. The incentive effect in case of aid granted at the discretion of the authorities after the start of the project (start of the project before authorization, premature start of the measure without impacting its eligibility for aid). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 a) Principle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 b) Premature start of the measure without impacting its eligibility for aid before entry into force of RAG 2007. . . . . . . . . . . . . . . . . . . . . . 192 c) Premature start of the measure without impacting its eligibility for aid based on the RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 aa) General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 bb) Non-notifiable aid based on an approved aid scheme. . . . . . 194 cc) Notifiable aid based on an approved or exempted aid scheme.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 dd) Aid based on a non-approved or non-exempted aid scheme.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 ee) Ad hoc aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 ff) Mandatory context of aid schemes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 gg) Critical reflection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 d) Premature start of the measure without impacting its eligibility for aid based on the GBER I.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 aa) SME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 bb) Large enterprises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 cc) Ad hoc aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

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3. The incentive effect in the context of an approved or exempt aid scheme with no discretionary power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 a) General.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 b) The incentive effect in the context of the RAG 2007. . . . . . . . . . . . . 212 c) The incentive effect in the context of the GBER I. . . . . . . . . . . . . . . . 215 4. The incentive effect in case of a change in the legal basis . . . . . . . . . . 217 5. Summary principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 The beneficiaries’ own contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Lock-in periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 I. Lock-in periods according to the RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 II. The lock-in periods according to the RRIA and GBER I . . . . . . . . . . . . . . 224 III. Additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Aid intensities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 Eligible aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 I. Summary on eligible aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 1. Regional investment and employment aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 2. Regional operating aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 3. Regional aid for newly created small enterprises . . . . . . . . . . . . . . . . . . . . . 236 II. Regional investment and employment aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 1. General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 2. Eligible investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 a) Investment in tangible assets (regional investment aid).. . . . . . . . . 239 b) Investments in intangible assets (regional investment aid). . . . . . 240 c) Investments in wage costs (Regional employment aid). . . . . . . . . . 244 aa) General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 bb) Regional employment aid within the meaning of the RAG 2007.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 (1) Creation of jobs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 (2) Wage costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 (3) Staffing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 (4) Maximum aid intensity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 (5) The accumulation of regional investment aid for tangible and intangible assets with regional investment aid in form of regional employment aid. . . . . . . . . . . . . . . . . . 258 cc) Regional employment promotion according to the rules of the block exemption regulations, specifically according to Article 12, 13 GBER I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 3. Eligible investment purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 a) Establishment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 b) Setting-up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 c) Extension. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 d) Diversification of production.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 e) Fundamental change in the overall production process.. . . . . . . . . 272 f) Acquisition of an establishment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 g) Replacement investments in form of operating aid. . . . . . . . . . . . . . . 278 4. Appropriate forms of assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 5. Aid for large investment projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 a) Large investment project. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 b) Principle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 c) Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 aa) ECSC Treaty and sectoral approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 bb) Horizontal approach, the multi-sectoral framework 1998. . 286 cc) Extension of the horizontal approach, the Multisectoral framework on regional aid 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 d) RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 aa) Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 bb) In detail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 (1) Large investment project.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

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(a) Definition.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b) The Commission’s position in regard to large investment projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Reduction of the aid intensity for large investment projects.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Notification.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Single project.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) Period of three years.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b) Fixed assets combined in economically indivisible way. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Significant decisions of the Commission. . . . . . . . . . . . . . . . . . . . . . bb) Ratio legis of the provisions in RAG 2007.. . . . . . . . . . . . . . . . . . . cc) Development and content of para. 60 RAG 2007.. . . . . . . . . . . e) GBER I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Timely applicability of the different system of rules. . . . . . . . . . . . . g) Leading undertakings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) In detail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Criteria for the market power assessment. . . . . . . . . . . . . . . . (2) Relevant product market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Relevant geographic market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Defining market shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) Increase in capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) Objective of the aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) Appropriateness of the aid instrument . . . . . . . . . . . . . . . . . . . (8) Incentive effect within the assessment of compatibility (9) Proportionality of regional aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) Negative effects of an intended aid granting. . . . . . . . . . . . . (11) ‘Crowding-out of private investment’. . . . . . . . . . . . . . . . . . . . . (a) Market power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b) Inefficient market structures . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) Effects on trade and location. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) Balancing test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Critical reflection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Transfer of an undertaking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Operating aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Exceptions and permissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Sector operating aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Horizontal operating aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Regional operating aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. About regional operating aid in detail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Assisted regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Limiting the operating aid on the part of the granting authority: justification and proportionality of regional operating aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Limitations of the beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) operating aid for areas in outermost regions and for the least populated areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Duration and reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Rules on the cumulation of aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Cumulation provisions in RAG 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Cumulation of different types of regional aid . . . . . . . . . . . . . . . . . . . . b) Cumulation of different types of aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Provisions on cumulation and block exemption regulations. . . . . . .

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F. Commission Regulation (EC) 800/2008 (GBER I)

1 Art. 13–14

J. Entry into force, implementation, transparency and verification. . . . . . . . . . I. General remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Timely validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Approved regional map as a requirement for the application. . . . . . . . . IV. Notification requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Appropriate measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Boundary to aid for environment and training. . . . . . . . . . . . . . . . . . . . . . . . . . VII. Boundary to aid for research and development . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Duration of validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IV

512 512 513 515 516 519 526 528 529 537

A. Introduction I. Rationale and purpose of regional aid Regional aids are state aids targeted at regions. They promote the economic develop- 1 ment of certain disadvantaged areas within the European Economic Area.1.2 Being a special form of horizontal aid, they address the handicaps of the disadvantaged regions, compensate the drawback of the structurally weak areas and promote the economic, social and territorial cohesion of the individual Member States and the European Union as a whole (concept of cohesion).3 Therefore they are reserved for those regions and are designed to assist the development of the most disadvantaged regions4 by supporting investment and job creation5. They are regarded as being compatible with the internal market (until 30 November 2009 with the common market) according to Article 107(3) lit. a and c TFEU, provided that they are addressed to the most disadvantaged areas. Otherwise they lose the incentive for firms to invest in a disadvantaged area, distort the market conditions and devitalise so the efficacy of the Community economy as a whole. 6 Regional aids remain neutral towards the intersectoral allocation of economic resources. 7 Consequently, only multisectoral aid schemes for a given region are regarded as regional

1 The European Economic Area (EEA) covers the territory of the Member States of the European Union and of the EFTA-States excluding Switzerland, Agreement on the European Economic Area of 2 May 1992, Agreement on the first enlargement of the EEA of 14/10/2003, Agreement on the second enlargement of the EEA of 25/7/2007. 2 Para. 1 Guidelines on National Regional Aid for 2007–2013, OJ 2006 C 54/13 (Regional Aid Guidelines 2007 – RAG 2007); Point 1.4 Guidelines on National Regional Aid, OJ 1998 C 74/9 (Regional Aid Guidelines 1998 – RAG 1998), amended by the Community Guidelines on State Aid for rescuing and restructuring firms in difficulty, OJ 1999 C 288/2, (No. 96) and by the Guidelines on National Regional State Aid, OJ 2000 C 285/5. 3 Para. 2 RAG 2007; Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Article 87 und 88 of the Treaty to national regional investment aid (Regulation on regional investment aid – RRIA), OJ 2006 L 302/29, Recital 3; GBER I, Recital 40; Com., Consultation paper of DG Competition ‘Common Principles for an economic assessment of the compatibility of State Aid under Article 87.3 EC-Treaty’ of 9 October 2009, para. 28, http://ec.europa.eu/competition/state_aid/reform/ economic_assessment_de.pdf, (Consultation paper ‘economic assessment’); quod vide Mederer/Pesaresi/ van Hoof/Fort/Nyssens, EU Competition Law, Part 4, Chapter 1, para. 4.31. 4 Para. 3 RAG 2007; 1.3 and 1.4 RAG 1998; Recital 3 RRIA; Recital 40 GBER I. 5 Therefore teleworking jobs can only be promoted in eligible regions regardless where the firm which creates the teleworking jobs is located. Com., Decision of 25 February 1998 concerning aid which Germany intends to grant under the 26th framework plan of the joint scheme for improving regional economic structures with a view to promoting teleworking, OJ 1999 L 271/25; Heidenhain/Jestaedt, EC State Aid Law, § 15 Para. 8. 6 Para. 1.7 RAG 1998. 7 Para. 2.3 RAG 1998.

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additions on aids.8 Usually, they are granted as regional investment aid,9 as regional additions on investment aids granted to small and medium-sized enterprises 10 or as aids granted to newly established firms.11 If that is not sufficient considering the structural handicaps of a region, a regional operating aid is also possible.12 It may be granted based on an aid scheme, approved by the Commission or exempted by Article 4 RRIA or Article 12 to 14 GBER I or as an individual aid which has to be notified to the Commission, either in the form of an ad hoc aid13 or in the form of a notifiable aid, based on an aid scheme14.15 2 The European Commission does not regard regional top-ups on other forms of horizontal aids in eligible areas as regional aids, such as aids for research, development and innovation, employment,16 training or the environment, that means aids, which pursue other than regional objectives of common European interest. 17

II. State aid justification 3

The justification of regional State aids in the sense of compatibility with the internal market is based on two approaches: the concept of compensation of regional handicaps in favour of the recipient undertakings in order to create a benefit of the eligible area on the one hand and the concept of incentive effects on the other. Both concepts are covered in detail by the relevant legislative acts.

1. Compensation for regional handicaps 4

A subsidy is of lowest effect on the internal market if the recipient does not receive an additional advantage but if existing regional handicaps are simply compensated. 18 Considering that the amount of an aid depends on the economic power of a region19, regional aids are first of all a compensation for regional handicaps,20 which means a 8 Para. 2.4 RAG 1998; Recital 9 and Article 7 lit. b 1 st half-sentence RRIA; Recital 14 and Article 1 (4) sentence 1 GBER I. An exclusion applies to the sector tourism: Note 9 and Article 7 lit. b 2 nd halfsentence RRIA; Recital 14 and Article 1 (4) sentence 2 GBER I. 9 Para. 1.4 RAG 1998; para 1, 3 RAG 2007; Article 1 (1) RRIA; Article 13 GBER I. Regional investment aids include regional employment aid (cost of labour aid) linked with an investment; Recital 14 RRIA; Recital 37 and Article 2 no. 17, Article 13 (5) and (8) GBER I. 10 Para. 1.3 Fn. 1 RAG 1998; Para. 1 RAG 2007, amended by Note 39 GBER I; these are regional additions on investment-aid to small and medium-sized enterprises granted in disadvantaged and in other areas. 11 Para. 7, 84–91 RAG 2007; Note 43 and Article 14 GBER I. 12 Section 1 para. 5 RegLL 1998; para 1, 6, 76–83 RAG 2007. 13 Article 2 (1) lit. d RRIA; Article 1 no. 3 lit. a, 4 GBER I. 14 Article 2 (3) lit. b GBER I. 15 Para. 10, 106 RAG 2007; Recital 6, Article 1 (1) sentence 2 RRIA; Article 13 (1) GBER I. 16 That does not apply to regional employment aid (cost of labour aid) linked with an investment. That regional employment aid is to be regarded as a regional aid, see above Fn. 9. 17 Para. 2, Fn. 1 RAG 2007. 18 See Community Framework for State Aid to the Motor Vehicle Industry, 1997 OJ C 279/1, para. 3.2 lit. c, amended by the notice on the extension of the period of validity of the Community framework for State aid to the motor vehicle industry, OJ 2000 C 258/6 (Motor vehicle-Community Framework 1997): That requires a cost-benefit analysis with regards to the actual location in an eligible area and at least another location in order to calculate the disadvantage the investor is facing. 19 Para. 1, 5 RAG 2007 and the provisions on the relevant GDP in para. 15–20, 25, 27, 30 RAG 2007. 20 GBER I, Recital 40; Cavallo/Junginger-Dittel, The Multisectoral Framework 2002, European Commission, Competition Policy Newsletter 1/2004, 78: ‘… which should compensate the regional handicaps …’; with regards to the general compensation of regional handicaps: Notes 23, 47, 122, 146, 179, 191, 238. 384, 387 and 448.

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IV

generalized compensation for the disadvantages which an undertaking has to accept if it sets up its business in a less favoured region in terms of economics or infrastructure or expands in such a region.21 That compensation for regional handicaps will only be necessary if the enterprise can 5 set up its business also at a different location which is less disadvantaged (locationunbound). Without a real choice of location for an investment, a compensation for regional handicaps in the case of resettlement is not justified. 22

2. Incentive effects That approach is based on the idea that an enterprise only makes an investment in 6 the supported way if the investment is financially supported. The incentive effect can be manifested in the investment itself, in the investment volume as well as in the investment period.23

3. Relevant legislative acts The Guidelines on National Regional Aid for 2007-2013 (Regional Aid Guidelines 7 2007 – RAG 2007) as well as Article 1–14, 35, 43, 44 GBER I and Article 1-9 RRIA (because of Article 44(2) GBER I) are the central rules in order to examine if a planned regional aid is compatible with the internal market.

III. Genesis The RAG 2007 and the provisions of the GBER I go back to three roots: the 8 development and history of the previous regional guidelines on the basis of a support for coordination by the European Commission (1.), the sectoral regulations (2.), particularly the multi-sectoral framework 2002, and the new state aid policy, expressed in the State Aid Action Plan (3.). On that basis, the European Commission has developed the new RAG 2007 which came into force on 1 January 2007. Furthermore 21 See Recital 14 sentence 2 Commission Regulation No 70/2001 of 12 January 2001 on the application of Article 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises, OJ 2001 L 10/ 33, amended by Commission Regulation (EC) No 364/2004 of 25 February 2004 amending Regulation (EC) No 70/2001 as regards the extension of its scope to include aid for research and development, OJ 2004 L 63/22, Commission Regulation (EC) No 1040/2006 of 7 July 2006 amending Regulations (EC) No 2204/2002, (EC) No 70/2001 and (EC) No 68/2001 as regards period of application, OJ 2006 L 187/8, Corrigendum to Commission Regulation (EC) No 1040/2006 of 7 July 2006 amending Regulations (EC) No 2204/2002, (EC) No 70/2001 and (EC) No 68/2001 as regards period of application, OJ 2006 L 194/33 and by Commission Regulation (EC) No 1976/2006 of 20 December 2006 amending Regulations (EC) No 2204/2002, (EC) No 70/2001 and (EC) No 68/2001 as regards the extension of the periods of application, OJ 2006 L 368/85 (SME-Exemption Regulation); Para. 2, 22 no. 2 Communication from the Commission concerning the criteria for an in-depth assessment of regional aid to large investment projects, OJ 2009 C 223/3; previously published on 17/6/2009 as ‘guidance paper setting out criteria for the indepth assessment of regional aid to large investment projects’ (criteria); Knoblich, Die Entwicklung des Regionalbeihilferechts und aktuelle Herausforderungen, in: Oberender, Der ‘more economic approach’ in der Beihilfenkontrolle, p. 85, 90. 22 See Motor vehicle-Community Framework 1997, Sec. 3.2 lit. a. Therefore, the Free State of Saxony does not promote enterprises mixing asphalt. Those enterprises have to set up their business where they want to supply the asphalt. Asphalt is very difficult to be transported several hundred kilometres, see ‘Richtlinie des Sa¨chsischen Staatsministeriums fu¨r Wirtschaft und Arbeit zur Fo¨rderung der gewerblichen Wirtschaft einschließlich der Tourismuswirtschaft im Rahmen der Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur’ (GRW) (RIGA) of 19/2/2009, OJ of the Free State of Saxony: Sa¨chsABl. 2009, 525 (RIGA SN 2009), Annex no. 2.4. 23 Recital 29 sentence 3 and Article 8 (2), (3) GBER I; para. 38 RAG 2007.

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on that basis, the Regulation 1628/2006 on National Regional Investment Aid of 24 October 2006(RRIA)24 which was repealed on 29 August 200825 and replaced by the GBER I on 1 January 2009 the latest,26 as well as the regional provisions of the GBER I itself27 were developed.

1. Support for coordination of the European Commission addressed to the Member States 9

10

11

12

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Art. 92-94 of the EEC-Treaty (later Article 87-89 EC-Treaty and now Article 107109 TFEU) had a rather subsidiary function because of the more important provisions of the ECSC-Treaty28 which was signed in 1951 and came into force in 1952. Only 14 years later, on 20 October 1971 the representatives of the national governments in the Council adopted a first resolution on general regional aid schemes. 29 Following a Commission Communication to the Council of 23 June 197130, they made the commitment to apply the jointly agreed principles and the coordination by the European Commission to regional state aids. The communication was based on the concern that there was a risk of ‘outbidding’ and hence there was a need to implement a first series of measures necessary for coordination in order to limit those risks. 31 So the core of the regional state aid law consists of a coordination of national policies by the European Commission. Besides those principles, the Member States agreed arrangements for application. Those contained a monitoring which was rather moderate. It was agreed that the Commission would monitor the results of the coordination. Subsequently, the Commission was informed on the most important applications on the basis of a procedure that guaranteed the confidentiality.32 It was intended that the Commission would work with the responsible senior officials from the Member States, monitored the progress of the application of the principles on coordination and reported on the progress on an annual basis back to the Council. 33 On 17 February 1971, the Commission came to the first negative decision concerning a general regional aid scheme which was justified by having no regional specificity. 34 But in treaty violation proceedings against Germany on 12 June 1973, the ECJ found that the decision was void.35 In the subsequent 10 years, the Commission refined the rules in several communications.36 On 23 July 1984, the Commission decided that state aid with respect to the regions Borken-Bocholt and Siegen granted by the state of North Rhine-Westphalia were incompatible with the Common market and not allowed to be granted from 30 June 1985 onwards. The ECJ found on 14 October 1987 that the decision of the 24

RRIA, OJ 2006 L 302/29. Article 43 sentence 1 GBER I. 26 Article 44 sentence 2, 45 GBER I. 27 In addition to the provisions of the general part, Articles 13, 14, 15 (4) lit. a, 29, 35, 43, 44 GBER I. 28 Treaty establishing the European Steel and Coal Community of 18 April 1951, coming into force 24 July 1952, BGBl. 1952 II 448 (ECSC-Treaty). 29 OJ 1971 C 111/1. 30 OJ 1971 C 111/7. 31 OJ 1971 C 111/1, recitals. 32 OJ 1971 C 111/1, no. 9 of the arrangements for application. 33 OJ 1971 C 111/1, no. 9 last sentence of the arrangements for application. 34 Commission Decision 71/121/EEC of 17/2/1971 (subsidy for investment – incentive for the establishment of others than mining companies in coal mining areas) OJ 1971 L 57/19. 35 ECJ, Case-70/72 Commission v. Germany [1973] ECR, 813. 36 Communication of the Commission to the Council 1973, COM (73) 110 of 27/6/1973; Communication of the Commission to the Council 1975, COM (75)77 final of 26. February 1975; Communication of the Commission on regional aids of 21 December 1978, OJ 1979 C 31/9. 25

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Commission was null and void in so far as the Commission had prohibited the aid37, because the Commission had given no plausible and coherent reason.38 The Commission thereafter adopted substantially specific regulations. 39 Considering 14 the completing the internal market in 199240, those regulations finally led to the Guidelines on National Regional Aid of 1998 (Regional Aid Guidelines 1998 – RAG 1998).41 They contained the criteria which the Commission applies to the compatibility of regional aids granted by the end of 2006 with the common market according to Article 87(3) lit. a and c EC-Treaty.

2. Sectorial legislation on the specification of Treaty provisions The second root is the sectorial legislation. The Treaty establishing the European 15 Coal and Steel Community was the oldest of those legislative acts.42 To this were added the Regulation on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway in 1969, 43 since 1971 the Community framework on aids to the textiles and clothing industry, 44 1977 the community framework on aids to the synthetic fibres industry, 45 1989 the community framework on aids to the motor vehicle industry46. The reform of that framework in 199747 was based on the right approach of a compensation of disadvantages on the basis of a location comparison.48 Furthermore, in 1989 the guidelines on aids to maritime transport companies49, in 1990 the directive of the Council on aids to shipbuilding50 as well as the regulations on aids in the agricultural and fishery sector were added.51 Those regulations include the so-called sensitive sectors. It soon became apparent that more and more large investments were made. How- 16 ever, the Commission could not examine State aid granting to those investments, as an 37

ECJ, Case-248/84 – Germany v. Commission [1987] ECR 4013. ECJ, Case-248/84 – Germany v. Commission [1987] ECR 4013, para. 22. 39 Communication of the Commission on the method for the application of Article 92 (3) (a) and (c) to regional aid of 1988, OJ 1988 C 212/2; Communication of the Commission of 1990 amending the Communication of 1979, OJ C 10 of 16/1/1990, 8; Communication of the Commission of 1990 amending the Communication of 1988, OJ C 163 of 4/7/1990, 6; Letter from the Commission to the Member States 39 (94) D/587 of 17 January 1994, Wettbewerbsrecht in den Europa¨ischen Gemeinschaften, Vol. II A, Luxemburg 1995, 250; Communication of the Commission on changes to the method for the application of Article 92 (3) (c) EC-Treaty to regional aid, OJ C 364/6 of 20 December 1994. 40 Bacon/Wishlade, European Community Law of State Aid, Oxford 2009, para. 15.04. 41 RAG 1998, OJ 1998 C 74/9, see footnote 2 regarding the subsequent amendments. 42 Treaty establishing the European Coal and Steel Community of 18/4/1951, came into force on 24/7/ 1952, BGBl. 1952 II 448 (ECSC-Treaty). 43 Regulation (EEC) No 1191/69 of the Council of 26 June 1969 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway, OJ 1969 L 156/1. 44 Community framework on aids to the textiles industry, Communication of the Commission to the Member States, SEC (71) 363 final of 30 July 1971 (Textile-Community framework). 45 Community framework on aids to the synthetic fibres industry, Communication of the Commission to the Member States of 1977. 46 Community framework on aids to the motor vehicle industry, OJ 1989 C 123/3 (motor vehicle framework 1989), extended by the Commission Decision, OJ 1991 C 81/4 (motor vehicle framework 1991) and OJ 1993 C 36/17 (motor vehicle framework 1993). 47 Motor vehicle framework 1997 (footnote 18). 48 Section 3.2. Motor vehicle framework 1997 (footnote 18). 49 Guidelines on aids to maritime transport companies (on financial and fiscal measures concerning shipping operations with ships registered in the Community), SEK (89) 921 final of 3/8/1989. 50 Council Directive of 21 December 1990 on aid to shipbuilding, OJ 1990 L 380/27. 51 Commission communication concerning State involvement in the promotion of agriculture and fisheries products, OJ 1986 C 272/3. 38

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appropriate legal basis did not exist. Furthermore, it was not possible to regard almost every sector as a sensitive one. Therefore, in 1994 the Commission announced a horizontal multi-sectoral common framework for state aids to large investments projects to all economic sectors.52 17 Four years later the first multi-sectoral framework on regional aid for large investment projects (Multisectoral Framework on Regional Aid 1998 – MFRA-1998) came into force on 1 September 1998.53 Regardless of the sector, that framework included almost every large investment project54 if the total costs of the project exceed EUR 50 million55 and the aid intensity exceeds 50 percent of the corresponding regional aid ceiling for large companies and the project involved aid per job of least EUR 40 000 56, or regardless those criteria, the total aid amounted to at least EUR 50 million. 57 Furthermore, there was an obligation of prior notification for all large investment projects regardless of the aid was granted as an ad-hoc aid 58 or was based on an aid scheme approved by the Commission59 and therefore normally there was no obligation of notification.60 18 According to this framework, the permitted intensity of aid was calculated by the multiplication of several factors. These included the four-tier competition factor in order to check if the project was part of sector suffering from structural overcapacity or if the project fell into a market declining,61 the five-tier factor ‘capital-labour’ which highlighted the capital intensity in relation to the jobs newly created or safeguarded including training places62,63 as well as the three-tier factor ‘regional impact’ which focused on the degree of indirect job creation for each job created by component suppliers or service providers of the undertaking receiving an aid.64 The result was within a range of 15 percent and 100 percent of the relevant regional maximum of an investment.65 The multi-sectoral frame-

52 Communication from the Commission to the Council, to the European Parliament, Economic and social committee and the Committee of the Regions regarding the competitive policy for the European Union, KOM (94) 319 final. 53 Communication of the Commission – Multisectoral framework on regional aid for large investment projects, OJ 1998 C 107/7 (MSF-1998). 54 The framework did not include the following sectors: agriculture, fishery, iron and steel industry, shipbuilding, synthetic fibres, motor vehicle industry, traffic and coal as well as aid granted to the creation of jobs only according to para. 4.11–4.14 RAG 1998; para 1.3. sentence 1 and 2 as well as para. 2.1. footnote 6 MSF-1998. 55 In the case of the textile and clothing industries only 15 million Euros applied, para. 2.1. footnote 8 MSF-1998. 56 In the case of the textile and clothing industries only 30 000 Euros applied, para. 2.1. footnote 10 MFRA-1998. 57 Para. 2.1. MSF-1998. 58 Para. 2.1. footnote 7 MSF-1998. 59 Mn. 2.1. MSF-1998. 60 If the grant of aid fell within the approved aid scheme, ECJ Cases C-47/91 – Italgrani [1994] ECR I4635, para. 24; C-278/95 P Siemens [1997] ECR I-2507, para. 31. Based on the general obligation of notification according to Article 88 (3) EC-Treaty, the MSF-1998 introduced a specific notification procedure by providing for an exemption for aids which were granted on the basis of a state aid scheme approved by the Commission. 61 Factor ‘T’ with a multiplying range of between 0.25 and 1.0: para 3.2.–3. 6., 3.10. MSF-1998. 62 Commission, State aid N 300/2002 of 30/10/2002, para. 36 – Communicant Semiconductor Technologies; N 514/2002 of 27/11/2002 – Agrolinz Melamin Piesteritz. 63 Factor ‘I’ with a multiplying range of between 0.6 and 1.0: para 3.7., 3.8., 3.10. MSF-1998. 64 Factor ‘M’ with a multiplying range of between 1.0 and 1.5: para. 3.9. and 3.10. MSF-1998. 65 The lowest factor implied high workplace-related capital intensity in a sector facing serious structural overcapacity and/or an absolute decline in demand and only a small increase of indirect workers, para. 3.10. MSF-1998; that has not been the case for commercial reasons.

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work promoted positive regional impacts of the specific investment by allowing a higher rate of aid,66 but not above the regional ceiling for this region.67 In practice, in contrast to all declarations of the Commission68 the framework proved 19 as cumbersome and laborious.69 Every notification required describing the sector structure as well as proof of every single direct and indirect job, the latter by ‘letters of intent’, to the Commission.70 It were the small firms which were facing difficulties receiving the relevant information and declarations from their future business partners.71 Furthermore, the framework proved counteracting innovations: the more jobs an investment project created, the higher the aid was. By applying the capital-labour-factor, the creation of many simple jobs for less experienced workers would have led to a higher aid as if a similar investment project which had aimed at the creation of more cost intensive but innovative jobs.72 Despite the effort, the framework ensured transparency with regards to the intensity of the aid and to the decision of the commission which became predictable. On 19 March 2002 the Commission adopted a new, second multi-sectoral framework 20 on regional aid (Multisectoral Framework on Regional Aid 2002 – MSF-2002).73 This framework redefined the two-tier thresholds for an obligatory notification procedure, the combination of volume of investment and intensity of aid as well as the intended absolute aid level.74 The MSF-2002 required considerable reductions of the relevant regional aid ceilings in two stages: a reduction of 50 percent for an investment volume of more than EUR 50 million and of 66 percent for more than EUR 100 million. Furthermore, the obligation of notification now depends on the absolute aid amount on the basis of the regional aid ceiling for an investment volume of EUR 100 million. 75 Thus, there was an obligation of notification in the case of investment projects if the aid proposed was more than the maximum allowable aid that an investment of EUR 100 million could obtain according to the method of calculation in the new framework. 76 Furthermore, the new MSF-2002 announced a simplification of the complex methods of calculation laid down in the MSF-1998, so it would be easier to receive an approval 66

Factor ‘M’: para. 3.10. MSF-1998. MSF-1998, para. 3.10. NB: No project would of course be allowed to receive aid above the regional ceiling’. 68 Para. 1.6. MSF-1998. 69 See the criticism of Solte ´sz, Beihilfenkontrolle, EWS 2004, 241, 242 et seq. 70 See Commission, State aids C 86/2001 of 9/4/2002, OJ 2002 L 307/37, para. 76, 81–91 – Infineon; C 61/2002 of 23/7/2003, OJ 2003 L 314/26, para. 176 and 178 – Shotton, UK; N 300/2002 of 30/10/2002, para. 36, 44 – Communicant Semiconductor Technologies; N 514/2002 of 27/11/2002, para. 34, 38, 40, 41 – Agrolinz Melamin Piesteritz; N 113/2003 of 23/7/2003, para. 26, 30–35 – Otto; N 522/2003 of 3/2/2004, section 3.2 page 8 and page 9 et seq. – AMD; N 612/2003 of 20.4.2004, section 3.2 page 5 and page 6 – Mu¨ller. 71 E.g. Com., State aid N 668/2002 of 13 May 2003, para. 42 et seq., 45, 48, 50 – Papierfabrik Jass. 72 Commission, State aid N 640/2002 of 11/12/2002, para. 41 – Vestas; N 608/2003 of 20/4/2004, para. 15 – DHL on one hand and N 480/2000 of 17/8/2000, page 8 – United Kingdom: Motorola; N 434/ 2001 of 25/7/2001, para. 343 – France: ATMEL; C 86/2001 of 9/4/2002, OJ 2002 L 307/37, para. 79 – Infineon; N 300/2002 of 30/10/2002, para. 34 – Communicant Semiconductor Technologies; N 345/2003 of 10/12/2003, para. 45 – France: St Microelectronics; N 522/2003 of 3/2/2004, section 3.2 page 8 – AMD on the other. 73 Multi-sectoral Framework on regional aid for large investment projects OJ 2002 C 70/8, Commission communication on the modification of the Multisectoral Framework on regional aid for large investment projects (2002) with regard to the establishment of a list of sectors facing structural problems and on a proposal of appropriate measures pursuant to Article 88 paragraph 1 of the EC Treaty, concerning the motor vehicle sector and the synthetic fibers sector, OJ 2003 C 263/3 (MSF-2002). 74 Para. 2.1. MSF-1998; para. 21 and 24 sent. 1 MSF-2002. 75 Para. 24 sent. 1 MSF-2002; simplistically: Bartosch, EU-Beihilferecht, Article 87 Abs. 3 EGV para. 17. 76 Para 24 MSF-2002. 67

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for large investment projects.77 The framework also applied to ad-hoc aids which are to be notified in any case78.79 The framework came into effect in several stages: when the ECSC-Treaty expired on 24 July 2002, the framework applied to aids which had fallen into the scope of the ECSC-Treaty,80 from 1 January 2003 onwards it applied to the motor vehicle and synthetic fibres industry and from 1 January 2004 onwards to all other sectors.81 It was intended that the framework expired on 31 December 2009. 82 21 The MFRA-2002 was based on a completely different approach. It was not aimed at the creation of jobs or the regional impact or the compensation of disadvantages, which was the justification for any regional aid, but only at the reduction of the intensity of aids.83 This comprised the reduction of the regional aid ceiling, which had been fixed according to the relevant regional aid map, for large investments by 50 per cent 84 for an investment volume of 50 million euros and a further reduction of the aid ceiling to 34 percent of the maximum aid intensity for that part which exceeded the EUR 100 million– threshold.85 Furthermore, the framework did not provide for projects of an investment volume of more than EUR 100 million an obligation of notification and approval if the investing undertaking accepted an aid which it would have had received applying the maximum intervention rate and the reductions for an investment volume of only up to EUR 100 million according to the regional aid map86.87 The new framework did not refer to the investment volume but to the absolute aid amount 88 depending on the regional aid ceiling. So it changed the previous systematic approach the obligation of notification was based on.89 Furthermore, the new framework did not favour particularly positive regional impacts.90 Finally, the framework excluded 77

Para. 7, 9, 10 MSF-2002. Ad-hoc aids always are to be notified, para. 6 page 2 MSF-2002; for the current subsidy period: para. 64 footnote 60 RAG 2007; Article 3 (3), Article 6 (1), Article 13 1) sentence 2 GBER I. 79 Para. 6 sentence 3 MSF-2002. 80 Para. 27, 39 MSF-2002. 81 Para. 39, 40 MSF-2002. 82 Para. 38 MSF-2002. 83 Para. 21, 22, 23, 42 lit. a, 45 lit. b MSF-2002; an useful overview on the objectives is to be found in: Cavallo/Junginger-Dittel (Fn. 20), Competition Policy Newsletter 1/2004, 78. 84 Para. 21, 45 lit. a and b MSF-2002. 85 Para. 21 MSF-2002. In the motor vehicle industry only an aid ceiling of up to 5 million euros was permitted on the basis of conventional promotion instruments and – provisions implemented on the basis of the joint Federal Government/La¨nder scheme for improving regional economic structures according to Article 91 a (1) no. 1 German Grundgesetz (German Constitution). Therefore, considering a permitted aid ceiling of 35 per cent in East Germany, a conventional subsidy could only amount to an investment volume of 14.28 million euros. Any other amount above 14.28 million euros could only be subsidised up to the 30 percent of the aid ceiling of 35 percent, which meant in absolute terms 10.5 percent, para. 42 lit. a MSF-2002. 86 Commission, State aid C 47/1999 (ex N 195/1999) of 17/8/1999, OJ 1999 C 340/8 and OJ 2001 L 97/ 27 – state aid map Germany 2000–2003; N 641/2002 of 2/4/2003 – state aid map Germany 2004–2006. 87 Para. 24 MSF-2002. 88 In the subsidy period 2000–2006, that level 26.25 million euros (pretax) in Thuringian Forest applying the 35 percent gross aid equivalents; see Commission, State aids C 47/1999 (ex N 195/1999) of 17/8/1999 – state aid map Germany 2000–2003; N 641/2002 of 2/4/2003 (state aid map Germany 2004– 2006). 89 The MSF-1998 referred to an investment volume of 50 million ecus (euros) and an intervention level of more than 50 percent of the regional aid ceiling, para. 2.1.i. 90 The subsidy could be increased by multiplying it by a factor of 1.15 if the project is co-financed from structural funds resources as a major project within the meaning of Article 25 of Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the structural funds, in line with the provisions laid down in Article 26 of the same Regulation. The rate of co-financing must be at least 10 percent of the total public expenditure, if the project is located in an area eligible for aid under Article 87 (3) lit. c of the EC-Treaty and at least 25% of the total public expenditure if the project is located in an area eligible for aid under Article 87 (3) lit. a thereof, para. 25 et seq. MSF-2002. 78

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firms with a strong market power from aids.91 That as well as the whole MSF-2002 have been clearly criticised.92 However, the Multisectoral Framework on Regional Aid 2002 showed another 22 peculiarity: In 1971, the Commission and the Member States agreed on a monitoring safeguarding the interest of the undertakings, hence a communication on the aids granted within a procedure maintaining the secrecy.93 From now on, regarding projects of an investment volume of more than 50 million euros, the Commission decided to publish a plurality of data, the name of the undertaking, the nature of the investment, which meant the setting-up of a new establishment, the extension of an existing establishment or any other, the investment volume, the amount of eligible costs, the amount of the aid pre- and post-tax as well as the conditions of the aid, in the official journal within 20 working days starting from the granting of the aid.94 Furthermore, the Commission published all decisions including the data if it considers it necessary in order to understand the decisions.95 Both, the RAG 1998 and 2007 as well as MSF-2002 apply the same conceptual 23 ground for justification for state aid grant: the compensation of regional handicaps.96 In the MFRA-2002, the considerable reduction of the amount of aid replaced the former scrutiny of the incentive effects. Hence, this across-the-board and generalised reduction of the amount of aid was the equivalent to not having implemented a specific scrutiny of the incentive effects.97 If a deepened scrutiny of the incentive effects had been implemented, in return, it must have been possible to grant the maximum regional aid without any reduction in the case of large investment projects of more than 50 million euros and more than 100 million euros.

3. State Aid Action Plan The third root is the Commission’s new policy on aid. It is clearly expressed through 24 the mentioned State Aid Action Plan – less and better targeted aid – Roadmap for State Aid Reform 2005-200998 as well as through the document ‘Common Principles for an Economic Assessment of the Compatibility of State Aid under Article 87(3)’. 99 These documents represent a paradigm shift. Thus, the eligibility of an aid shall be 25 conditional on the transparency of the grant as well as on the efficiency of the instruments applied. Furthermore, this plan provides the introduction of a benchmarking to verify that state aid is the best type of state intervention and is achieving the objective. The Action Plan and the new ‘Common Principles’100 are based on the concept of 26 market failure. According to this concept, an aid shall be compatible with the internal 91

Para. 24 lit. a, b MSF-2002; see para. 303-311 regarding the further provision of that framework. Solte´sz, Beihilfenkontrolle, EWS 2004, 241, 243, 244 et seq. 93 See above para 11, footnote 32. 94 Para. 36 and Annex A MSF-2002. 95 Article 26 Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (Regulation on the application), OJ 1999 L 83/1; Commission, State aids C 48/2006 (ex N 227/2006) of 22/11/2006, OJ 2007 C 48/7 and of 23/7/2008, OJ 2008 L 346/1 – DHL; N 856/2006 of 13/6/2007, OJ 2007 C 308/9 – Plastic Logic Limited (PLL); C 35/2001 (ex N 84/ 2001) of 6/6/2001, OJ 2001 C 231/2 and of 19/6/2002, OJ 2002 L 329/10 – Bilbao. 96 See Para 4 et seq.; Cavallo/Junginger-Dittel, (footnote. 20), Competition Policy Newsletter 1/2004, 78:‘…which should compensate the regional handicaps…’. 97 Para. 12 MSF-2002. 98 State Aid Action Plan, Less and Better Targeted Aid – Roadmap for State Aid Reform 2005-2009, SEK (2005) 795; COM (2005) 107 final of 7/6/2005 (State Aid Action Plan). 99 Commission, Consultation Paper ‘Economic Assessment’ (Fn. 3). 100 Commission, Consultation Paper ‘Economic Assessment’ (Fn. 3). 92

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market if the market is failing. A “failure of the market” will be assumed if the market does not lead to economically efficient results. Thus, the Commission deviates from its former view and differs from the ECJ. So far, the Commission acted on the general principle ‘that aid granted by a member state to undertakings only falls within the derogating provisions of Article 92(3) [since 1 December 2009: Article 107(3) TFEU] if the Commission can establish that the aid will contribute to the attainment of one of the objectives specified in the derogations, which under normal market conditions the recipient firms would not attain by their own actions.’101 In contrast, the new definition is based on the efficiency of economic actions which means the increased degree of welfare on a given market or in a national economy. 102 The Commission thus reverses the prevailing criteria. It is no longer the achievement of the objectives mentioned in Article 107(3) TFEU, it is about whether the market does not lead to an efficient result without an aid. On the basis of such a vague definition, a clear decision on the question if an aid is compatible with the internal market is no longer possible. The decision of the Commission is no longer predictable and it leads to a loss of transparency and certainty. The German Federal Council came to the same conclusion in its decision on the State Aid Action Plan of the Commission on 23 September 2005.103 Furthermore, by adopting the Action Plan which contains the aforementioned approach, the Commission exceeds its power under Articles 107-109 TFEU (primary legislation).104 According to the general distribution of competences, the Commission is neither authorised to allocate resources nor to harmonise the legal and financial policy of the Member States. The European state aid control is rather aimed at the protection of the internal market only. The objective is neither the protection of state resources nor the efficient use of resources. 105 The economical and efficient use of tax revenue falls within the core-competences of the Member States and is to be enforced through their budgetary law not through the state aid control by the European Commission. 106 The national institutions which are in charge of the financial control, in Germany only the Federal Court of Auditors and the States’ Courts of Audit are called to control the economical and efficient use of tax revenue. Finally, the concept of market failure is not convincing with regards to regional aids: If at a particular date no undertaking decides to invest in a specific region or to set up its business there, it is to be regarded as market-orientated behaviour. That is the market not just market failure.107 If a state provides incentives and compensates regional handicaps, e.g. poor infrastructure, which burden an undertaking in a specific region and which would not burden an undertaking in a different region, the state intervenes in the market by granting an aid without distorting this market. By receiving an aid, the undertaking only receives compensation for its additional expenses due to the regional handicaps, but not a general advantage which will address a market failure. The financial crisis following the collapse of the investment bank Lehmann Brothers on 15 September 2008 has shown what market failure is like: Regardless the ratings, banks 101

ECJ Case C-730/79 Philip Morris [1980] ECR 2671, para. 16, 26. State Aid Action Plan (footnote 98), p. 7. 103 Bundesrat Document 509/05 (Decision) of 23/9/2005 (Title of the decision: ‘Beschluß des Bundesrates zum Konsultationspapier der Kom. der Europa¨ischen Gemeinschaften: Aktionsplan staatliche Beihilfen – Weniger und besser ausgerichtete staatliche Beihilfen – Roadmap zur Reform des Beihilferechts 2005 bis 2009, KOM (2005) 107 endg.; Ratsdok. 10 083/05’). 104 Bundesrat Document 509/05 (Decision) of 23 September 2005, para. 2. 105 Bundesrat Document 509/05 (Decision) of 23 September 2005, para. 2 and 3. 106 Bundesrat Document 509/05 (Decision) of 23 September 2005, para. 2. 107 Knoblich (fotenote. 21), p. 85, 92. 102

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were unwilling to grant more loans to each other. This was neither any objective circumstances nor ‘asymmetric’ information or similar measurable criteria; it was purely subjective considerations of the previous market participants. They did not trust their business partners any longer, regardless the objective risks and regardless the existing reciprocal knowledge. With respect to investment aid, this means that a market failure can correctly only be 31 assumed if simply no longer would be invested regardless the region. In that case a regional aid would not lead to the intended result. Such a refusal of investment, which is not limited to a certain region, needs to be addressed by instruments which are broader in scope and not limited to a region. Furthermore, the deepen assessment of the incentive effects 108, which is associated 32 with ‘market failure’ approach, leads nowhere. The state aid assessment of the Commission has not become more transparent or foreseeable nor has the result become more predictable on that basis. All attempts109 so far have shown that this concept has not lead to any progress with respect to the three criteria nor provided a satisfactory answer to the questions raised by the Commission itself. The same applies to balancing the test which has been developed on the basis of the aforementioned considerations. 110 Thus, the communication concerning the criteria for an in-depth assessment of regional aid for large investment projects: ‘The Commission will not use the criteria set out in this guidance mechanically but will make an overall assessment of their relative importance. In this balancing exercise, no single element is determinant, nor can any set of elements be regarded as sufficient on its own to ensure compatibility.’111 Thus the assessment will slip purely factual in the area of the arbitrariness.112

B. Regional aid and European regional policy The European Economic Policy is determined not only by the European Competi- 33 tion Policy including the European State Aid Policy but, particularly, by the European Regional Policy.113 The latter is aimed at promoting an economic, social and territorial cohesion as well as an overall harmonious development of the Union as a whole. The Union has decided to reduce disparities between the levels of development of the various regions and the backwardness of the most disadvantaged regions (cohesion). 114 These objectives shall be attained by the economic policies of the Member States. 115 They are supported by the so-called structural fund aid. 116 These structural funds 108

See below para. 142 et seq. Commission, (Criteria), (fn 21); Commission, Consultation Paper ‘economic assessment’ (footnote 3). 110 Explained in the Consultation Paper ‘economic assessment’ (fn 3), para. 9 et seq. 111 Para. 52 sent. 3 and 4 criteria (footnote 21). 112 The European Courts do not reverse this trend, GC, Cases T-102/07 and T-120/07 Biria para. 133– 135. 113 Article 174, 175 sentence 3, 176, 177 sentence 1, 178 sentence 1 TFEU (until 1 December 2009: Article 158, 159 sentence 3, 160, 161 sentence 1, 162 sentence 1 EC-Treaty). 114 Article 174 sentence 1 and 2 TFEU. 115 Article 175 sentence 1 TFEU. 116 Council Regulation (EEC) of 24 June 1988 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ 1988 L 185/9 (Regulation on Structural Funds 1988); Council Regulation (EEC) No 2081/93 of 20 July 1993 amending Regulation (EEC) No 2052/88 on the tasks of the Structural Funds and their effectiveness and on coordination of their activities between themselves and with the operations of the European Investment Bank and the other existing financial instruments, OJ 1993 L 193/5 (Regulation on Structural Funds 1993); Council 109

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encompass the European Regional Development Fund (ERDF), European Social Fund (ESF), the European Agricultural Guidance and Guarantee Fund (EAGGF) as well as the Cohesion Fund.117 It is the ERDF which is intended to help to redress the main regional imbalances in the Union through participation in the development and structural adjustment of regions whose development is lagging behind and in the conversion of declining industrial regions.118 Furthermore, the Union supports the Member States through the European Investment Bank and more financing instruments,119 such as the European Fisheries Fund (EFF)120 or the European Agricultural Fund for Rural Development (EAFRD).121 With the structural funds, the European Union provides substantial resources to the Member States available for their regional policies.122 34 Both policies, the European State Aid Policy and the European Regional Policy, which is mainly expressed by the structural fund aid, are closely linked. This is expressly intended by the Commission. Insofar it follows the case law of the ECJ123.124 This is particularly evident in the complete identity between the most disadvantaged regions in the scope of Article 174 TFEU, which are the ones with most need for assistance according to the rules of the European Regional Policy, the so-called objective-1 areas 125 (now areas under the convergence objective)126 and the regions according to Article 107(3) lit. a TFEU, the so-called a)-areas127, including the statistical effect regions.128 Regulation (EC) No 1260/1999 of 21 June 1999 laying down general provisions on the Structural Fund, OJ 1999 L 161/1 (Regulation on Structural Funds 1999); Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999, OJ 2006 L 210/25, amended by Council Regulation (EC) No 284/2009 of 7 April 2009 amending Regulation (EC) No 1083/ 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund concerning certain provisions relating to financial management, OJ 2009 L 94/10 (Regulation on Structural Funds 2006). 117 Article 177 sentence 2 TFEU. 118 Article 176 TFEU. 119 Article 175 sentence 4 TFEU. 120 Council Regulation (EC) No 1198/2006 of 27 July 2006 on the European Fisheries Fund, OJ. 2006 L 223/1 (Regulation on the EFF). The EFF is the successor of the previous Financial Instrument for Fisheries Guidance (FIFG), Council Regulation (EC) No 1263/1999 of 21 June 1999 on the Financial Instrument for Fisheries Guidance, OJ 1999 L 161/54 (Regulation on FIFG), Article 104 (1) of the Regulation on the EFF. 121 Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD), OJ 2005 L 277/1 (Regulation on EAFRD). 122 In the funding period 2000-2006, the allocation from the ERDF, ESF and EAFRD, section guidance in prices of 1999, amounted towards 195 billion euros, Article 7 (1) Regulation on Structural Funds 1999 (footnote 116); in the funding period 2007-201, the ERDF, ESF and cohesion fund, in prices of 2004, will provide more than 308 billion euros in total, Article 18 (1) Regulation on Structural Funds 2006 (footnote 116). 123 ECJ, Case C-248/84 (footnote 37). 124 Communication from the Commission to the Member States on the links between regional and competition policy — Reinforcing concentration and mutual consistency, OJ 1998 C 90/3; Hancher/ Ottervanger/Slot/Jestaedt para. 18–005: ‘regional policy as a cornerstone of the Community cohesion policy’; Bacon/Wishlade (footnote 40), para. 15.01, 15.06. 125 Article 1 no. 1 Regulation on Structural Funds 1988 (footnote 116); Article 1 Nr. 1 Regulation on Structural Funds 1993 (footnote 16); Article 1 sentence 2 no. 1 Regulation on Structural Funds 1999 (footnote 116). 126 Article 3 (2) lit. a Regulation on Structural Funds 2006 (fn 116). 127 Para. 16 sentence 3 RAG 2007; no. 3.10.5 RAG 1998 (footnote 2); more detailed: para 51–54, 56–60. 128 Para. 18–20 RAG 2007; Article 8 (2) Regulation on Structural Funds 2006 (footnote 116); in concrete terms, particularly regarding the assessment of the assisted area status of the statistical effect regions, see para. 52, 53 and 61–64.

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The same criteria apply to both, to the areas which need assistance according to the rules of the European Regional Policy and areas under the convergence objective as well as to the a)-areas under the regime of the European state aid control: 129 a gross domestic product (GDP), measured in purchasing power parities (PPP) and calculated on the basis of the Community figures provided by EUROSTAT for the last three years on average available at the time of fixing,130 which is lower than 75% of the Community average.131 The provisions on promoting individual projects showed this link, too. Para. 25 35 MFRA-2002132 allowed a bonus of 0.15% on the maximum allowable aid intensity for major projects if the rate of co-financing with structural funds means is at least 10% of the total public expenditure in the case that the project is located in an area eligible for aid under Article 107(3) lit. c TFEU or at least 25% of the total public expenditure in the case that the project is located in an area eligible for aid under Article 107(3) lit. a TFEU. 133

C. The legal acts of regional state aid law I. Relationship between GBER I and RAG 2007 The provisions of the GBER I on regional aids are based on the RAG 2007 which 36 came into force before. Both legal acts coexist. The RAG 2007 are to be regarded as the superstructure,134 they contain the legal basis for the eligibility criteria135 as well as further provisions.136 They are the provisions on which the exemption rules of Articles 12-14 GBER I are based. However, the provisions of the GBER I on regional aids specify restrictively the RAG 37 2007 on the one hand, and extend the RAG on the other. The GBER I does not contain any provisions on operating aids which are generally allowed according to para. 76 to 83 RAG 2007. Only Article 14 GBER I exempts aids for newly created small enterprises, which are described in para. 84 to 91 RAG 2007 and are granted in areas according to Article 107(3) TFEU, from the notification requirement of Article 108(3) TFEU. Thus, the scope of application of the GBER I is more restrictive that the one of the RAG 2007. On the other hand, Article 13(9) GBER I contains more detailed provisions on the exemption of aids for investments in the processing and marketing of agricultural products and thus exceeds the scope of RAG 2007. The situation is similar with regards to aid to firms in difficulty. In this respect, the GBER I includes clearer and more concrete rules for SME than the RAG 2007 do. The latter is based on the Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty (Rescuing and Restructuring Guidelines – RRGl 2004)137 without giving more details. 129

See more details para. 52 et seq. These are the years of 2000-2002 for the current funding period, Article 5 (1) Regulation on Structural Funds 2006 (footnote 116); para. 16 footnote 21 RAG 2007. 131 Article 8 (1) Regulation on Structural Funds 1988 (footnote 116); Article 8 para. 1 Regulation on Structural Funds 1993 (footnote 116); Article 3 (1) Regulation on Structural Funds 1999 (footnote 116); Article 5 (1) Regulation on Structural Funds 2006 (footnote 116); no. 3.9 and 3.10.5 RAG 1998 (footnote 2); para. 16 sentence 1 and 3 RAG 2007. 132 MSF-2002 (footnote 73). 133 See above para. 21 and footnote 90. 134 Para. 1–11 RAG 2007. 135 Para. 12–32, 42–49, 96–104 RAG 2007. 136 E.g. for aids for large investment projects: Para. 60–70 RAG 2007. 137 Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty, OJ 2004 C 244/2 (Rescuing and Restructuring Guidelines – RRG 2004). 130

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1. Synopsis of Articles 12–14 GBER I and the corresponding provisions of the RAG 2007 Art. 12-14 GBER I, which are to be regarded as a whole, correspond to the following provisions of the Regional Guidelines 2007-2013. 39 In the scope of Article 12 GBER I 38

40

Art. 12(1) lit. a GBER I

to para. 34 sentence 1 RAG 2007,

Art. 12(1) lit. b sentence 1 GBER I

to para. 35 RAG 2007,

Art. 12(1) lit. b sentence 3 GBER I

to para. 35 footnote 37 RAG 2007,

Art. 12(2) GBER I

to para. 56 sentence 2 tiret 1–4 RAG 2007,

Art. 12(3) lit. a GBER I

to para. 36 footnote 39 RAG 2007,

Art. 12(3) lit. b GBER I

to para. 58 RAG 2007 and

Art. 12(3) lit. c GBER I

to para 40 sentences 2 and 3 RAG 2007;

In the scope of Article 13 GBER I Art. 13(1) sentence 1 GBER I

no corresponding provision in the RAG 2007,

Art. 13(1) sentence 2 GBER I

to para. 64 footnote 60, 71 RAG 2007,

Art. 13(2) sentence 1 GBER I

to para. 96 sentence 1, 104 sentence 1 RAG 2007,

Art. 13(2) sentence 2 GBER I

to para. 40 sentence 1 and 4 RAG 2007,

Art. 13(2) sentence 3 GBER I

to para. 40 sentence 1 footnote 43 RAG 2007,

Art. 13(3) GBER I

to para. 41–48 and 96–104 RAG 2007,

Art. 13(4), 1st half sentence GBER I

to para. 49 RAG 2007,

Art. 13(4), 2nd half sentence 1st alternative GBER I

to para. 67 sentence 1, footnote 61 sentence 2 RAG 2007,

Art. 13(4), 2nd half sentence 2nd alternative GBER I

to para. 8(3) footnote 9 as well as para. 50 footnote 48 RAG 2007,

Art. 13(5) GBER I

to para. 72, footnote 67 RAG 2007,

Art. 13(6) sentence 1 GBER I

to para. 39 RAG 2007,

Art. 13(7) sentence 1 GBER I

to para. 34 sentence 3, 52 sentence 2 RAG 2007,

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Art. 13(7) sentence 2 GBER I

to para. 52 sentence 1, footnote 49 RAG 2007,

Art. 13(7) sentence 3 GBER I

to para. 53 sentence 1 RAG 2007,

Art. 13(7) sentence 4 GBER I

to para. 53 sentence 2 RAG 2007,

Art. 13(7) sentence 5 GBER I

to para. 54 sentence 1 RAG 2007,

Art. 13(7) sentence 6 GBER I

to para. 54 sentence 2 RAG 2007,

Art. 13(7) sentence 7 GBER I

to para. 55 sentence 1 RAG 2007,

Art. 13(7) sentence 8 GBER I

to para. 55 sentence 2 RAG 2007,

Art. 13(8) GBER I

to para. 36, 2nd alternative and footnote 38 RAG 2007,

Art. 13(9) GBER I

to para 8(2) sentence 2 RAG 2007 and the Community Guidelines for State aid in the agriculture sector138 and

Art. 13(10) GBER I

to para. 60 sentence 2 RAG 2007;

in the scope of Article 14 GBER I

41

Art. 14(1) GBER I

to para. 84 RAG 2007,

Art. 14(2) GBER I

to para. 85 sentence 2 RAG 2007,

Art. 14(3) sentence 1 lit. a GBER I

to para. 86 sentence 1, 1st alternative RAG 2007,

Art. 14(3) sentence 1 lit. b GBER I

to para. 86 sentence 1, 2nd alternative RAG 2007,

Art. 14(3) sentence 2 GBER I

to para. 86 sentence 2 RAG 2007,

Art. 14(4) sentence 1 lit. a GBER I

to para. 88, 1st tiret RAG 2007,

Art. 14(4) sentence 1 lit. b GBER I

to para. 88 2nd tiret RAG 2007,

Art. 14(4) sentence 2 GBER I

to para. 89 RAG 2007,

Art. 14(5) lit. a GBER I

to para. 87, 1st tiret RAG 2007,

Art. 14(5) lit. b GBER I

to para. 87, 2nd tiret RAG 2007,

Art. 14(5) lit. c GBER I

to para. 87, 3rd tiret RAG 2007,

Art. 14(5) lit. d GBER I

to para. 87, 4th tiret RAG 2007 and

Art. 14(6) GBER I

to para. 91 RAG 2007.

138 Community Guidelines for State aid in the agriculture sector, OJ 2000 C 28/2, corrected in OJ 2000 C 232/17.

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Furthermore, some of the provisions of the RAG 2007 are in almost the same words or identical with regards to the content in the recitals of the GBER I: for example para. 60 footnote 55 RAG 2007 in recital 41 sentence 2 to 4 GBER I or para. 84, 85 and 91 RAG 2007 in recital 43 GBER I.

2. Interdependence of GBER I and RAG 2007 43

Furthermore, the gearing between the GBER I and the RAG 2007 is also demonstrated by a number of other provisions. These include the provisions on the scope of application,139 the definitions,140 the cumulation,141 the incentive effect,142 the thresholds for the notification of aids which apply irrespective if the aid is notified or exempted, 143 or the transparency and monitoring of aids.144 This indicates the interdependence of both legal acts. Although the GBER I, which as regulation is higher-ranking law, has to be interpreted in the light of the RAG 2007,145 the RAG 2007 also has to be interpreted in the light of the GBER I. This is particularly evident in para. 11 RAG. 2007. This provision allows transferring the facilitating rules of the exemption regulations to the RAG 2007.

3. The RAG 2007 contain the legal basis for the application of the GBER I 44

The GBER I exempts the granting of regional aids from the prior notification according to Article 108(3) TFEU in regions eligible for regional aid, as determined in the approved regional aid map for the Member State concerned for the period 20072013.146 The same applies to the aid intensity.147 Both are governed by the provisions of the RAG 2007.148

II. Regional aids according to the GBER I within the context of the regional guidelines 2007–2013 45

The RAG 2007 is at first a Commission’s internal regulation, by which the Commission has exercised its discretion.149 By proposing appropriate measures according to Article 108(1) sentence 2 TFEU and Article 18 Regulation on the application 150 as well as the adoption by the Member States, this exercise of discretion was transposed in national law.151 These appropriate measures also152 obliged the Member States to repeal the 139

Article 1 GBER I and para. 8 RAG 2007. Article 2 GBER I and for example para. 34 sentence 2 and 3, 57, 60, 86, 87 RAG 2007. 141 Article 7 GBER I and para. 71–75 RAG 2007. 142 Article 8 GBER I and para. 38 RAG 2007. 143 Article 6 (2) GBER I and para. 64 RAG 2007. 144 Articles 9, 10 GBER I and para. 107 and 108 RAG 2007. 145 See the transfer of para. 60 footnote 55 RAG 2007 to recital 41 GBER I and thus to the justifying preamble of the GBER I. 146 Article 13 (1), (2) sentence 1 GBER I. 147 Article 13 (1), (3) GBER I. 148 Para. 12–32, 42–49, 96–104 RAG 2007. 149 Para. 105 RAG 2007. 150 Regulation on the application (footnote 95). 151 Article 19 (1) of the Regulation on the application (footnote 95). 152 The appropriate measures also contained the following obligations: – Where environment aid schemes allow regional investment aid to be granted for environmental investments pursuant to footnote 29 of the Community guidelines on State aid for environmental protection, OJ 2001 C 37/3, to amend the relevant schemes in order to ensure that aid may only be granted after 31 December 2006 if it complies with the new regional aid map in force on the date the aid is granted and 140

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existing regional aid schemes including notified schemes, such as open-ended approved guarantee schemes, disregarding also Article 10(2) of the SME-Exemption Regulation 153 and Article 11(2) of the Regulation on State Aid for Employment154 by 1 January 2007.155 Germany was the only Member State which refused the full approval, arguing that the differentiation of the new regulations between transparent (non-repayable aids) and intransparent State aid (as loans, guarantees or equities) was unacceptable, thus accepted the opening of the formal investigation procedure and accepted it afterwards unconditionally.156 The Commission then closed the procedure.157 If, despite the acceptance, the appropriate measures are not implemented and the 46 relevant national State aid schemes are not repealed, the State aid which is based on these state aid schemes is to be regarded as ad-hoc-aid and subject to the relevant legal framework.158

1. Preface National regional State aid in the form of investment or operational aid as a general 47 compensation of disadvantages159 is aimed at meeting the challenges in the lessfavoured areas, resolving the problems and promoting the economic, social and territorial cohesion between the Member States and the entire European Union. Thus, they differ from all other forms of horizontal aid.160 ‘Less-favoured areas’ are to be understood as the eligible regions pursuant Article 107(3) lit. a and c TFEU (previous Article 87(3) lit. a and c EC-Treaty).161 Therefore, regional State aid only is allowed in these regions and aim to the development of these areas by promoting investments and the creation of new employment in view of a far-reaching development. Regional State aid can only play effectively the role that is assigned to them and hence 48 justify the possible distortions of competition, provided that they adhere to certain principles and obey certain rules. This includes the exceptional nature of these instruments; hence their sparing use as well as concentrating resources on the most disadvantaged regions.162 This means that greater distortions of competition can be – To amend, as necessary, other existing aid schemes in order to ensure that any regional bonuses such as those allowed for training aid, aid for research and development or environment aid may only be granted after 31 December 2006 in areas which are eligible for support under Article 87 (3) lit. a or c EC-Treaty (now Article 107 (3) lit. a or c TFEU) in accordance with the regional aid maps adopted by the Commission in force on the date the aid is granted, para. 107 RAG 2007. 153 SME-Exemption Regulation (footnote 21). 154 Commission Regulation (EC) No 2204/2002 of 12 December 2002 on the application of Article 87 and 88 of the EC Treaty to State aid for employment, OJ 2002 L 337/3 (Regulation on State Aid for Employment). 155 Commissioner Kroes, letter dated 6th March 2006 (D (06)222), asked the Member States to give their explicit and unconditional agreement to the proposed appropriate measures within one month, otherwise the formal investigation procedure provided for in Article 88 (2) of the EC Treaty would be initiated against the relevant Member State, here Germany. 156 Com., Decision on opening the formal investigation procedure dated 15 June 2006, C 25/2006, OJ 2006 C 194/35. 157 The Commission closed the procedure by its decision State aid C 25/2006 of 22 November 2006, OJ. 2006 C 320/16. 158 Com., State aid C 34/2009 (ex N 588/2008) of 19 November 2009, OJ. 2010 C 23/34, chapter 3.2., 2nd tiret – PETROGAL; see para. 151. 159 Regarding the general compensation of disadvantages see para. 1, 3 seq., 23 and para. 122, 146, 179, 191, 238, 384, 387 and 448 as well as para. 2, 22 no. 2 criteria (footnote. 21). 160 Para. 2 RAG 2007. 161 Para. 86 RAG 2007. 162 Industry Council, Conclusions of 6th and 7th Nov 1995 on competition policy and competitiveness of the industry, para. 1 (at the end) RAG 1998 (footnote 2).

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accepted in the case of the regions covered by Article 107(3) lit. a TFEU than in those covered by Article 107(3) lit. c TFEU.163 49 Granting a regional State aid is only permitted in eligible areas listed in the national regional aid maps which are approved by the Commission.164

2. Territorial scope – the national regional aid maps 50

The national regional aid map contains a list165 of all eligible regions of a Member State and the relevant aid intensities for initial investments of large companies. 166 It should encompass the entire territory of the relevant Member State 167 and requires approval by the Commission.168 The same applies to regional operating aid which are only allowed in the eligible areas listed by the Member States.169

51

a) Eligible areas and the selection. Following the RAG 2007, there are two major groups of regions where regional aid may be granted:170 the areas which fulfil the requirements of Article 107(3) lit. a) TFEU (until 1 December 2009: Article 87(3) lit. a EC), the so-called a)-regions and the areas which fulfil the requirements of Article 107(3) lit. c TFEU (until 1 December 2009: Article 87(3) lit. c EC), the c)-regions.

52

aa) Brief overview of the process for the selection of eligible areas. The development of the maps of the Member States is based on a multi-stage selection process. First, the Commission determines in an abstract manner the share of the Member State’s population in the total population of the European Union to be comprised of a maximum of regional support. This overall ceiling, is assigned to the Member States. For this purpose, the Commission allocates the population numbers to each Member State, on its a) areas171 and the areas172 which are affected by the statistic effect. 173 It also assigns the population shares to each Member State which accounts for its a)-regions of the previous funding period (so-called ‘economic development’ regions) and its sparsely populated areas.174 Then the Commission distributes the residual population coverage to the Member States by a calculation of gross domestic product and unemployment rate.175 In addition, it gives the Member States a safety net for the population to avoid unintended hardship.176 Furthermore, it allocates as a transitional support a second separate population ceiling (temporary population ceiling or continuity ceiling) to the Member States for the years 2007 and 2008177 Thus, the Member States concerned have 163

GC, Case T-380/94 AIUFASS and AKT [1996] ECR, II-2169, para. 54; para. 5 RAG 2007. Para. 96 sentence 1 and 2 RAG 2007; Article 13 (1), 2 sentence 1 AGVO; formally not included is regional operating aid only. These aids can only be granted in areas covered by Article 107 (3) lit. a TFEU or in sparsely populated areas, hence only in areas which are listed in the regional aid maps, para. 96 sentence 3, 76 sentence 2, 4 RAG 2007; see para. 87, 96 seq., 102 et seq., 105, 499 et seq., 516. 165 Para. 104 sentence 1, 3 RAG 2007. 166 Para. 96, 102 RAG 2007. 167 Para. 100 sentence 2 RAG 2007. 168 Para. 97, 101 RAG 2007. 169 Para. 76 sentence 2, 4; 84 sentence 2; 89 RAG 2007; Article 14 (1), (3) sentence 1, (4) sentence 1 GBER I. 170 Para. 5 RAG 2007. 171 See para. 34 and para. 56–60. 172 See para. 34 and more detailed para. 61 et seq. 173 Para. 16, 17, 19, 27 and Annex V RAG 2007. 174 Para. 25 Fn. 27, 26 RAG 2007. 175 Para. 27 RAG 2007. 176 Para. 14, 28 RAG 2007, See also para. 67. 177 Para. 95 Fn. 81, Annex V RAG 2007: ‘Transitional additional coverage 2007-2008 under Article 87 (3) lit. c EC.’; regarding the principle of continuity cf also para. 55, 65, 67, 69, 73, 74, 79, 102. 164

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up to two Member State-specific population ceilings: a ceiling for the whole funding period and a transitional ceiling, only for the years 2007 and 2008. The ceiling applicable to the entire funding period clearly differentiates between the 53 shares of the population which account for a)-regions and for the statistical effect regions as well as for the c)-assisted areas. The Member States have, with respect to the c)-regions the opportunity to select – according to certain rules established by the Commission and its selection of types of areas – as many areas as correspond to these types as a national c)region until they have exhausted their c)-region-population-ceiling. The same applies to the second; the transitional population ceiling. In this case, however, there are only areas to choose from, which were reported in the 2000-2006 funding period as c)-regions.178 The selected c)-regions form with the a)-assisted areas, including the statistical 54 effected regions, and the transitional areas within the meaning of para. 95 RAG 2007, together with the relevant permissible State aid intensities for initial investment, the socalled national regional aid maps.179 The Member States shall submit their maps to the Commission for review and approval. Has the Commission approved on the individual maps, they will be published. By the date of publication they come into effect and are an integral part of RAG 2007.180 bb) Determination of population coverage at Union level. Considering the excep- 55 tional nature of regional State aid, the Commission is of the opinion that the proportion of the total population in a) – and c)-assisted areas, has to be significantly lower than the proportion of the total population in non-assisted areas.181 Therefore, the proportion of the population that is covered by the RAG 2007 should be just as high as only the most disadvantaged areas of the Community (intra-Community coherence) plus a limited number of areas which are in relation to the average economic situation in the Member State disadvantaged (intra Member State coherence) should be eligible for aid. The Commission decided that the eligible areas should only comprise of 42% of the total population of the EU-25.182 With the accession of Bulgaria and Romania on 1 January 2007, the proportion rose to around 45.5%.183 To ensure continuity for the existing Member States, the Commission has identified in every Member State a socalled safety net that at least half of the population which was located in an assisted area in the previous funding period 2000-2006, would also be covered by regional aid in the current period.184 With this safety net, the population coverage increased by 1.1% to 43.1% of the EU-25 and with the accession of Bulgaria and Romania to around 46.6% of the EU-27.185 cc) Eligible areas under Article 107(3) lit. a TFEU, so-called a)-regions. The topoi 56 ‘abnormally low’ and ‘serious underemployment’ constitute the core elements to determine the a)-regions. Their mention in Article 107(3) lit. a TFEU (formerly Article 87(3) lit. a EC) shows that this concerns only areas where the economic situation is extremely unfavourable compared to the Community as a whole.186 These areas are determined solely by the Commission and allocated to the Member States. 187 Following 178

Para. 95 sentence 2 RAG 2007. Para. 96 sentence 1, 99 RAG 2007. 180 Para. 101 RAG 2007. 181 Para. 12 RAG 2007. 182 Regarding its development cf.: Bartosch (Fn. 75), Article 87 (3) EC-Treaty, para. 21. 183 Cf. the forecast in para. 13 RAG 2007. 184 Para. 14 RAG 2007; regarding the principle of contiuity cf. Para. 52, 65, 67, 69, 73, 74, 79, 102. 185 Para. 14 Fn. 16 RAG 2007. 186 ECJ, Case C- 248/84 Germany v Commission [1987] ECR 4013, para. 19. 187 Para. 16 sentence 3, Annex V RAG 2007. 179

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a judgment of the ECJ for annulment of a Commission decision which had declared the German aid scenery within the meaning of Article 91 lit. a of the German Grundgesetz (the German Constitution) incompatible with the Common market,188 the Commission now applies the rules of the structural funds189 to determine the a)-regions. These rules on structural funds are based on statistical data by EUROSTAT. 190 The underlying Structural Fund Regulations191 regard an area as particularly worthy of funding, if it is a region where the development is significantly lagging behind, so one of the most disadvantaged regions (Objective 1 – or ‘convergence’ objective regions).192 These are the regions corresponding to level II of the Nomenclature of Territorial Units for Statistics (NUTS II),193 whose per capita gross domestic product (GDP) measured in purchasing power standards (PPS) and calculated on the basis of the average Community EUROSTAT data of the last three years available at the time of fixing, 194 is less than 75% of the EU average.195 Thus, it is impossible that these regions comprise more than half of the community‘s population.196 Without consideration of the outermost regions,197 there is an identity between the Objective 1 area – or ‘convergence’ regions and the areas covered by Article 107(3) lit. a TFEU, the a)-assisted areas. 198 57 Outermost regions are also classified as a)-regions.199 This is still the case if the per capita GDP in those regions exceeds the threshold of 75% of the Community average. 200 This is based on the specific obstacles they face in their integration into the internal 188

ECJ, Case C- 248/84 Germany v Commission [1987] ECR, 4013. Para. 16 RAG 2007; Com., Links between regional and competition policy (Fn. 124). 190 Para. 16, 103 sentence 1 RAG 2007. 191 Regulation on Structural Funds 1988 (footnote 116); Regulation on Structural Funds 1993 (footnote 116); Regulation on Structural Funds 1999 (footnote 116); Regulation on Structural Funds 2006 (footnote 116). 192 Article 1 No. 1 Regulation on Structural Funds 1988 (footnote 116); Article 1 No. 1 Regulation on Structural Funds 1993 (footnote 116); Article 1 sentence 2 No. 1 Regulation on Structural Funds 1999 (footnote 116); Article 3 (2) lit. a Regulation on Structural Funds 2006 (footnote 116). 193 Nomenclature of territorial statistical units (NUTS) – (Nomenclature commune des Unite ´s Territoriales Statistiques NUTS), EUROSTAT, Quick statistical reports on the regions, 25 August 1986; Article 1 and 3 in conjunction with Annex I Regulation (EC) 1059/2003 of the European Parliament and the Council of 26 May 2003 on the establishment of a common classification of territorial units for statistics (NUTS), OJ 2003 L 154/1, amended by the Regulation (EC) 1888/2005 of the European Parliament and the Council of 26 October 2005 on the establishment of a common classification of territorial units for statistics (NUTS) by reason of the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia to the European Union, OJ 2005 L 309/ 1; by Regulation (EC) 105/2007 of the Commission of 1 February 2007 amending Annexes VII and IX to Regulation (EC) No 999/2001, OJ 2007 L 39/1; and by the Regulation (EC) 176/2008 of the European Parliament and the Council of 20 February 2008 on the establishment of a common classification of territorial units for statistics (NUTS) by reason of the accession of Bulgaria and Romania to the European Union, OJ 2008 L 61/1 (NUTS-Regulation 2003). 194 For the current funding period, these are the years 2000–2002, para. 16, Fn. 21 RAG 2007. 195 Article 8 (1) Regulation on Structural Funds 1988 (footnote 116); Article 8 (1) Regulation on Structural Funds 1993 (footnote 116); Article 3 (1) Regulation on Structural Funds 1999 (footnote 116); Article 5 (1) Regulation on Structural Funds 2006 (footnote 116). 196 Even after the accession of Bulgaria and Romania to the EU, these areas cover a maximum of about 46.6% of the total population, para. 13, Fn. 15 and 16 RAG 2007. 197 Areas in outermost regions are designated according to Article 349 TFEU (ex Article 299 (2) EC); currently these include the Azores, Madeira, the Canary Islands, Guadeloupe, Martinique, Re´union, and French Guayana, as well as the Islands Saint-Martin and Saint Barthe´lemy which were part of Guadeloupe until February 2007. 198 Para. 16, 17 RAG 2007; for the funding period 2000–2006: No. 3.10.5. RAG 1998 (footnote 2). 199 See para. 56 Fn. 198. 200 Para. 17 RAG 2007; the Canary Islands show a per-capita-GDP of 87.7% in the relevant period 2000-2002, Com., State aid N 626/2006 of 20 December 2006, para. 36 – Spain; and Madeira has a percapita-GDP of 87,8%, Com., State aid N 727/2006 of 7 February 2007, para. 23 – Portugal. 189

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market because of their remoteness and other difficulties. Since 1 December 2009, Article 108(3) lit. a 2nd half sentence TFEU follows this administrative practice. Therefore, the areas referred to in Article 349 TFEU are a)-regions according the primary law since 1 December 2009. In principle, the NUTS territorial units are based on administrative units.201 In 58 Germany, the NUTS I level corresponds to the level of the La¨nder, the NUTS II level corresponds to the regional districts below the La¨nder-level, and the NUTS III corresponds to the counties or county-level cities.202 The local communities which belong to a county are called ‘small administrative units’.203 The same territorial authority, e.g. the state of Berlin, can therefore represent all three (four) NUTS levels simultaneously.204 However, Member States have some discretion how to ‘cut’ the individual NUTS 59 regions. But this is their only way to influence the selection of a)-assisted areas by administrative means.205 Essential for the creation of newly formed ‘non-administrative units’206 is only that these regions conform to the geographical, socio-economic, historical, cultural and environmental criteria of NUTS regions. 207 Due to their economic weakness in a)-regions, distortions of competition are 60 compatible with the internal market to a larger extent than in c)-regions or in nonassisted regions. Therefore, higher aid intensities than in other regions, are permissible.208 Furthermore, the granting of regional operating aid in a)-assisted areas is in principle allowed in all places.209 In c)-regions, however, regional operating aid is compatible with the internal market only in sparsely populated areas210 or for newly created small enterprises211 unless transitional rules stipulate otherwise212.213 dd) Regions affected by the statistical effect214. A special rule applies to regions 61 whose GDP in an EU-25 exceeds the threshold of 75% of the EU-wide average GDP but would not in an EU-15, without those ten states joining on 1 May 2004. These regions have not become more stable due to their own development and performance. For them, the excession of the GDP threshold of 75% is a purely a statistical effect. The ten new Member States had an own GDP below the average GDP of the EU-15. Therefore, the Community average GDP has declined. A GDP of 75% of the EU-15 corresponds to a GDP of 82.2% of the EU-25.215 These statistical effect-regions will be treated as original assisted areas within the meaning of Article 107(3) lit. a TFEU (until 1 December 2009: Article 87(3) lit. a EC.) until 31 December 2010. This aims to maintain the progress achieved in these areas in the past and the changing the aid intensities plus

201

Article 3 (4) NUTS-Regulation 2003 (footnote 194). Annex II NUTS-Regulation 2003 (footnote 194). 203 Annex III NUTS-Regulation 2003 (footnote 194). 204 Com., State aid N 459/2006 of 8 November 2006, para. 46 – Germany. 205 Heidenhain/Jestaedt (Fn. 4) § 15 para. 31 assumes that the Member States do not have any influence. 206 Article 3 (5) NUTS-Regulation 2003 (footnote 194). 207 Article 3 (5) sentence 2 NUTS-Regulation 2003 (footnote 194). 208 Para. 42 RAG 2007. 209 Para. 76 sentence 2 RAG 2007. 210 Para. 30 lit. b RAG 2007. 211 Para. 84–91 RAG 2007; Article 14 GBER. This also applies to operational aid granted to small and medium sized undertakings within the meaning of the GBER, Article 16 GBER. 212 Para. 94 RAG 2007. 213 Para. 76 sentence 4 RAG 2007. 214 Para. 18, 19, 20, 46 RAG 2007. 215 Para. 18, Fn. 23 RAG 2007. 202

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the illegality of operating aid will not have an effect.216 Also to this extent, the regional guidelines correspond to the Structural Funds Regulation support. 217 62 However in 2010, according to para. 20 RAG 2007 and unlike Article 8 of the Regulation on Structural Funds 2006,218 the Commission assessed on the basis of the latest GDP three-year average data from Eurostat if the regions affected by the statistical effect exceeded the 75% GDP threshold of EU-25. If this value falls below the average GDP, the region retain its status as an assisted area under Article 107(3) lit. a TFEU after 1 January 2011 to the end of the funding period,219 so until 31 December 2013.220 If the average GDP reaches or exceeds the 75% threshold, the respective region will be treated in principle as an assisted area under Article 107(3) lit. c TFEU. 221 The Commission completed the review on 20 July 2010 on the basis of the statistical data of the years 2005 to 2007.222 Thereafter, from 1 January 2011 only four of the original 16 regions affected by the statistical effect retained the status of being a)-regions. 223 That is the first time since 1988, the classifications of an area which qualifies for assistance under Objective 1 or Objective ‘Convergence’ under the Structural Funds and within the meaning of Article 107(3) TFEU in the context of regional funding, have been fallen apart, although the regional guidelines follow the case law of the ECJ224 and apply the criteria provided for by the Regulation on Structural Funds. This divergence is based on the time interval of more than four months between the RAG 2007, together with its publication225 and the final version of the Regulation on Structural Funds.226 Its specific design was not known in detail at the time of the adoption of the Regional Guidelines 2007-2013. Looking at the new regional aid maps,227 which are to be created by the Member States, serve as the legal basis for State aid and which have to be approved by the Commission,228 it did not seem useful to wait for an agreement between the Member States and the Commission with regard to the Structural Funds. 63 The regions affected by the statistical effect are true a)-assisted areas. 229 Therefore, the same rules as for all other a)-assisted areas are to be applied. 230 If they loose their status, they will become c)-assisted areas, with the consequence that the intervention rate of 30% is reduced to 20%231 and the granting of an operating aid, in principle,232 can only be 216

Para. 19 RAG 2007. Article 8 (1) Regulation on Structural Funds 2006 (footnote 116) also stipulates this statistical effect. 218 Article 8 (4) Regulation on Structural Funds 2006 (footnote 116) provides for that the regions affected by the statistical effect do not loose their status until the end of the funding period on 31 December 2013. 219 Para. 20 RAG 2007. 220 Article 106, 108 Regulation on Structural Funds 2006 (footnote 116). 221 In these areas, only an aid intensity of 20% may be granted. Currently, the aid intensity amounts to 30%, para. 46 RAG 2007. 222 Com., Communication of the Commission on the review of the State aid status and the aid ceiling of the statistical effect regions in the following National regional State aid maps for the period 1 January 2011–31 December 2013, OJ C 222/2 of 17 August 2010 (Status-Communication). 223 The regions Hainaut (BE), Kentriki Makedonia (EL), Dytiki Makedonia (EL) and Basilicata (IT) will not loose their status according to Article 107 (3) lit. a TFEU, Commission, Status-Communication, (Fn. 222), para. 3, Table No. 1. 224 ECJ, Case C-248/84 Federal Republic of Germany v Commission of the European Communities [1987] ECR, 4013. 225 RAG 2007, OJ C 54/13 of 4 March 2006. 226 Regulation on Structural Funds 2006 (see above footnote 37). 227 Para. 96–103 RAG 2007. 228 Regarding the details, see para. 109 et seq. 229 Para. 19 RAG 2007. 230 See para. 56–60. 231 Para. 46 RAG 2007. 232 Para. 76 sentence 2, 94 and 84, 86, 87 1.–3rd tiret, 88 RAG 2007. 217

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regarded as compatible with the internal market in sparsely populated areas 233.234 However, these areas had, in accordance with para. 94 RAG 2007, the possibility, even beyond this period up to 31st December 2012 to grant regional operating aid. Both policies, the European State aid control as well as the European regional policy, 64 following the case law of the ECJ235 and expressively intended by the Commission,236 are closely interlinked.237 ee) Assisted Areas Eligible under Article 107(3) lit. c TFEU, so-called c)-regions. 65 Art. 107(3) lit. a TFEU gives the Commission the power to approve aid to promote the areas of a Member State which are disadvantaged in comparison to the average economic situation in this Member State.238 This benchmark differs from the on which applies to a)-assisted areas. Whereas the whole European Union, i.e. all Member States form the benchmark with regard to the a)-assisted areas, the individual Member State forms the benchmark with regard to Article 107(3) lit. a TFEU. Therefore, the assisted areas under Article 107(3) lit. c TFEU, so-called c)-regions, may only comprise a part of a Member State. In order to allow Member States some discretion with regard to their selection of c)-assisted areas,239 the Commission first determined an individual framework for each Member State, which limits their.240 This framework is a population ceiling and determines for each Member State the number of inhabitants, which its c)assisted areas may cover.241 Secondly, the Commission sets out the criteria which are the basis for the selection of the c)-assisted areas by the Member States. 242 Additionally, according to a phasing-out rule, the Member States are allowed, to determine further c)assisted areas for the period from 1 January 2007 to 31 December 2008 (continuity plafond).243 (1) Individual population ceiling. The Commission determines the individual popu- 66 lation ceiling for each Member State, as follows: First, the Commission determines that all eligible areas cover 43.1% of the population of the 67 EU-25.244 This value is divided into a population share of 42% for the actual assisted areas and a population share of 1.1% for the so-called safety net.245 The residents of the a)-regions including the statistical effect regions are deducted from the value of 42%. Furthermore, the inhabitants of the designated c)-regions are deducted from this value.246 Subsequently, the 233

Para. 30 lit. b, 80 2nd tiret RAG 2007. Para. 20 sentence 3, 76 sentence 4 RAG 2007; See also Com., State aid N 439/2007 of 16 July 2008, corrigendum of 22 December 2008, para. 8 Fn. 5, 41 – Germany. 235 ECJ, Case C-248/84 (footnote 37). 236 Com., Links between regional and competition policy (Fn. 124), OJ 1998 C 90/3; Hancher/ Ottervanger/Slot/Jestaedt (Fn. 125), para. 18-005; Bacon/Wishlade (Fn. 40), para. 15.01, 15.06. 237 See para. 33–35. 238 ECJ, Cases C- 248/84, ECR 4013, para. 19; C-113/00 – Spain, Estremadura [2002] ECR I-7601, para. 65. 239 The Commission determines alone and without administrative participation of the Member States the a)-areas, cf. para. 56. However, the Member Sates are not obliged to show all proposed a)-areas in their regional aid maps: See para. 121. 240 Para. 24 RAG 2007. 241 Para. 23 RAG 2007. 242 Para. 30–32 RAG 2007. 243 Para. 95 RAG 2007; regarding the principle of continuity see also para. 52, 55, 67, 69, 73, 74, 79, 102. 244 Para. 14 Fn. 16 RAG 2007. 245 Para. 14, 28 RAG 2007; regarding the safety net see also para. 52. 246 Annex IV, III (2) RAG 2007. This ambiguity in relation to para. 27 RAG. does not exist in the English and French version, cf.: ‘After deducting the population coverage resulting from the application of the objective criteria set out in sections 3.2 and 3.3, as well as the allocations referred to in the two preceding paragraphs from the upper limit of 42% of EU-25 population determined in section 3.1, . .’or 234

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remaining quantity is allocated to the Member States247 on the basis of a relative formula.248 Thus, a population coverage limit is determined249 for each Member State, with the exception of those whose entire territory is regarded as an a)-region250. If this population coverage percentage is less than half of the population assisted in the funding period 2000-2006, the population ceiling is increased up to 50% of the assisted population of the relevant Member States according to RAG 1998251.252 The RAG 2007 calls this increase of up to 50% a safety net.253 This contributes to the prevention of accidental hardships and guarantees a certain degree of continuity for the previous Member States (EU-15).254 The reported255 c)-assisted areas include the so-called ‘economic development’ regions of the Member States as well as the regions with a low population density.256 Furthermore, the reported c)-assisted areas included the statistical effect regions from 1st January 2011 onwards, if an assessment has led to the result that thy exceed the average threshold of 75% of the average GDP of the EU-25 on the basis of the available EUROSTAT data for the last three years.257 Here, ‘reported’ only means the information from the Commission about the guaranty of the population in the relevant areas which is given to the Member State in advance, i.e. before any further calculations. 258 Regions which are regarded as a)-regions in the funding period 2000-2006 and which have developed so well that they exceed the threshold of 75% of the average GDP in an EU-15 and can, therefore, not be treated as a)-regions any longer, are called ‘economic development’ regions.259 The treatment as c)-assisted areas allows the Member States optional to continue supporting these areas. This is to avoid that a previous subsidy stops abruptly260 and thus jeopardises the successes to date, the principle of assistance-continuity. 261 For political reasons, Northern Ireland is one of the ‘economic development’ regions.262 Areas with low population density only include areas which have a population density of less than 12.5 inhabitants per square kilometre at NUTS III level 263.264 After assigning the individual a)-regions, together with the regions affected by the statistical effect and the related parts of the population, as well as after the individual assignment of the population in the developing areas and the areas with low population the French version: ‘Apre`s de´duction de la couverture de population de´coulant de l’application des crite`res objectifs e´tablis aux points 3.2 et 3.3 et les parts des deux paragraphes pre´ce´dents du plafond de 42% de la population de l’UE-25 de´termine´ a` la section 3.1,…’. 247 Annex IV, III (2) RAG 2007. 248 Para. 24–29, Annex IV RAG 2007. 249 Para. 22, 23 RAG 2007. 250 This includes in relation to an EU-25: Estonia, Lithuania, Latvia, Malta, Poland and Slowenia, Annex V RAG 2007. 251 RAG 1998 (footnote 2). 252 Para. 28 RAG 2007. 253 Para. 14, 28 RAG 2007. 254 Para. 14 RAG 2007; regarding the principle of continuity see also para. 52, 55, 65, 69, 73, 74, 79, 104 and 109. 255 Annex IV, III (1) and (2) RAG 2007. 256 Para. 25, 26 RAG 2007. 257 Para. 20 RAG 2007; for more details see para. 53, 61–64. 258 Para. 25 to 27 and Annex IV, III (2) RAG 2007. 259 Para. 25 Fn. 27 RAG 2007. If they only exceeded the threshold of 75% of the average GDP in an EU25, they would count to the regions affected by the statistical effect, cf. para. 61. 260 Para. 25 RAG 2007. 261 Para. 25 RAG 2007; regarding the principle of continuity see also para. 52, 55, 65, 67, 73, 74, 79, 102. 262 This privilege is a continuation of the privilege of this former civil war region to be treated as an a)region although exceeding the GDP-thresholds, para. 25 Fn. 28 RAG 2007. 263 Regarding the Nomenclature commune des Unite ´s Territoriales Statistiques (NUTS), Article 1 and 3 in conjunction with Annex I NUTS-Regulation 2003 (footnote 194). 264 Para. 26, Fn. 29, para. 30 lit. b RAG 2007.

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density to the Member States, is still up to 42% of the population of an EU-25 remaining part of population which needs to be divided in relation to the Member States. The Commission has made use of a calculation formula to determine the regional aid ceilings for the areas covered by Article 107 sec. 3 lit. c TFEU and to select the non-designated areas on the basis of the criteria ‘dropping below the per capita average GDP of EU-25’ and ‘unemployment rate of more than 15% above the national average’.265 This formula is based on average data of the last three years for which the relevant figures are available. These time periods are not identical for the individual data. The data with regard to the per capita GDP data are based on the years 2000-2002, and for the unemployment rate at the level of Member States and the EU-25 on the years 2001-2003.266 The disparity is considered as definitely sufficiently high if the unemployment rate in the area concerned is 50% higher than the national average.267 Where, on the basis of this assignment of population shares for the designation of c)- 72 regions, individual Member States all in all, including a)-regions as well as the statistical effect regions, got allocated a population ceiling covering less than half of the residents living in that Member State in an assisted area during the funding period 2000-2006, the difference is compensated by the so-called safety net.268 In addition, para. 95 RAG 2007 contains a transitional rule for the years 2007 and 73 2008 which applies to areas that were c)-assisted areas in the funding period 2000-2006 and now no longer meet the relevant criteria. It stipulates that Member States are allocated additional population proportions for these areas for the years 2007 and 2008 which can be used for the selection of c)-areas out of these areas for the period up to 1st January 2009269 (second population ceiling, continuity ceiling).270 Thus, this transition rule corresponds to the principle of continuity and aims not to jeopardise the existing regional economic development successes due to a sudden termination of funding opportunities. The RAG 2007 contain the relevant data for each Member State in Annex V. 271 These 74 include the respective a)-assisted areas272 including the statistical effect regions273 as well as the related percentage shares of population in relation to the total population of each Member State. Furthermore, the data include the population shares with respect to the selection of the c)-assisted areas and the population shares with respect to the safety net274 as well as the additional population coverage shares for the continuity ceilings which can only be used for the period ending 31st December 2008. 275 (2) Selection of areas. Member States may allocate the general population coverage 75 ceilings, which was assigned to them by the Commission in accordance with para. 30,

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Para. 24–29, Annex IV RAG 2007. Annex IV (2) RAG 2007. 267 Para. 27, Fn. 30, Annex IV, I sentence 2 RAG 2007. 268 Para. 28 RAG 2007, see also para. 52. 269 Para. 95 sentence 1, 1st tiret RAG 2007. 270 See para. 52; regarding the principle of continuity see also para. 55, 65, 67, 69, 74, 79, 102. 271 Para. 29, Annex V RAG 2007. 272 This applies to the Member States BE, BU, CZ, DE, EE, EL, ES, FR, HU, IT, LT, LV, MT, PL, PT, RO, S I, SK and UK, Annex V RAG 2007. 273 This applies to the Member States AT, BE, DE, EL, ES, IT, PT and UK. 274 This applies to the Member States AT, BE, CY, DE, DK, EL, FI, ES, FR, HU, IE, IT, LU, NL, PT, SE and UK. 275 This applies to the Member States CY, CZ, DK, ES, FR, IE, IT, LU, NL, PT and SK, see Fn. 289; regarding the principle of continuity see also para. 52, 55, 65, 67, 69, 73, 79, 102. 266

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31 RAG 2007, to the areas in which they want to grant regional aid under Article 107(3) lit. c TFEU. 76 The Member States are therefore allowed to select the following as c)-assisted areas 276: – the economic development areas;277 – areas with a low population density;278 Unlike for the calculation of the population ceiling279, for the determination of national assisted areas the selection of areas at NUTS II level with less than 8 inhabitants per square kilometre is allowed in addition to the selection of regions at NUTS III level with a population density of less than 12.5 inhabitants per square kilometre280.281 – contiguous zones with a minimum of 100000 inhabitants within NUTS II and NUTS III regions which have either a per capita GDP below the EU-25 average or an unemployment rate of more than 15% above the national average. The determination of both criteria is based on the most recent three-year average of Eurostat data, 282 which is available at the time of the decision of the Commission on the Compliance of each Member State Regional Map with the rules of the RAG 2007. These two three-year periods need not be identical, they can refer to divergent periods of time depending on the available most recent data283.284 – NUTS III regions with less than 100000 inhabitants, in which either the per capita GDP is below the average of the EU-25 or the unemployment rate is more than 15% above the national average.285 Again, both criteria are based on the most recent threeyear average of EUROSTAT data.286 – Islands and other regions with a similar geographical isolation, such as peninsulas or mountain regions,287 which do not meet the criteria of a NUTS III region on their own, but fulfil the same conditions as the regions presented under the fourth bullet point.288 Regions which are geographically separated from the EU by areas which are not part of the EU or by areas which are not fully subject to the Treaties 289 are also to be regarded as regions with a similar geographical isolation.290 Those regions mentioned under the fifth tiret, regardless of the GDP or the unemployment criterion if they have less than 5000 inhabitants;291

276 Due to their small size, it is sufficient with regard to Cyprus and Luxemburg that the selected areas show either a per-capita-GDP below the EU-average or an unemployment rate of more than 115% of the State’s average as well as have at least 10 000 inhabitants, para. 30 Fn. 32 RAG 2007. 277 Para. 30 lit. a RAG 2007; See para. 69. This rule is used by the Member States EL, ES, FI, HU, IE, IT and UK. 278 Para. 30 lit. b RAG 2007. This rule is used by the Member States ES, FI and SE. 279 Para. 26 Fn. 29 RAG 2007. See para. 70. 280 Com., State aids N 359/2006 of 20 December 2006, para. 20–23 – Finland; N 431/2006 of 20 December 2006, para. 12–15 – Sweden; N 626/2006 of 20 December 2006, para. 58–61 – Spain. 281 Para. 30 lit. b RAG 2007; Com., State aid N 359/2006, para. 20–23 – Finland. 282 Para. 30 lit. c RAG 2007. 283 Regarding the different periods: cf. Annex IV (2) RAG 2007. See also para. 71. 284 This rule is used by the Member States AT, BE, CY, DE, DK, ES, FI, FR, IE, IT, NL, SE and UK. 285 Para. 30 lit. d RAG 2007. This rule is used by the Member States AT, DK DE and LU. 286 Regarding the actuality and different periods: Cf. Annex IV (2) RAG 2007 and para. 71 and 76 3rd tiret. 287 Para. 30 lit. e, fn. 34 RAG 2007. 288 Para. 30 lit. e RAG 2007. This rule is used by the Member States CY, DK, FR and IT. 289 Article 355 (5) lit. b TFEU, until 1 December 2009 Article 299 (6) lit. b EC. 290 Com., State aid N 814/2006 of 24 January 2007, para. 14 – Cyprus. 291 Para. 30 lit. f RAG 2007. This rule is used by the Member States DE, DK, FI and IE.

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– NUTS III regions or parts thereof, which are adjacent to an a)-assisted area or have a land border or a sea border of less than 30 km to a State which is not a Member State of the European Economic Area or EFTA.292 This option corresponds to the opportunity to reduce the funding gap between an a)assisted area and a c)-assisted area to a value that does falls below 20% points. 293 This can particularly be done by raising the intervention rate i.e. the aid intensity in a c)assisted area.294 This reflects the principle of the generalized compensation for regional handicaps295 and corresponds to the real situations. Economically prosperous regions, do not border directly to those regions whose average GDP is higher than the EU average. In fact, there is always an extended change. However, the Member States are allowed to grant appropriate compensations to undertakings investing in those areas to prevent the death of regions, which are adjacent to a)assisted areas and do not fulfil the criteria of the average GDP and of the unemployment rate296 but that cannot be regarded as economically prosperous.297 At the same time, this option is also used to prevent investments which are simply relocated. 298 – in exceptional and justified cases, also other contiguous areas with at least 50 000 inhabitants, which have undergone a profound structural change, or which are undergoing a serious economic decline compared to similar areas. Member States which wish to take this opportunity299 have to demonstrate, using recognised economic indicators, that granting of regional investment aids in the areas concerned is in view of the situation at Community level justified.300 The causative indicators approved by the Commission include: closure of military bases,301 massive job losses in ‘old industrial’ sectors such as shipbuilding,302 shoe,303 leather,304 textile,305 paper,306 photo,307 car, engine manufacturing,308 steel, chemical,309 or food industries,310 thus in the consumer goods and the capital goods industry,311 closure of coal mines, quarries312 or gas fields and associated job losses in upstream and downstream industries, difficulties to compete with regard to imports from third countries, 313 292

Para. 30 lit. g RAG 2007. This rule is used by Austria, State aid N 492/2006 of 20 December 2006 para. 29–31; Germany, State aid N 459/2006 of 8 November 2006, para. 55–59; Finland, State aid N 359/2006 of 20 December 2006, para. 42–44 and Italy, State aid N 324/2007 of 28 November 2007, para. 70–73. 294 Para. 47 Fn. 45 RAG 2007. 295 See Para. 4. 296 Para. 30 lit. d RAG 2007. 297 This rule is used by the Member States AT, BE, DE, ES, FI, FR, IT, PT and UK. 298 Mederer/Pesaresi/van Hoof/Dupont/TumasonytTumasonyte EU Competition Law, Part 4, Chapter 6, para. 4.860. 299 This rule is used by the Member States: BE, DE, ES, FI, FR, IT and SE. 300 Para. 30 lit. h RAG 2007. 301 Com., State aid N 459/2006, para. 69, 78 – Germany. 302 Com., State aid N 626/2006, para. 80 – Spain. 303 Com., State aid N 459/2006, para. 64 – Germany; State aid N 343/2006, para. 87, 167 – France. 304 Com., State aid N 343/2006, para. 167 – France. 305 Com., State aid N 324/2007, para. 77 – Italy; State aid N 626/2006, para. 87 – Spain; State aid N 343/ 2006, para. 87, 126, 129, 132, 170 – France. 306 Com., State aid N 343/2006, para. 87, 114, 150 – France. 307 Com., State aid N 343/2006, para. 99 – France. 308 Com., State aid N 459/2006, para. 70 – Germany; State aid N 343/2006, para. 85, 97, 103, 132, 170 – France; N 324/2007, para. 77 – Italy. 309 Com., State aid N 324/2007, para. 88 – Italy; State aid N 343/2006, para. 87, 114, 153, 170 – France. 310 Com., State aid N 324/2007, para. 111 – Italy. 311 Com., State aid N 343/2006, para. 103, 113 – France. 312 Com., State aid N 343/2006, para. 132 – France. 313 Com., State aid N 343/2006, para. 132 – France. 293

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restructuring of region determining industry sectors,314 predominantly rural area,315 difficult geographical environment,316 low population density,317 negative population growth318 and decreasing workforce,319 above-average migration (high migration losses),320 low penetration of information technology,321 deconstruction or operating322 of nuclear power plants,323 objective 2 area under the Structural Funds,324 region of economic revival,325 well below average education,326 low or missing327qualifications of the workforce,328 high and rapidly increasing aging index,329 low average income of the population,330 increase in (long-term) unemployment,331 high youth unemployment,332 only few job opportunities,333 geographical isolation334 mono industrial structures335 or extended workbenches, i.e. premises without headquarters. 336 77 In order to allow Member States the possibility of greater flexibility, para. 31 RAG 2007 provides for so-called fine distinction which was abolished by the RAG 1998 and demanded by Germany337.338 This flexibility in the designation of assisted areas allows Member States to select below the NUTS III level certain punctual areas with at least 20 000 inhabitants as c)-regions. This minimum limit may be reduces to at least 5,000 inhabitants for islands or other areas with similar local isolation.339 This allows Member States to select areas in prospering cities if these are characterised by very localised imbalances such as social challenges or insufficient infrastructure, poor living environment or a lack of local recreational infrastructure, 340 shortly, which are characterised by ‘general desolation’. However, the Member States are obliged, on the basis of recognised economic indicators such as per-capita-GDP, productivity - or qualification indicators, employment situation or unemployment rate, to demonstrate that the proposed areas have a larger need for economic development than other areas in the same region. 314

Com., State aid N 343/2006, para. 85 – France. Com., State aid N 343/2006, para. 97 – France. 316 Com., State aid N 343/2006, para. 148 – France. 317 Com., State aid N 343/2006, para. 89, 152 – France. 318 Com., State aid N 431/2006, para. 30, 37 – Sweden; State aid N 343/2006, para. 93 – France. 319 Com., State aid N 343/2006, para. 93. 320 Com., State aid N 343/2006, para. 111, 117, 118 – France. 321 Com., State aid N 626/2006, para. 88 – Spain. 322 Com., State aid N 343/2006, para. 148 – France. 323 Com., State aid N 745/2006, para. 36 – Belgien. 324 Com., State aid N 343/2006, para. 122 – France; State aid N 745/2006, para. 38 – Belgien. 325 Com., State aid N 343/2006, para. 129, 133 – France. 326 Com., State aid N 359/2006, para. 48 – Finland; State aid N 324/2007, para. 92, 97 Italy; State aid N 431/2006, para. 38 – Sweden. 327 Com., State aid N 343/2006, para. 158 – France. 328 Com., State aid N 343/2006, para. 96, 102, 117 – France. 329 Com., State aid N 324/2007, para. 97 – Italy; State aid N 343/2006, para. 152 – France. 330 Com., State aid N 343/2006, para. 80, 89, 93, 96, 100, 103, 118, 119, 121, 131, 141 – France. 331 Com., State aid N 343/2006, para. 107, 110, 117, 118, 135, 138, 158 – France. 332 Com., State aid N 343/2006, para. 155 – France. 333 Com., State aid N 324/2007, para. 119, 126 – Italy; State aid N 343/2006, para. 90, 91, 119, 121, 138 – France. 334 Com., State aid N 343/2006, para. 94 – France. 335 Com., State aid N 343/2006, para. 88, 94, 156, 159, 163 – France. 336 Com., State aid N 343/2006, para. 164 – France. 337 See Com., State aids C 47/99 of 17 August 1999, OJ 1999 C 340/8 para. 12, 38 – regional aid map Germany 2000–2003 and of 14 March 2000, OJ 2001 L 97/27 para. 49 et seq. as well as ECJ, Case C-242/ 00 Germany v Commission [2002] ECR I-5603, para. 22, 36 (see above footnote 157). 338 Para. 31 RAG 2007.This rule is used by the Member States BE, DE, DK, FI, FR, IE, and IT Gebrauch. 339 Para. 30 lit. f, 31 RAG 2007. 340 Mederer/Pesaresi/van Hoof/Dupont/TumasonytTumasonyte (Fn. 298), Chapter 6, para. 4.865. 315

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According to para. 31 RAG 2007, however, only investments by SMEs may be subject to State aids. In addition to the funding rate provided for by the respective regional map, they may receive a plus bonus of 20% for small and 10% for medium enterprises.341 Aid granted for investments in these areas by companies that do not fulfil the criteria of SME developed by the SME recommendation of the Commission342 are to be regarded as not compatible with the internal market. The same applies to SMEs, making investments with eligible costs exeeding EUR 25 million, unless it requires no more, as it would have received at an EUR 25 million investment. Para. 95 RAG 2007 allows Member States to select further c)-areas for the years 2007 and 2008 from areas that were c)-regions at the end of the funding period 2000-2006 and that do not longer meet the criteria for c)-areas. This is on the basis of the designated continuity ceilings ‘additional population coverage 2007-2008 according to Article 87(3) lit. c (now Article 107(3) lit. c TFEU) ‘,343 and on the basis of the categories provided.344 The c)-regions will be selected on the basis of the NUTS II and III levels, provided for by Article 3(3), (4) NUTS Regulation 2003345. In Germany, these will be regional districts and the counties or county-free cities.346 These areas cover smaller administrative units which are the communities in Germany.347 The use of this structure prevents the Member States from arbitrarily cut off commercial areas from residential areas and to register larger areas as assisted areas. 348 As part of the area selection according to para. 30 lit. h RAG 2007 Member States may combine several sub-regions under NUTS II or NUTS III regions to a coherent c)assisted area. This applies if this area constitutes a single economic area such as the labour market region in Germany349 or in the cases where only a large part of a region will be selected.350 The Commission shall verify compliance with the overall ceiling on coverage for the Member State concerned by the actual population of the regions on the basis of the most recent recognised statistical information. 351

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b) The maximum rates (Subsidy Value Limits). The maximum rates are expressed 83 as intensity for each base, with regard to the eligible costs.352 The intensity is shown as gross grant equivalent (GGE)353 and describes the rate of State aid as a percent value before taxes, which may be granted for an investment or which is granted for an investment. If an undertaking is granted an aid of 30% GGE for an investment of EUR 341

Para. 31 sentence 3 RAG 2007; Com., State aid N 459/2006, para. 83, 85 – Germany. Recommendation of the Com. of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ 2003 L 124/36; cf. also Annex I of the Regulation (EC) 364/2004 of the Com. of 25. February 2004 amending the Regulation (EC) No. 70/2001, OJ 2004 L 63/22, and Annex I of the Regulation (EC) 800/2008 of the Com. of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Article 87 and 88 of the Treaty (General block exemption Regulation – BER) OJ 2008 L 214/3 (SME-Recommendation). And for the following sentence: arg. e. para. 64 RAG 2007. 343 Annex V RAG 2007; regarding the principle of continuity see also para. 52, 55, 65, 67, 69, 73, 74, 79, 102. 344 This rule is used by the Member States CY, CZ, DK, ES, FR, IE, IT, LU, NL, PT and SK. 345 NUTS-Regulation 2003 (footnote 193). 346 Annex II NUTS-Regulation 2003 (footnote 193). 347 Article 4 (1) and Annex III NUTS-Regulation 2003 (footnote 193). 348 Com., State aid N 459/2006, para. 45 – Germany; State aid N 324/2007, para. 58 – Italy. 349 Com., State aid N 459/2006, para. 62, 63 – Germany. 350 Com., State aid N 459/2006, para. 68 – Germany. 351 Para. 32 in conjunction with para. 24, 23, 13 fn. 15, 16 RAG 2007. 352 Para. 41 RAG 2007. 353 Para. 41 sentence 2 RAG 2007. 342

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100, this will be for a lost grant an amount of EUR 30 before taxes. The calculation method applied by the Commission with regard to the RAG 1998 was the net grant equivalent (NGE), which was the after-tax value of aid. In the example mentioned, this will be a lost grant of EUR 30 after taxes. However, the Commission has stopped using this method following the judgments of the ECJ in the Alzetta-Case354 and due to transparency and simplification aspects.355 aa) a)-Assisted areas. Following the EU enlargement on 1 May 2004, the Commission differentiated the subsidy rates for regional aid in a)-assisted areas, depending on the respective per capita average GDP of an EU-25, measured in purchasing power standards (PPS), in three levels of intensity, expressed in gross grant equivalent (GGE): 356 – 30% GGE for regions with less than 75% of the average per capita GDP in the EU-25 and in regions affected by the statistical effect at least until 31 December 2010 – 40% GGE for regions with a per capita GDP of less than 60% of the average per capita GDP in the EU-25 and – 50% GGE for regions with a per capita GDP of less than 45% of the average per capita GDP of the EU-25.357 85 Outermost regions should particularly be supported. Therefore, these areas have the option to raise the specific aid intensities of 30%, 40% and 50% by 20% points. 358 Thus, it is permitted to grant an aid intensity of 50% GGE in an area with a per capita GDP of less than 75% of the average GDP and aid intensity of 60% GGE in an area with a per capita GDP of less than 60%.359 With a per capita GDP of more than 75% of the EU-25 average, the aid intensity may be increased by 10% points to 40% GGE. 360 In case of a theoretical per capita GDP of more than 100% of the EU-25 average, the aid intensity should remain at a level of only 30% GGE.361 This results in the following scale for these areas: – 40% GGE for outermost regions with a per capita GDP of more than 75% of the average per capita GDP of the EU-25;362 – 50% GGE for outermost regions with a per capita GDP of less than 75% of the average per capita GDP of the EU-25.363 – 60% GGE for outermost regions with a per capita GDP of less than 60% of the average per capita GDP of the EU-25.364 86 There are no outermost areas with less than 45% of GDP, and a funding opportunity of up to 70% for large companies, so the next possible threshold, and there are no outermost areas with a GDP of more than 100%. 87 In principle, in a)-areas, the award of regional operating aid is compatible with the internal market, too.365 84

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GC, judgment of 15 June 2000, T-298/97 et al., ECR 2000, II-2319, para. 89 – Alzetta. Para. 41 Fn. 44 RAG 2007. 356 Para. 41 and Fn. 44 RAG 2007. 357 Para. 43, 44 RAG 2007. 358 Para. 45 RAG 2007. 359 Com., State aid N 343/2006, para. 39 – France; State aid N 727/2006, para. 23 – Portugal. 360 Para. 45, 2nd halfsentence RAG 2007. 361 Arg. e. contr. para. 45 RAG 2007, cf. para. 86. 362 Para. 44, 45 2nd halfsentence RAG 2007; Com., State aid N 626/2006, para. 37 – Spain: Canary Islands; State aid N 727/2006, para. 23 – Portugal: Madeira. 363 Para. 44, 45 1st halfsentence RAG 2007; Com., State aid N 343/2006, para. 39 – France; State aid N 727/2006, para. 23: – Portugal: Madeira. 364 Para. 44, 45 1st halfsentence RAG 2007; Com., State aid N 343/2006, para. 39 – France. 365 Para. 76 sentence 2 RAG 2007. See also para. 463 et seq., 468, 470. 355

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bb) c)-Areas. In c)-areas, the aid intensity is necessarily lower than in a)-assisted areas in consideration of the aid target.366 Thus, the regional aid ceiling in c)-assisted areas generally must not exceed 15% GGE.367 This maximum aid intensities are not dependent of other criteria. They therefore always apply to areas with low population density within the meaning of para. 30 lit. b RAG 2007368 as well as to areas mentioned in para. 30 lit. c, d and e RAG 2007. If an area according to para. 30(c), (d) or (e) RAG 2007 does not meet either of the criteria, it cannot be selected by the relevant Member State as a possible c)-area. However, these areas may be selected as c)-areas on the basis of other aspects. An aid intensity of at least 15% GGE may also be granted in c)-areas at NUTS III level of parts thereof which are adjacent to an a)-assisted area or which have a border with a state that is not a Member State of the European Economic Area 369 or EFTA370 that means in the areas according to para. 30 lit. g RAG 2007. 371 With regard to NUTS III or smaller areas, which are adjacent to an a)-assisted area, this intervention rate of 15% GGE can be raised until the funding gap between the two regions is only 20%.372 This aims to avoid that the disparities in funding between neighbouring regions lead to regional political turmoil and a death of the economically stronger border region. 373 This can lead to a higher aid rate for c)-areas than generally permitted. 374 The maximum possible aid can therefore amount up to 30% GGE (50% GGE deducted by 20% GGE maximum gap) in a c)-area depending on the rate applying to the neighbouring region according to Article 107(3) lit. a TFEU.375 If the regions affected by the statistical effect are covered by Article 107(3) lit. c TFEU after 31st December 2010,376 there is an intensity of 20% GGE allowed.377 Any other increase in the aid intensity is prohibited. In case that an area within the meaning of para. 30 lit. c, d or e RAG 2007 meets both criteria mentioned in this provision which is the per capita GDP and the ‘unemployment rate’; the maximum allowable aid intensity does not increase.378

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Para. 42 RAG 2007. Para. 47 sentence 1 RAG 2007. 368 NUTS-II-areas with a population density if less than 8 inhabitants per square-km or NUTS-III-areas with a population density of less than 12.5 inhabitants per square-km, para. 30 lit. b, 48 RAG 2007. 369 The European Economic Area (EEA) includes all EU-Member States as well as the EFTA-States Norway, Island and Liechtenstein: Agreement on the European Economic Area of 2 May 1992, Agreement on the first extension of the European Economic Area of 14 October 2003, Agreement on the second extension of the European Economic Area of 25 July 2007. 370 The EFTA includes Norway, Island, Liechtenstein and Switzerland, Convention establishing the European Free Trade Association (EFTA) of 4 January/3 May 1960. 371 Para. 48 RAG 2007. 372 Para. 47 fn. 45 RAG 2007. 373 See para. 76 lit. g; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (fn. 298), Chapter 6, para. 4.860. 374 Com., State aids N 359/2006, para. 44 – Finland; N 459/2006, para. 19, 20, 31, 56 fn. 32, 58 and 59 – Germany; N 492/2006, para. 31 – Austria; N 324/2007, para. 73 – Italy. 375 Com., State aids N 459/2006, para. 31 fn. 26 – Germany; N 487/2006 of 13 September 2006, para. 16 – Hungary. 376 Para. 18–20 RAG 2007; Com., Status-Communication (fn. 222), para. 3 Table No. 2; cf. para. 62. 377 Para. 46 RAG 2007; this does not apply to the counties of Celle, Cuxhaven and Lu ¨ neburg. With respect to them, an aid intensity of only 15% GGE was notified approved for the period until 31 December 2010, Com., State aid N 459/2006, para. 17, 32 and Annex No. 2 – Germany; Com., StatusCommunication (fn. 222), para. 3 Table No. 2. 378 Com., State aid N 459/2006, para. 51 – Germany. 367

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With regard to areas covered by para. 30 lit. a,379 f,380 h381 and by para. 31382 RAG 2007, the upper limit of incentives of 15% GGE is to be reduced to 10% GGE if the per capita GDP of 100% of the average GDP in relation to the EU-25 is exceeded and in addition the unemployment rate falls below the average of the EU-25 at NUTS III level383.384 Otherwise, the maximum intensity remains at a level of 15% GGE in these c)areas. For the determination of the aid intensities applying to these areas, here also average values based on EUROSTAT data available for the last three years (at the time of determination).385 The same applies to the determination of the c)-regions according to para. 30 lit. c, d or e RAG 2007. The maximum intervention rate for large undertakings amounts to only 10% GGE in c)-areas which were additionally designated until 1 January 2009 according to para. 95 RAG. 2007.386 If a selected c)-area meets the conditions of several aid criteria according to para. 30, 31 and 95 RAG 2007, the most favoured criterion is to be applied to this area. 387 Therefore, there is no cumulation of aid intensities even if an area is designated according to both para. 95 and para. 31 RAG 2007.388 The granting of regional operating aid in c)-areas is only compatible with the internal market if the area has a low population density389.390 Furthermore, according to para. 94 RAG 2007, it is permitted, for a period of two years in the regions which are not covered by Article 107(3) lit. a TFEU (until 30 November 2009 according to Article 87(3) lit. a EC). These regions include the economic development regions within the meaning of para. 25 Fn. 27, 30 lit. a, 93 RAG 2007 as well as the statistical effect regions which lost this status as a)-areas on 1 January 2011 due to the review 391 on 20 July 2010.392 However, it is required in any case that the relevant Member State selects the assisted areas und notifies this to the Commission for approval. There are three mayor regional levels. – selected a)-regions, – selected c)-regions and – non-assisted areas. The non-assisted areas include those which do not meet the criteria of an assisted area as well as those which were designated as an a)-area including the statistical effect regions in Annex V of RAG 2007 but without being selected for an aid map by the Member State.393 379

Economic development areas, Com., State aid N 626/2006, para. 52, 54, 57 – Spain. Islands and other areas with less than 5000 inhabitants, Com., State aid N 459/2006, para. 54 – Germany. 381 Areas affected by structural changes, Com., State aid N 745/2006, para. 37 – Belgium. 382 Com., State aid N 459/2006, para. 85 – Germany. 383 In Germany at the level of the counties and cities, Annex II NUTS-Regulation 2003 (footnote 194). 384 Para. 47 sentence 2 RAG 2007; Com., State aid N 523/2006 of 12 October 2006, para. 12 – Luxemburg. 385 The data for the per-capita-GDP are based on the years 2000–2002 and for the unemployment rate at the Member State’s level and at the leve of the EU-25 on the years 2001–2003, Annex IV (2) RAG 2007. See also para. 71. 386 Para. 95 sentence 2 3rd tiret RAG 2007. 387 Com., State aid N 626/2006 of 20 December 2006, para. 55, 57 – Spain. 388 Com., State aid N 374/2006 of 24 October 2006, para. 37 – Irland. 389 Para. 30 lit. b, 76 sentence 4, 80 2nd tiret RAG 2007. 390 Para. 76 sentence 4 RAG 2007. See also para. 463 et seq. 391 Com., Status-Communication (fn. 222), OJ 2010 C 222/2; para. 62–64, 106. 392 Para. 94 RAG 2007. These are Attiki, Principado de Asturias, Regio ´ n de Murcia, Anto´noma de Ceuta, Auto´noma de Melilla, Burgenland, Algarve, Highlands and Islands, Brandenburg-Su¨dwest, Leipzig, Halle, Lu¨neburg, counties Lu¨chow-Dannenberg, Uelzen, Celle, Cuxhaven and Lu¨neburg. 393 Com., State aid N 459/2006, para. 32, 33 – Germany. 380

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Considering only the selected areas, there are the following five area groups with 99 there respective permissible maximum funding intensities, i.e. without the permissible bonuses of 20% GGE for small and 10% GGE for medium-sized enterprises: 394 – a)-regions, differentiated according to the different per capita average GDP-values with the three State aid maximum rates of 50%, 40% and 30%, including the statistical effect regions with a regional aid ceiling of 30% until 31 December 2010; – c)-regions, differentiated according to the different per capita average GDP-values and the average unemployment rate with the two basic State aid maximum rates of 15% and 10% GGE as well as, regardless of this differentiation, with an aid ceiling of 15% GGE for regions with low population density; – c)-regions that are adjacent to other assisted areas or have external borders form with a variable rate of assistance of 15%, which can rise up to 30%; – c)-regions as additional areas with an assistance rate of 10% GGE until 31 December 2008 – c)-regions with an aid ceiling of 20% for the statistical effect regions which are not regarded as a)-areas from 1 January 2011 onwards due to exceeding the per capita average GDP of 75% in relation to an EU-25.395 In case of aid for small or medium-sized enterprises within the meaning of the 100 Commission’s SME recommendation396 the determined ceilings as set up above can be increased by 20% GGE for micro and small companies and by 10% GGE for medium sized companies.397 This means that a small independent enterprise in French Guyana with fewer than 50 persons as staff headcount and an annual turnover or balance sheet not exceeding EUR 10 million can receive funding of 80%, and in an Article 107(3) lit. c assisted area up to 50%, of its initial investment. These bonuses for SME do not apply for aid in transport.398 Equally excluded are 101 those benefits for SME that relate to large investment projects within the meaning of para. 60 RAG 2007,399 i.e. projects where the eligible costs exceed EUR 50 million.400 c) Approval of the Member States’ regional aid maps. aa) Content of the regional 102 aid maps. The Member States notify the Commission the selected areas proposed for eligibility under Article 107(3) TFEU as well as the aid intensities envisaged for large enterprises and the adjustments in the regional aid ceiling for large regional investments401 as well as the envisaged period of validity of the list (regional aid map).402 These intensities do not comprise the permitted bonuses for small and medium sized enterprises403, 20% GGE for small enterprises and 10% GGE for medium sized enterprises. 404 Where for certain regions, transitional rules will apply, or where a change of aid intensity is anticipated, the relevant periods and aid intensities should be specified in detail. 405 In

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Para. 49 RAG 2007. See para. 64 and 96. 396 SME-Recommendation (footnote 342). 397 Para. 49 RAG 2007. 398 Para. 49 footnote 47 RAG 2007. 399 Para. 67 footnote 61 RAG 2007; see also Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.856. 400 Para. 60, 61 RAG 2007. 401 Para. 60, 67 RAG 2007. 402 Para. 102 sentence 1 and 2, 96 footnote 82 RAG 2007. 403 SME-Recommendation (footnote 342). 404 Para. 49 RAG 2007. 405 Para. 102 sentence 2 RAG 2007. 395

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order to ensure continuity406, which is essential for long-term regional development, the list of regions notified by Member States should in principle apply throughout the overall aid period until 2013.407 The provision regarding the gradual reduction of the aid ceilings for economic development regions as laid out by the Member States for the overall period pursues the same objective.408 Finally, the provision of Para 104 Sentence 3 and 5 RAG 2007 can be assigned to pursuing this end as well. According to this, any Member State wishing the Commission to assess the list of regions eligible for aid could submit a notification to the Commission before 1 April 2010409 and thereby initiating a mid-term review.410 If, as a result of this mid-term review in 2010, certain regions did not fulfil the required criteria anymore and thus could not receive any regional aid anymore, those areas lost their eligibility for regional aid coverage without any further transitional provisions. 411 Those transitional regulations which apply to the ‘economic development regions’ do not apply to these areas, with the exception of the statistical effect regions. 412, 413 103 According to para. 99 RAG, depending on the socio-economic situation of the Member States the regional map will include two groups of assisted areas: Article 107(3) lit. a regions including the statistical effect regions and those regions which are to be designated by Member States for eligibility for regional aid in accordance with Article 107(3) lit. c up to the Member State individual limit for population coverage. 104 To the extend that the regional aid map covers those areas determined in Annex V RAG 2007 which are eligible for support under Article 107(3) lit. a TFEU including the statistical effect regions, it will normally not be necessary to provide detailed supporting socio-economic data.414 On the other hand detailed supporting information should be given to explain the designation of the Article 107(3) lit. c TFEU regions, unless there are the economic development415, the low population density416 and the ‘border’ regions417. The explanation has to include the detailed identification of the regions concerned, population data, information on GDP and unemployment levels in the regions concerned, and ‘any other relevant’ information, i.e. any relevant details explaining in an appropriate manner the justification of the designation. 418 105 Regional Operating aid: in terms of regional operating aid it needs to be distinguished as follows. General regional operating aid419 within the meaning of para. 5 RAG 2007420 are not to be included in the regional maps421: it is not possible to describe 406 In regard to the principle of continuity and its reflection in the RAG 2007 see para. 52, 55, 65, 67, 69, 73, 74 and 79. 407 Para. 104 sentence 1 RAG 2007. 408 Para. 93 RAG 2007. 409 Para. 104 sentence 3 RAG 2007. 410 Bacon/Wishlade (footnote 40) Para. 15.41. 411 Para. 104 sentence 5 RAG 2007; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.872. 412 Regarding the statistical effect regions see paras 18, 104 sent. 5, 20 RAG 2007; Com., StatusCommunication (fn. 222), para. 3. 413 Para. 25 footnote 27, 30 lit. a, 93, 94 RAG 2007; see also para. 52, 68 et seq., 96 et seq., 109. 414 Para. 103 sentence 1 RAG 2007. 415 Regions that qualified as Article 87 (3) lit. a) EC areas in the aid period 2000–2006, and which exceeded the relevant threshold of 75% of the average pro capita consumption during aid period 2007– 2013 and would also have exceeded it in relation to a EU-15, para. 25 and para. 30 lit. a RAG 2007. 416 Para. 30 lit. b RAG 2007. 417 Para. 30 lit. g, 47 footnote 45 and para. 48 RAG 2007. 418 Para. 103 sentence 2 RAG 2007; Com., State Aid N 459/2006, para. 67–85 – Germany. 419 Para. 6 sentence 2 RAG 2007. 420 Para. 76–83 RAG 2007. 421 Para. 96 sentence 3 RAG 2007.

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a grant equivalent for this kind of aid in advance. Thus, the Commission always needs to be notified individually of these operating aids according to Article 107(3) TFEU, regardless of whether these operating aids are regarded as state aid regulations, such as guarantee schemes422, or as ad hoc aid.423 Ad hoc aid is an individual aid which is not granted on the base of an aid scheme.424 General regional operating aid is only permitted in the Article 107(3) lit. a areas as set out in the regional aid maps including the statistical effect regions,425 as well as in c)-assisted areas set out in the regional aid maps with low population density426 and within the transitional provisions regarding to para. 94 RAG 2007. bb) Scope of assessment in the course of the approval procedure for regional maps. 106 The Commission will examine the individual Member States’ notifications427 in accordance with the procedure set out in Article 108(3) TFEU and based on the criteria for assisted areas as set out in the RAG 2007428, the maximum aid ceilings429 as set out in the RAG 2007 and the population limits430 as determined by the Commission. cc) The Commission decision regarding the submitted regional aid maps. The 107 examination concludes with a reasoned decision. Recalling the jurisdiction of the Court, the Commission regards this decision only in 108 that case as legally binding for the Member States if they have accepted the decision. 431 That means that the Commission does not consider this procedure to have a direct impact towards the respective Member State as it derives from Article 23 Procedural Regulation432. By this, she renounces her rights to initiate infringement proceedings pursuant Article 108(3) sentence 3 TFEU in case of the Member State’s non-compliance with her decisions as in Article 108(2) sentence 2, 258 TFEU. Thus and despite the repeated references to Article 108(3) TFEU, 433 the regional guidelines provide that the approved regional maps will be considered ‘integral part’ of the regional guidelines 2007-2013.434 However, in a different way of what is stated in para. 97 RAG 2007, the ECJ in his 109 judgment of 18 June 2002 Germany/Commission435 only considered those ‘decisions’ of the Commission as integral to the guidelines and having binding force only on the condition that the Member State has accepted them according to Article 19 of the 422 See Com., State Aid N 430/2007 of 16 July 2008, corrigendum of 23 September 2008 – Thuringia; N 431/2007 of 16 July 2008, corrigendum of 23 September 2008 – Mecklenburg-Vorpommern; N 432/2007 of 16 July 2008, corrigendum of 23 September 2008 – Thuringia; N 433/2007 of 16 July 2008, corrigendum of 23 September 2008 – Brandenburg; N 439/2007 of 16 July 2008, corrigendum of 22 December 2008 – Germany; N 311/2008 of 23 September 2008 – Saxony-Anhalt; No N 443/2008 of 8 April 2009, corrigendum of 15 June 2009 – Saxony. 423 Para. 96 sentence 3 RAG 2007. 424 Article 2 No 4 GBER I; para. 10 sentence 3 in conjunction with sentence 1 RAG 2007, see mainly para. 181 et seq. 425 Para. 76 sentence 2, 94 RAG 2007; Com., State Aid N 459/2006, para. 30 – Germany; State Aid N 439/2007, para. 8 footnote 5; 41 – Germany. 426 Para. 76 sentence 4, 30 (b) RAG 2007. 427 Para. 101 RAG 2007. 428 Para. 15–20, 21–23, 30–32 RAG 2007. 429 Para. 42–49 RAG 2007. 430 Para. 24–29 RAG 2007; as an example: Com., State Aid N 459/2006, para. 34 – Germany; State Aid N 343/2006, para. 182, 183 – France. 431 Para. 97 RAG 2007. 432 Procedural Regulation (footnote 95). 433 Para. 96 sentence 3, 98 sentence 1, 100 sentence 2, 101 sentence 1 RAG 2007. 434 Para. 101 sentence 3 RAG 2007. 435 ECJ, Case C -242/00 Germany v Commission [2002] ECR, I-5603.

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Procedural Regulation, where they relate to the maximum population coverage in an assisted area but not those decisions relating to the compatibility of the regional aid maps with the common market moreover.436 110 Furthermore, para. 106 sentence 1 RAG 2007, Article 1(1) lit. b of the Enabling Regulation437 as well as Article 13(1), sentence 2 GBER I require from 1 January 2007 a regional aid map to be adopted438 or approved439 by the Commission for regional aid to be granted.440 This procedure is gentle on resources, but efficient: it avoids a breach of the common market by the granting of a regional aid provided that the member states comply with the rules. dd) Legal effects of an approval of the regional aid map. The regional maps will take effect on 1 January 2007, or their date of publication if later, and will be considered an integral part of the Regional guidelines 2007.441 They are generally effective until 31 December 2013. However, they can be reviewed in 2010 or on initiation of a Member State.442 112 The adoption of the regional aid map by the Commission constitutes the prerequisite for being able to declare a regional aid443 as compatible with the common market and hence to be able to approve it444 in future or to enable the grant of regional aid for existing445 or future group exemption regulations446.447 113 In the meantime, the Commission has adopted the regional maps of all Member States.448 That enables these regions to get approval for certain regional aid in 111

436

ECJ, Case C -242/00 Germany v Commission [2002] ECR, I-5603, para. 35. Council Regulation (EC) No 994/98 of 7 May 1998 on the application of Article 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid OJ L 142, 14/ 05/1998, p.1 (Council Enabling Regulation). 438 Para. 106 sentence 1 RAG 2007. 439 Article 13(1), (2) sentence 1 GBER I. 440 Para. 106 sentence 2 and 3 RAG 2007. 441 Para. 101 sentence 2 RAG 2007. 442 Para. 104 sentence 1 und 2 RAG 2007 and para. 104 sentence 3 RAG 2007 (footnote 40) para. 15.41. 443 Those regional aid schemes can be submitted in the form of either general frameword regulations or aid guidelines or individual aid. Other aid which does not qualify at least as regional aid, can not be notified on the basis of the regional maps; in that regard ambiguous Heidenhain/Jestaedt (footnote 4), § 15 para. 22. 444 Para. 96 RAG 2007 and arg. e. Para. 106 RAG 2007. 445 The solely existing Group Exemption Regulation at the time of the publication of the RAG 2007 was the SME Bloc Exemption Regulation (Regulation 70/2001, footnote 21) which was still valid at the time, Article 2 Commission Regulation (EC) No 1976/2006 of 20 December 2006 amending Regulations (EC) No 2204/2002, (EC) No 70/2001 and (EC) No 68/2001 as regards the extension of the periods of application, OJ L 368/2006, p. 85 (Prolongation Regulation); para. 98 sentence 1 RAG 2007. 446 At the time, future group exemption schemes were namely the Exemption Regulation to Regional investment aid (Regulation 1628/2006 – RRIA) (footnote 3) as well as the subsequent general Group Exemption Regulation (Regulation 800/2009, GBER I). The RRIA, which ceased to be in force on 29 August 2008, was fully integrated into the GBER I, Art. 43 GBER I. In regard to the relation of the application of these two regulation towards each other, see above para. 8. 447 Para. 98 RAG 2007; Article 13 (1), (2) GBER I. 448 Com., State Aid N 745/2006 of 21 February 2007 – Belgium; State Aid N 1/2007 of 24 January 2007 – Bulgaria; State Aid N 693/2006 of 21 February 2007, corrigendum of 24 April 2007 – Denmark; State Aid N 459/2006 of 8 November 2006 – Germany; State Aid N 466/2006 of 13 September 2006 – Estonia; State Aid N 359/2006 of 20 December 2006 – Finland; State Aid N 343/2006 of 7 March 2007 – France; State Aid N 408/2006 of 31 August 2006 – Greece; State Aid N 374/2006 of 24 October 2006 – Ireland, amendment N 130/2010 of 20 July 2010; State Aid N 324/2007 of 28 November 2007 – Italy, amendment N 117/2010 of 6 July 2010; State Aid N 447/2006 of 13 September 2006 – Latvia; State Aid N 641/2006 of 24 October 2006 – Lithuania; State Aid N 523/2006 of 12 October 2006 – Luxemburg; State Aid N 631/ 2006 of 12 October 2006 – Malta; State Aid N 249/2007 of 27 June 2007 – Netherlands; State Aid N 492/ 2006 of 20 December 2006 – Austria; State Aid N 531/2006 of 13 September 2006 – Poland; State Aid N 437

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accordance with Article 107(3) lit. c TFEU or to submit them to the rules of the GBER I.449 ee) The Member States’ margin of discretion. The Member States are not completely 114 bound by these regional maps. Even though the regional maps are meant to cover the entire national territory of a Member States450 the Member States are not obliged to fully exhaust their options as framed by the RAG 2007 and by the decision of the Commission. This applies in particular to the population ceiling. A Member State may at first and even for the duration of the entire funding period renounce to exhaust the allowed aid intensities451 as well as the designated Article 107(3) lit. a areas452 or the designated population ceilings453 and keep parts of this ceiling in reserve454. Following the ruling in case Germany/Commission455, the RAG 2007 explicitly state that Member States may at any time notify to the Commission a request to add further regions to the list until the relevant population coverage456 is reached.457 France has amended its regional map already three times pursuant to this option.458 It is not clear whether a Member State can use the non-exhausted part of the 115 population ceiling relating to Article 107(3) lit. a areas if it wishes to nominate further eligible Article 107(3) lit. c areas. The same applies to the part of the population coverage relating to the statistical effect regions. The wording of para 99 No 2 RAG 2007 could be in contradiction with this option ‘…up to the limit for population coverage determined in accordance with section 3.4.1’. It is a rather convincing argument however that by such a nomination the Member State complies with the principles that form the basis of the population ceiling: i.e. the character of regional aid being an exemption and also compliance with the limits relating to the part of the Union-wide overall population in the assisted areas.459 Moreover, exchanging Article 107(3) lit. a regions against Article 107(3) lit. c regions results in a renouncement of the aid intensities related to the status as an Article 107(3) lit. a area and it also takes away the possibility to grant regional operating aid within the meaning of para.76 RAG 2007. Therefore, the other way around, i.e. the renouncement of Article 107(3) lit. c areas in exchange for an additional Article 107(3) lit. a area is prohibited. Equally prohibited is the substitution of an Article 107(3) lit. a area selected by the 116 Commission460 by a different area selected by the Member State and its treatment as an Article 107(3) lit. a area including the granting of respective aid intensities or regional 727/2006 of 7 February 2007 – Portugal; State Aid N 2/2007 of 24 January 2007 – Rumania; State Aid N 431/2006 of 20 December 2006 – Sweden; State Aid N 469/2006 of 13 September 2006 – Slovakia; State Aid N 434/2006 of 13 September 2006 – Slovenia; State Aid N 626/2006 of 20 December 2006 – Spain; State Aid N 510/2006 of 24 October 2006 – Czech Republic; State Aid N 487/2006 of 13 September 2006 – Hungary; State Aid N 673/2006 of 20 December 2006 and 24 January 2007 – United Kingdom; State Aid N 814/2006 of 24 January 2007 – Cyprus; http://ec.europa.eu/comm/competition/state_aid/regional_aid/regional_aid.html. 449 Para. 106 sentence 1 RAG 2007; Article 13 (2) sentence 1 GBER I. 450 Para. 100 sentence 2 RAG 2007. 451 Para. 100 Sentence 1 RAG 2007; Com., State Aid No N 459/2006, para. 17, 32, 33 – Germany. 452 Com., State Aid No N 459/2006, para. 14, 16 footnote 4, 32, 33 – Germany. 453 Com., State Aid No N 459/2006, para. 35, 36 – Germany. 454 Com., State Aid No N 343/2006, para. 182 – France. 455 EuGH, C-242/2000, ECR 2002, I-5603, para. 44 – Germany. 456 Annex V RAG 2007. 457 Para. 104 sentence 6 RAG 2007. 458 Com., State Aid N 186/2008 of 4 June 2008, OJ 2008 C 241/13 – France, State Aid N 2/2009 of 24 March 2009, OJ 2009 C 95/3 – France und N 146/2010 of 20 July 2010, OJ 2010 C 239/2 – France. 459 See above para. 55. 460 See above para. 56–64.

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operating aid within the meaning of para. 76 RAG 2007. Granting regional aid for an area that does not have any disadvantages to be counterbalanced by means of the aid would distort competition. Such an aid would not be compatible with the Common market and therefore unlawful on substantive grounds. 117 Any Member State wishing to amend the list of regions eligible for aid under Article 107(3) lit. c or the applicable aid intensities as of 1 January 2011 could submit a notification to the Commission before 1 April 2010.461 Any changes of region in this context may not exceed 50% of the total population coverage allowed for the Member State under Article 107(3) lit. c.462 The limitation avoids the complete swap of assisted areas in the second half of the aid period which might only be due to political reasons and not to regional developments; and it might as well avoid the related circumvention of the ratio of the population coverage specific to the Member State. 118 In regard to the new or exchanged areas the same basic conditions apply as in general for the initial approval; notably there is no option of a simplified or accelerated procedure.

3. The material scope of application 119

a) Sectoral scope of application of RAG 2007. The RAG 2007 apply to regional aid granted in every sector of the economy463, apart from the fisheries sector464 and the coal industry.465 Moreover, the production of agricultural products listed in Annex I of the Treaty is excluded from the scope of the guidelines.466 However, RAG 2007 do apply to the processing and marketing of such products, but only to the extent laid down in the Community guidelines for State aid in the agriculture sector467, or any replacement Guideline468, 469 The RAG 2007 apply only on a subsidiary basis to some other sectors. Specific provisions which may derogate wholly or partly from the guidelines take precedence over these. Currently, this includes the transport sector and (maritime) shipbuilding.470 The Commission finally considers regional aid granted for activities in 461

Para. 104 sentence 3 RAG 2007. Para. 104 sentence 4 RAG 2007. 463 Para. 8 RAG 2007. 464 Para. 8 sentence 1 RAG 2007; Council Regulation No 104/2000 (EC) of 17 December 1999 on the common organisation of the markets in fishery and aquaculture products, OJ 2000/L 17/22 (Regulation on fisheries and aquaculture); Commission Regulation (EC) No 1860/2004 of 6 October 2004 on the application of Article 87 and 88 of the EC Treaty to de minimis aid in the agriculture and fisheries sectors, OJ 2004/L 325/4, amended by Commission Regulation (EC) No 875/2007 of 24 July 2007 on the application of Article 87 and 88 of the EC Treaty to de minimis aid in the agriculture and fisheries sectors and amending Regulation (EC) No 1860/2004, OJ 2007/L 193/6; para 2.2., 2.3., 3.7. Guidelines for the examination of state aid to fisheries and aquaculture, OJ 2008/C 84/10 (the Fisheries Guidelines); Commission Regulation (EC) No 736/2008 of 22 July 2008 on the application of Article 87 and 88 of the Treaty to State aid to small and medium-sized enterprises active in the production, processing and marketing of fisheries products, OJ/2008 L 201/16 (fishery products regulations). 465 Definition of ‘coal’: para 8 footnote 7 ReglL 2007; Council Regulation (EC) No 1407/2002 of 23 July 2002 on State aid to the coal industry, OJ 2002/L 205/1 (Coal State Aid Regulation 2002). 466 Para. 8 sentence 2 RAG 2007. 467 Community guidelines for State aid in the agricultural sector, OJ 2000/C 28/2; Corrigendum to the Community guidelines for State aid in the agriculture sector, OJ 2000/C 232/17 (Agricultural guidelines 2000). 468 Para. 20 Community guidelines for State aid in the agriculture and forestry sector 2007-2013, OJ 2006/C 319/1 (Agricultural and forestry guidelines 2007). 469 Para. 8 sentence. 3 RAG 2007. 470 Para. 8 footnote. 9 RAG 2007; Para. 10 Framework on State aid to shipbuilding, OJ 2003/C 317/11, prolonged by the Commission communication concerning the prolongation of the Framework on State aid to shipbuilding, OJ 2006/C 260/7 and the Communication from the Commission concerning the 462

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the steel sector471 and to the synthetic fibres industry472 as incompatible with the common market.473 b) The sectoral scope of application of the GBER I. With respect to the application 120 of regional state aid regulations in Article 12 to 14 GBER I no differences were found. Under Article 1(3) GBER I aid for so called sensible sectors is also excluded. These sectors include fishery and aquaculture (Article 1(3) lit. a GBER I), primary production of agricultural products (Article 1(3) lit. b GBER I), mining of hard coal (Article 1(3) lit. d GBER I), the steel industry (Article 1(3) lit. e GBER I), (maritime) shipbuilding (Article 1(3) lit. f GBER I) and synthetic fibres industry (Article 1(3) lit. g GBER I). 474 Moreover, the GBER I also expressly provides for improving the processing and marketing of agricultural products475 as per legal definition in Article 2 No. 22, 23 and 24 GBER I.476 Provisions with the same content can be found already in Article 1(2) RRIA.477 Processing of agricultural products means any operation on an agricultural product 121 resulting in a product which is also an agricultural product. Processing does not include on-farm activities necessary for preparing an animal or plant product for the first sale,478 for example the cooling and filling of freshly milked milk into milk cans. Marketing of agricultural products means holding or display with a view to sale, offering for sale, delivery or any other manner of placing on the market. The first sale by a primary producer to resellers or processors and any activity preparing a product for such first sale is not to be considered as marketing within the meaning of the GBER I. However, a sale by a primary producer to final consumers shall be considered to be marketing only if it takes place in separate premises reserved for that purpose. 479 It has to be a commercially organized business within the meaning of the commercial law, where the offering activity on the market is noticeable on the outside. 480 Typical cases are found in agricultural businesses which are targeted by so called sales events and promotional excursions (so-called ‘coffee-trips’). If the sale to the final consumer happens by the by, marketing cannot be assumed. Except from this regulation is aid favouring activities in the processing and marketing 122 of agricultural products when the amount of the aid is fixed on the basis of the price or quantity of such products purchased from primary producers or put on the market by the undertakings concerned; or when the aid is conditional on being partly or entirely passed on to primary producer, Article 1(3) lit. c GBER I. prolongation of the Framework on State aid, OJ 2008/C 173/3 (shipbuilding framework); please see also the comments to those sectors. 471 Definition of steel industry: Annex I RAG 2007. 472 Definition of synthetic fibres industry: Annex II RAG 2007. 473 Para. 8 sentence 5 RAG 2007. 474 See above para 15, 119, 120 for the for individual sectors. 475 According to the GBER I’s legal definition outlined in Article 2 No. 22 GBER I, agricultural products include: a) the products listed in Annex I of the Treaty except fishery and acquaculture products covered by Regulation (EC) No 104/2000 (Regulation on fisheries and aquaculture), (footnote 465); b) products falling under CN codes 4502, 4503 and 4504 (cork products) and c) products intended to imitate or substitute milk and milk products in the meaning of Council Regulation (EC) No 1234/2007 of 22 October 2007 stablishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation), OJ/L 299 of 16 November 2007, page 1. 476 Article 13 (9) GBER I. 477 RRIA (footnote 3). 478 Article 2 No. 23 GBER I. 479 Article 2 No. 24 GBER I. 480 Karsten Schmidt, Handelsrecht, 5th edition 1996, § 9 IV b bb; Heyman/Emmerich, HGB, Kommentar, 2nd edition 1995, § 1 Mn. 5; Baumbach/Hueck, HGB, Kommentar, 33. edition 2006, § 1 para. 7.

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This rule is a result of the priority that Articles 39 and 42 TFEU (up until 1 December 2009: Articles 33 und 36 EC) take insofar as primary agricultural production is concerned. It is a complementary regulation to Article 1(3) lit. b GBER I, which rules that the favouring of primary agricultural production is excluded from the exemption. 481 Within the RRIA482 Article 2(1) lit. n–q applies. c) Sectoral concentration. If aid granted under a scheme by a Member State appears to be unduly concentrated on a particular sector of the economy, the Commission may review the scheme pursuant to Article 17 Procedural Regulation 483 and may propose as an appropriate measure, to abolish the scheme.484 By limiting regional aid to certain sectors of the economy there is the danger that ultimately, it will not effect horizontal targets but rather sectoral targets and thus also have sectoral implications on the market.485 Furthermore, it corresponds to the approach of regional development by means of a generalized compensation for disadvantages that RAG 2007 aim at multi-sectoral aid schemes, thus aiming at covering as many branches of the economy as possible (and eligible) by the aid rules and hence maintaining neutrality with regard to an inter-sectoral allocation of resources. 486 Something else applies only where so called sensitive sectors are concerned. 487 In this respect the sectoral neutrality recedes behind the interest of an undisturbed market. The RAG 2007 thus provide the framework for multi-sectoral aid schemes which is open in a given region to all the undertakings of the sectors concerned. 124 According to Article 1(4) sentence 1 GBER I regional aid schemes which are targeted at specific sectors of economic activity within manufacturing or services are not exempt under this regulation. In this respect the GBER I substantiates the provisions laid down in para. 10 RAG 2007. An exemption applies to the tourism sector. Article 1(4) sentence 2 GBER I provides by way of a (legal) fiction that schemes aimed at tourism activities should not be considered as targeted at specific sectors. This exception also applies to the RAG 2007 via para. 11 RAG 2007. Moreover, it is the responsibility of the Member State to demonstrate that the intended confinement of aid to one area of activity, hence a particular sector, contributes towards a coherent regional development strategy and that it will not result in ‘unacceptable’ distorsions of competition, para. 10 RAG 2007. The question as to when the Commission assumes ‘unacceptable distorsions of competition’ remains unanswered as yet. Furthermore, according to Article 1(3) GBER I, aid for certain, so called sensitive sectors is excluded. 488 123

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d) Distinction between RAG 2007 and block exemption regulations. aa) Para. 11 RAG 2007 as ‘changeover switching rule’. Regional aid schemes that satisfy all the conditions laid down in one of the block exemption regulation within the meaning of the Council Enabling Regulation489 do not need to be notified, para. 11 RAG 2007. 481 Dissenting Bartosch, EU-Beihilfenrecht (footnote 75), Reg. 800/2008 Article 1 para. 3 with reference to the opinion of Advocate General Kokott in ECJ Case 283/03 – Kuipers [2005] ECR I-4255, para. 34: The application of the Court’s case-law for the establishment of a common market organisation. 482 RRIA (footnote 3). 483 Procedural Regulation (footnote 95). 484 Para. 10 RAG 2007. 485 Subsection 14 GBER I. 486 Section 3 and 4 RAG 1998. 487 Para. 8 RAG 2007; please see above para. 119–121. 488 Fishery and aquaculture (Article 1 (3) lit. a GBER I), primary production of agricultural products (Article 1 (3) lit. b GBER I), coal mining (Article 1 (3) lit. d GBER I), steel industry (Article 1 (3) lit. e GBER I), ship building (Article 1 (3) lit. f GBER I) and synthetic fibre industry (Article 1 (3) lit. g GBER I), Please see para. 120, 121 above for more detail. 489 Enabling Regulation to the Council (footnote 437).

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Initially, this included the RRIA490 and it currently includes the GBER I. By acting as ‘changeover switching rule’, this provision forms the direct link between the RAG 2007 and the relevant block exemption regulation. Thus, it enables applying the current exemptions of the GBER I to the RAG 2007.491 bb) Scope of GBER I. For the scope of the GBER I it needs to be established whether the aid at issue falls within the provisions of the GBER I. – Those regional aids that are not supported by an exempted aid scheme do not fall within the scope of the GBER I.492 The only exception to this rule is the regional ad hoc aid as per the conditions laid down in Article 13(1) sentence 2 GBER I. 493 – Aid granted under an exempted scheme that complies with the regulations of the GBER I usually falls within the scope of the GBER I.494 – However, it is unclear how to treat the case of a regional individual aid requiring approval under Article 6(2) GBER I that was based on an exempted aid scheme. According to Article 6(2) GBER I, regional investment aid awarded in favour of large investment projects shall be notified individually to the Commission if the total amount of aid from all sources exceeds 75% of the maximum amount of aid an investment with eligible costs of EUR 100 million could receive, applying the standard aid threshold in force for large enterprises in the approved regional aid map on the date the aid is to be granted. If the granted aid exceeds the grantequivalent as listed in the table in Para 64 RAG 2007 it won’t be exempted anymore even if it was based on an exempted scheme. This is especially important if the beneficiary is considered as a large enterprise within the meaning of Article 2 No. 8 GBER I. With view to the incentive effect in RAG 2007 it is subject to the rules of para 38 RAG; and within the scope of the GBER I, Article 8(3) GBER I applies. * It is conceivable to treat this aid according to the rules of the GBER I. The comparison of Article 6(1) and (2) GBER I as well as the wording ‘individual aid’ in Article 3(2) compared to the definition in Article 2 No. 3 and 4 GBER I might support this assumption. While Article 6(1) GBER I explicitly states that the block exemption regulation shall not apply to any aid mentioned in that provision, Article 6(2) GBER I establishes that the regional investment aid awarded in favour of large investment projects shall be notified to the Commission, however, unlike Article 6(1) GBER I, it does not exclude the aid from the remaining scope of the application. Furthermore an individual aid is defined in Article 2 No. 3 lit. b GBER I as notifiable awards of aid on the basis of an aid scheme. Finally, an aid scheme shall only be exempt if the scheme fulfils all the conditions of the relevant block exemption Regulation. This means that an aid scheme exempted by the GBER I should also fulfil the requirements of Article 8(3) GBER I. For its part, it presupposes those provisions. If a notifiable individual aid is granted that was based on a regional aid scheme exempted by the GBER I, it would have to comply with the provisions of this regulation and therefore fulfil the requirements of Article 8(3) GBER I simultaneously. If the individual aid does not comply with this provision, it does not fulfil the prerequisite of the exempted aid scheme and would be considered an ad hoc aid. * However, on a correct interpretation a notifiable aid is excluded from the provisions of the GBER I and shall be assessed in accordance with the RAG 2007 exclusively. 490

RRIA (footnote 3); Article 43 GBER I. See Para 43 above. 492 Those aids that are based on a non-exempt but approved aid scheme are not subject to the GBER I exemption scheme, Article 3 (2) GBER I. 493 Article 1 (5), Article 3 (3), Article 6 (1), (2), Article 13 (1) sentence 2 GBER I. 494 Article 3 (1), (2) GBER I. 491

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This derives from the aim of the GBER I. It is an exemption Regulation and it has the task of establishing the terms and conditions compliance with which exactly no longer requires the aid to be notified under Article 108(3) TFEU. It is not for it to go beyond and create additional compatibility criteria for such aid that is still subject of the notification obligation. This follows from Article 3(2) GBER I. This provision determines under which conditions an individual aid based on an aid scheme shall be exempt from the notification requirement of Article 108(3) TFEU. According to this, only those aids that are based on a scheme exempted per Article 3(1) GBER I and that comply on their parts with the conditions of GBER I, shall be exempt from authorization, hence exempted from the obligation of authorization. What is necessary is the so-called ‘double exemption’: the exemption of the scheme which replaces the authorization by the Commission and the exemption of the individual aid that is based on this scheme. Should an aid lacking any on of these exemptions, it is not possible to apply the GBER I to the present aid. This is clear from the recitals to the GBER I. According to this, large amounts of aid should continue to be assessed by the Commission on an individual basis.495 Recital 23 sentence 3 GBER I consequently explains that any aid granted above certain thresholds remains subject to the notification requirement of Article 108(3) TFEU. Finally, recital 25 sentence 2 GBER I notes that with respect to regional investment aid, this threshold should be set at a level taking into account the allowable aid intensities under the regional aid maps. Those recitals are reflected in Article 6(1) and (2) GBER I. Finally, it harmonizes with recital 7 sentence 1 GBER I. It describes only the legal consequences of those aids that are not subject to the GBER I. In addition, the following shall apply: for the purposes of the GBER I the term aid scheme is defined in Article 2 No. 2 GBER I. According to this, it comprises any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings (defined within the act in a general and abstract manner) or any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time and/or for an indefinite amount. Accordingly, aid that is not subject to the notification requirement within the scope of the GBER I needs to be based on an exempted aid scheme and it has to comply itself with all prerequisites of exemption of the GBER I and therefore does not need to be approved496. This includes aid granted on the basis of exempted aid schemes497 whose subsidy value does not exceed the thresholds specified in Article 6(2) GBER I. These thresholds are identical to the notification thresholds in para. 64 sentence 1, para. 67 sentence 1 RAG 2007. Thus, aids for very large investment projects whose proposed award exceeds the notification thresholds of Article 6(2) GBER I, para. 67 sentence 1 RAG 2007 are not to be treated according to the rules of the GBER I. Individually notifiable aids do not necessarily have to fulfil all conditions of the aid scheme on which they are based. This applies to those provisions of the exempted scheme that are stricter than the RAG 2007 in terms of the exemption regarding the ex post investigation by the Commission. To these stricter provisions count particularly the specific conditions of the exemption 495

Recital 23 sentence 1 GBER I. Article 3 (2) GBER I. 497 See, for example the following German decision: Staatliche Beihilfe X 167/2008, Article 1 Investitionszulagengesetz 2010 (InvZulG 2010) Gesetz zur Schaffung einer Nachfolgeregelung und zur A¨ nderung des Investitionszulagengesetzes 2007 vom 7 December 2008, BGBl. 2008 I Nr. 56 vom 10 December 2008, 2350, OJ 2009/C 280/7; Staatliche Beihilfe X 803/2009, Teil II A des Koordinierungsrahmens der Gemeinschaftsaufgabe ‘Verbesserung der regionalen Wirtschaftsstruktur’ (GRW) – Regelungen u¨ber Voraussetzungen, Art und Intensita¨t der Fo¨rderung, OJ 2010/C 12/17. 496

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Regulations for the incentive effect. These conditions differ from those detailed conditions specified in para. 38 RAG 2007. However, projects which need to be notified shall be assessed for their compatibility with the common market in ex ante and not ex post. There is no reason to assume that an individual notifiable aid based on an exempted aid scheme and fulfilling all conditions of RAG 2007 but not the stricter requirements of the GBER I would not be compatible with the common market498 or to assess it according to the rules of an ad hoc aid that is not based on an aid scheme.499 Likewise, the provisions of the GBER I shall not cover regional ad hoc aid as long as they don’t qualify as supplementary aid within the meaning of Article 13(1) sentence 2 GBER I. Consequently, those aids that are granted on the basis of an aid scheme that is 133 exempt from notification according to Article 3(1) GBER I but which are however subject to the notification requirement of Article 6(2) GBER I, fall within the scope of application of RAG 2007.500 Article 8 GBER I shall not assess their incentive effect. However, exempt – and hence covered by the GBER I – are only those aids that fulfil the requirements of the GBER I, hence these are those aids that are not subject to the notification requirement. The same applies for a scheme exempted by the RRIA 501. The incentive effect of an individual aid based on a regional aid scheme exempted by the RRIA, however not exempted by Article 3(2), (7) lit e RRIA, shall not be determined according to Article 5(1) RRIA but according to Para. 38 RAG 2007. 502

e) Undertakings in difficulty. With regard to the promotion of undertakings in 134 difficulty the following applies in relation to regional aid: aa) Rivalry between GBER I and rescue and restructuring guidelines (R&R Guide- 135 lines). Art. 1(6) lit. c, (7) GBER I excludes a SME from regional aid only in the case of a limited liability company, where more than half of its registered capital has disappeared and more than 25% of that capital has been lost over the preceding 12 months, Article 1(7) sentence 1 lit. a GBER I. The term ‘limited liability company’ refers in particular to the types of company mentioned in the first subparagraph of Article 1(1) of Council Directive 78/660/EEC503.504 This comprises stock corporation, partnership limited by shares/silent partnership and the limited liability company.505 In the case of business partnerships where the personally liable shareholder is not a capital company, or in the case of a company within the meaning of State aid legislation where at least one natural person has unlimited liability for the debt of the company, but also in the case of an unincorporated association, the net equity replaces the share capital as recorded in the accounts, thus in the balance sheets, Article 1(7) sentence 1 lit. b GBER I. 498 Likewise for compliance with the requirements of Para. 38 RAG 2007 instead of the stricter rules of Article 5 (1) RRIA (footnote 3): COM, State Aid N 203/2008 of 24 March 2009, para. 18–21, 25 – Papierfabrik Spremberg; No N 671/2008 of 30 November 2009, para. 62 – Mercedes-Benz Hungary. 499 See also below in para. 142. 500 Similar: Mederer/Pesaresi/van Hoof/Fort/Nyssens (Fn. 3), Chapter 1, Recital. 4.142. 501 RRIA (footnote 3). 502 COM, State Aid N 203/2008 of 24 March 2009, para. 18–21, 25 – Papierfabrik Spremberg; N 671/ 2008 of 30 November 2009, para. 62 – Mercedes-Benz Hungary. 503 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies 78/660/EEC), OJ L 222, 14.8.1978, p. 11, last amended by Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 and amending Council Directives 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions and insurance undertakings, OJ 2003 L 178/16 of 17 July 2003 (fourth Accounts Directive). 504 Para. 10 footnote 1 R&R Guidelines 2004 (footnote 137). 505 Article 1 (1) Fourth Accounts Directive (footnote 503).

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Regardless of the capital consumption, an undertaking is considered to be in difficulty and therefore excluded from the regional aid based on the GBER I where it fulfils the criteria under its domestic law ‘for being the subject of collective insolvency proceedings’.506 In formal terms this requires the submission of an application for the opening of insolvency proceedings by either the creditor or the debtor, § 13 InsO 507 and in material terms it requires a reason for insolvency according to § 17 InsO (illiquidity) or according to § 19 InsO (over-indebtedness). A petition for the opening of insolvency proceedings pursuant § 18 InsO (imminent insolvency) filed by the debtor is equally sufficient. Especially, this reason for insolvency is not at the disposal of third parties and notably not at the disposal of the creditors, so that without an application of the debtor the criteria for the initiation of ‘collective proceedings’ within the meaning of Article 1(7) lit. c GBER I are not fulfilled. 136 It is also permissible to grant regional aid to a newly created SME even though it meets the criteria for an undertaking in difficulty pursuant to Article 1(7) lit a and b GBER I.508 A SME is considered newly created for the first three years following the start of its operations. A newly created SME is only regarded as an undertaking in difficulty and thus excluded from receiving regional aid according to Article 1(6) lit c GBER I where it fulfils the criteria under its domestic law ‘for being the subject of collective insolvency proceedings’.509 This provision corresponds with para. 12 R&R guidelines.510 It is not unusual for a newly created undertaking to be in a precarious financial position initially. Therefore, such an undertaking shall not be eligible for neither a rescue nor a restructuring aid in the first three years following the start of its operations.511 Otherwise, there would be the risk of ‘suitable’ creations of new companies which were then always getting into difficulties and wanted to be ‘rescued’. A SME is also regarded as newly created, where it is spun off or split off from another firm, or where it emerges from the liquidation of a previous firm or the take-over of the assets of such a firm.512 What is essential is its SME-characteristics pursuant to annex I to GBER I. 137

bb) Adoption of the GBER I-criteria into the RAG 2007. The criteria in Article 1(7) GBER I are equivalent to the so-called ‘hard’ criteria as laid down in para. 10 R&R guidelines.513 The so called ‘soft’ criteria, such as increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges as well as falling or nil net asset value as described in para. 11 R&R guidelines, are of not relevant for the SME within the scope of the GBER I. Thereby Article 1(7) GBER I removes the latent and permanent confusion about the distinction of a promotion pursuant the rules of the regional aid regulations and the rules of the R&R guidelines, at least with regard to SME. The GBER I does not contain any specific rules for large companies, so that there should be no different view to para. 9 RAG 2007 in this respect.514

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cc) Rivalry between RAG 2007 and Rescue and Restructuring Guidelines (R&R Guidelines). According to Para. 9 RAG aid may only be granted to firms in difficulties 506

Article 1 (7) lit. c GBER I. The German Act on insolvencies called Insolvenzordnung vom 5. October 1994, BGBl. 1994 I 2866. 508 Article 1 (7) sentence 2 GBER I. 509 Article 1 (7) sentence 1 lit. c GBER I, see also above para 135. 510 Para. 12 RRG 2004 (footnote 137). 511 Para. 12 RRG 2004 (footnote 137). 512 Para. 12 sentence 2 RRG 2004 (footnote 137). 513 Para. 10 RRG 2004 (footnote 137). 514 See also recital 15 GBER I. 507

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within the meaning of the Community guidelines on State aid for rescuing and restructuring firms in difficulty (Rescue and Restructuring Guidelines – R&R Guidelines)515 in accordance with the R&R Guidelines. This provision takes account of the fact that aid in favour of firms in difficulty cannot be regarded as aid to promote the economic development of the relevant region.516 Formally, there is a complete distinction between the two regulations. In view of para. 10 and 11 R&R guidelines it is unclear when a firm qualifies to be in difficulty and thus is excluded from the scope of RAG 2007. In this respect it is necessary to differentiate. With regard to SME, only the ‘hard’ criteria in para. 10 R&R guidelines count, unless the company decides for itself to make use of the ‘soft’ criteria laid down in para. 11 R&R guidelines, arg. c. Article 1(7) sentence 1 GBER I. The clarification of the criteria for an undertaking in difficulty provided by this provision for para. 10 R&R guidelines in a regulation shall be applied as well within the context of para. 9 RAG 2007 through para. 11 RAG 2007. 517 In general, the same applies to large undertakings, but in addition the circumstances that led to the current situation of the undertaking have to be considered. 518 However, in this respect the Commission has not made a published decision. dd) Possible options and margin of discretion. It is also open to a SME, if it deems it 139 preferable, to make use of the ‘soft criteria’ of the para. 11 R&R Guidelines 519 and to renounce a promotion based on the GBER I for the benefit of a promotion pursuant the R&R Guidelines. Thereby, para. 11 R&R Guidelines offers an additional option at least for SME as shown by the wording of para. 33 R&R Guidelines ‘ The firm must qualify as a firm in difficulty’. It ‘may’ as in the meaning of ‘may in the interest of the company’ be considered in difficulty, hence eligible for a rescue and restructuring aid, if it only fulfils the ‘soft’ criteria of para. 11 R&R Guidelines which are in no way to concretise, but not the ‘hard’ criteria of para. 10 R&R Guidelines. However, the Commission has not commented on this as yet. This indicates that large companies should not be denied the same opportunities of 140 regional aid pursuant to RAG 2007 should they only fulfil the ‘soft’ (para. 11 R&R guidelines) but not the hard criteria (para. 10 R&R guidelines). This however, does not apply where a company was systematically robbed of its capital by either its own management or by its own shareholders, so that even with the remaining capital a very favourable economic climate, the best business or economic situation and an associated good market situation cannot lead to a recovery.520 In this respect the individual Member State relies on the Commission’s decision based on her analysis of the relevant facts.521 ee) Legal validity of approved individual aid. Once approval for a proposed regional 141 aid to a company has been issued, it won’t expire when the company gets into difficulty as referred to in the RRG or in Article 1(7) GBER I. Rather, the aid authorized for the healthy company cannot be granted or paid while it is in this state, i.e. during the ‘illness’.522 If a company is in difficulty and the subsidies concern investments already 515

RRG 2004 (footnote 137). See GC, Cases T-126/96 and T 127/96 – BFM and EFIM [1998] ECR II-3442, para. 102. 517 See also para. 43. 518 See details in para. 140. 519 RRG 2004 (footnote 137). 520 Cf. COM, State Aid N 416/2009 – Arcandor and Quelle; the situation in the case of Qimonda was different. 521 GC, Cases T-102/07 und T-120/07 – Biria, para. 104 et seq., 133, 137, 143. In terms of the Community Guidelines on State Aid for Rescuing and Restructuring firms in difficulty 1999, OJ 1999/C 288/2 of 9 October 1999 (Rescuing and Restructuring Guidelines 1999 – R&R Guidelines 1999). 522 Para. 9 footnote 12 RAG 2007; Para. 47 lit. c RRG 2004 (footnote 137). 516

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carried out before the crisis that the company acquired an entitlement to by its investment, i.e. such as investment allowances to be paid subsequently, then the payments to be made are following national legislation, i.e. the rules of Investment Allowance Law and the Budgetary Law. Once the crisis is overcome and the company makes up for the investment that it intended to carry out before the crisis and for which it had been granted authorization by the Commission, then the investment is not part of the restructuring process. It is only the temporally-moved but already planned investment.523 This is allowed to support as planned, i.e. limited by the decision of the Commission in the total allowance sum and the overall rate of assistance. 142

f) Ad hoc aids. Even though the RAG 2007 refer at several points to ‘ad hoc’ aid, 524 they don’t define these aids. It is only in Article 2(1) 1 lit. d Block Exemption Regulation for regional aid525 and subsequently Article 2 No. 4 GBER I that define ‘ad hoc aid’ as individual aid not awarded on the basis of an aid scheme. Aid scheme means an aid scheme exempted by the rules of an exemption regulation or by an aid scheme approval by the Commission.526 It is not considered to be awarded on the basis of an aid scheme if the granting of aid is based on a national aid scheme but the scheme doesn’t meet the described criteria or not any more. This can occur when the approval of the scheme was limited in time and the aid was granted after the expiry date of this temporary authorization or in case a Member State committed itself to repeal the referred aid scheme by way of appropriate measures at a time prior to the granting of aid. 527 However, the Commission does not always follow its own terminology. Occasionally, it refers to aid submitted for individual approval pursuant para. 64 sentence 1 RAG 2007 and based on authorized or exempted aid schemes for very large investment projects as ‘ad hoc’ aid.528

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g) Justifications. Both, para. 10 RAG 2007 as well as Article 13 GBER I provide that regional aid shall be granted generally on the basis of multi-sectoral regional aid schemes. The RAG 2007 require these aid schemes to form an integral part of a regional development strategy of the Member State with clearly defined objectives. 529 This finds its correspondence in the German coordination framework for the joint scheme ‘Improving the regional economy’ in Article 91 a (1) No. 1 GG530. As a successor instrument531 of the annually adapted and updated ‘GA framework’532 that used to be undertaken until the reform of federalism in 2006, it contains a comprehensive

523 See for similar cases of aid after successfully overcoming a crisis: COM, State Aid N 513/2005 – Germany, Support of firms after insolvency, of 13 September 2006, para. 17. 524 Para. 10, 38, 64 footnote 60, 71, 106 and footnote 86 RAG 2007. 525 RRIA (footnote 3). 526 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.908. 527 Commission, Opening Decision C 34/2009 (ex N 588/2008), Section 3.2, 1. and 2. Tiret – PETROGAL (footnote 158); see above para. 45, 46. 528 For example: Com., State Aid N 773/2007 of 16 July 2008 – Wacker Schott Solar; this decision is referred to as ‘ad hoc case’ on the webpage of the Commission: http://ec.europa.eu/competition/elojade/ isef/case_details.cfm?proc_code=3_N773_2007. 529 Para. 10 sentence 1 RAG 2007. 530 See following German source: BT-Drucks. 16/13 950, Koordinierungsrahmen 2009. 531 See following German source: Einfu ¨ hrung des Koordninierungsrahmens in § 4 Gesetz u¨ber die Gemeinschaftsaufgabe ‘Verbesserung der regionalen Wirtschaftsstruktur’ vom 6 October 1969, BGBl. ¨ nderung des Gesetzes u¨ber die Gemeinschaftsaufgabe ‘Verbes1969 I, 1861, gea¨ndert durch Article 8 (A serung der regionalen Wirtschaftsstruktur’) Zweites Gesetz zum Abbau bu¨rokratischer Hemmnisse insbesondere in der mittelsta¨ndischen Wirtschaft vom 7 September 2007, BGBl. 2007 I 2246 (GRWG). 532 See the following German source: § 4 Gesetz u ¨ ber die Gemeinschaftsaufgabe ‘Verbesserung der regionalen Wirtschaftsstruktur’ vom 6 October 1969, BGBl. 1969 I 1861.

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analysis533 as well as the resulting conclusions thereof and provisions of Germany’s promotion for the regional economic development.534 Where it is envisaged to grant regional aid without an aid scheme to a single firm, in 144 other words as ad hoc aid, or aid confined to one area of activity, it is the responsibility of the Member State to demonstrate that the project contributes towards a coherent regional development strategy and that, having regard to the nature and size of the project, it will not result in unacceptable distortions of competition. 535 Project means the subsidised project not the project without subsidy. Its main objective is to ensure that in terms of its regional policy the Member State always follows a strategy mainly aimed at the well-being of the assisted regions as opposed to the well-being of an individual company or an individual sector.536 The Member State is required to always invest the same effort in its examination, irrespective of its decision to grant regional aid on the basis of a scheme or without a scheme in form of an ad hoc aid. Though in general, the latter is only important in the case of ad hoc aid requiring approval. 537 Also, 10 RAG 2007 obliges the Member state to conduct an individual examination 145 and to provide evidence in case that an intended granting of aid on the basis of an aid scheme fails due to the subsequently occurring illegality (formally and materially) of the aid scheme the aid was based on538 and a different legal basis is not available.

D. The incentive effect I. Term The so called incentive effect539 as a basic prerequisite for the aid was already 146 complied with heretofore but the Commission has particularly emphasised it since 2005 because of the State aid action plan540. Within the meaning of State aid legislation and for public funding reasons it implies the effect that occurs when an aid has given the incentive for a particular investment. This is the case where the investment without the aid would not be made or not in the same manner.541 Without incentive, i.e. if the investment project would carry out too without the aid, taking in the aid merely constitute a dead-weight effect. The undertaking had received State resources beyond what is necessary and thus could have improved its position on the market in an unjustified manner. Where an undertaking carried out a certain investment at a certain location without State aid, it would not receive this aid as a generalized loss compensation for disadvantages that had not been accepted without this funding. The undertaking would reduce its overall operating costs in an unspecific manner. Such a funding is not regarded as investment aid but as operating aid.542 As long as the operating aid by 533

See the following German source: Part I of Koordinierungsrahmen 2009 (footnote 530). See the following German source: Part II of Koordinierungsrahmen 2009 (footnote 530). 535 Para. 10 sentence 3 RAG 2007. 536 COM, State Aid N 468/2009 of 12 October 2009 – Regional ad hoc aid Roche Polska; State Aid N 447/2009 – Poland: Regional aid hoc aid to TietoEnator Polska Sp. z o. o.; State Aid N 495/2009 of 24 February 2010, para. 25 – Latvia: Electric and electronic waste sorting and recycling facility in Tume. 537 Para. 67 footnote 60 RAG 2007, Article 3 (3), Article 6 (2), Article 13 (1) sentence 2 GBER I. 538 COM, decision No. C 34/2009 (ex N 588/2008), section 3.3, 8. and 9. Tiret – PETROGAL (footnote 158). 539 Para. 38 RAG 2007; Article 8 GBER I. 540 State Aid Action Plan (footnote 98), p. 7. 541 See for example para. 28 sentence 1 and Article 8 (2), (3) GBER I; para 38 sentence 1 RAG 2007. 542 Para. 76 RAG 2007. 534

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Art. 13–16 147–150

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itself is not compatible with the common market, this effect leads to a breach of the single market.543 Moreover, on the fiscal side in a purely national context it is a waste of public budgetary funds. However, the waste of resources is not a competition criteria and therefore it is unsuitable and illegal for the investigation of the compatibility with the single market.544

II. Condensed overview 147

RAG 2007, RRIA545 and GBER I replacing this latter regulation, pay specific attention to the incentive effect. All provisions distinguish between aid awarded on the basis of an aid scheme or ‘ad hoc’ without such a scheme. Where aid was granted on the basis of an approved or exempted aid scheme, a distinction has to be made depending on whether it was granted due to a discretionary decision of the granting authority or due to an approved or exempted legal scheme without any discretion on the part of the authorities,546 as for example in form of tax reductions or as an investment allowance. With aid granted due to a discretionary decision the incentive effect can be of importance at different stages of the realisation of a project: on the one hand during the granting decision process and on the other hand at the intended start of the project prior to this process. Finally and regardless of the distinction between a discretionary or non-discretionary granting of aid, the incentive effect of regional aid is important for the compatibility of State aid with the single market for notifiable large investment projects of large enterprises with great market strength within the meaning of para. 68 RAG 2007.

1. Basic general rules In principle and without taking account of the specific features, the following rules can be established: If the granting authority has discretion, as it is usually the case, the following chronological order applies: first is the aid application; next is the authorisation and only then the start of the project. If things have to happen fast, the following option is admissible as well: firstly, the aid application; next, the written permission by the granting authority for the projects start; to be followed by the start of the project and only after that the authorisation. 149 If the authorising authority has no discretion, as in case of fiscal funding rules, the following chronological order applies: firstly the aid scheme, then the start of the project (and only then the application for funding). If the aid scheme is the follow-up of an existing aid scheme, then the reversed order is admissible as well, i.e. first the start of the project and then the aid scheme as follow-up of the existing scheme (and after that the aid application). 148

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a) Discretion-based aid. For aid awarded due to a discretionary decision of the granting authority, an incentive effect is only present if the application for aid has been submitted before the start of work on the project or activity. 547 This applies irrespective Mestma¨cker/Schweitzer § 2 para. 117. See above para. 29. 545 RRIA (footnote 3). 546 Para. 38 footnote 41 RAG 2007; Article 5 (2) RRIA (footnote 3); Article 8 (4) GBER I. 547 Article 8 (6) GBER I; para. 38 sentence 2, 5 RAG 2007. 543 544

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of whether the proposed aids shall be based on an approved548 or an exempted aid scheme549 or granted ‘ad hoc’550 without any such scheme. If this requirement is not met, i.e. if work begins before the condition laid down in this paragraph is fulfilled, it will not be eligible for aid.551 In addition, it is generally required that a decision about the application for aid has to be taken before the start of the aided measure and regardless of whether the regional aid requires approval or not. This second condition has a number of modifications and waivers: – According to the provisions in the RAG 2007, but also within the scope of the RRIA,552 this second condition can be replaced by a confirmation of the competent authority that allows SME as well as large companies to start the project before the decision regarding the application has been issued.553 The granting authorities are imposed for these kinds of permission declarations varying obligations of examination and conditional explanations.554 This replacement option applies irrespective of whether the aid is based on an approved or an exempted aid scheme or whether it is granted as ‘ad hoc’ aid.555 – Within the scope of the GBER I in essence the same applies for SME and large companies556 with respect to aid based on an exempted scheme as well as for ‘ad hoc’ aid supplements.557 In addition, the granting authority is obliged to verify, before granting the individual aid concerned, that documentation prepared by the beneficiary establishes the incentive effect. 558 This applies before the granting of individual aids based on an exempted aid scheme559 as well as for ‘ad hoc’ aid supplements560. Ad hoc aid other than the one mentioned shall not be exempt for large companies by the GBER I.561

151 152

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b) Aid based on legal aid scheme. When aid is granted by law, and thus the granting 155 authority has no discretion as in case of tax aid schemes, the incentive effect is considered to be present within the scope of the RAG 2007.562 Within the scope of the GBER I, the incentive effect requires however, that the aid scheme, such as an Investment Allowance Act, was promulgated before the work on the project or activity has started.563 If the current statutory provision is a follow-up of a preceding scheme, i.e. the Investment Allowance Act 2010 replaces the Investment Premium Law 2007, 564 the 548

Para. 38 sentence 3 RAG 2007. Article 8 (2) GBER I. 550 Para. 38 sentence 4 RAG 2007; See also the definition in Article 2 No. 4 GBER I. However, the Commission does not always follow its own terminology. The State aid for very large investment projects as described in Para. 38 footnote 39, 64 sentence 1 RAG 2007 are sometimes referred to as ‘ad hoc’ aid, for example: COM, State Aid, N 488/2009 of 12 October 2009 – Regional ad hoc aid Roche Polska. 551 Para. 38 sentence 5 RAG 2007. 552 RRIA (footnote 3). 553 Para. 38 sentence 2 RAG 2007. 554 Para. 38 sentence 2, 4 RAG 2007. 555 Para. 38 sentence 2, 4 RAG 2007; Article 5 (1) RRIA (footnote 3). 556 For SME: Article 2 No 7; 8 (2) GBER I; for large companies: Article 2 No. 8; 8 (3) GBER I. 557 Article 3 (2), (3), Article 13 (1) sentence 2, in conjunction with Article 8 (2) GBER I for SME or in conjunction with Article 8 (3) halfsentence 1 GBER I for large companies. 558 Article 8 (3) half sentence 2 GBER I 559 Article 8 (3); 1 (5) GBER I. 560 Article 8 (3), 2, Article 3 (2), (3), Article 1 (5); 13 (1) sentence 2 GBER I. 561 Article 1 (5) GBER I. 562 Para. 38 sentence 3 footnote 41 RAG 2007. 563 Article 8 (4) GBER I. 564 See for example State Aid X 167/2008, Article 1 of the German Investitionszulagengesetz 2010 (InvZulG 2010) (footnote 497). 549

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incentive effect of the current scheme is considered to be present even if the work on the project or the activity has started before the successor scheme was adopted. 565 156

c) The special case of the incentive effect in para. 68 RAG 2007. In the case of aid for large enterprises with market power where notification is required due to the scope of the aid, the Commission assesses the incentive effect according to para. 68 RAG 2007.

III. In detail 1. The incentive effect as part of the aid granting based on discretion of the granting authority (without a premature start of the project or activity)566 Discretion based aid that is compatible with the common market requires always an aid application before the start of work on the project567 as well as a favourable funding decision. This applies in the same way to both, aid that is based on an approved or exempted aid scheme as well as ad hoc aid, i.e. an aid that is not based on an approved or exempted aid scheme.568 158 The beneficiary always needs to submit an application for aid before start of work on the project.569 If work begins before this condition is fulfilled, ‘the whole project will not be eligible for aid’.570 This obligation as well as the consequence of an aid exclusion resulting from a breach of this obligation, serve the purpose to exclude the possibility of a mere deadweight effect for discretion based aid decisions. 571 If the beneficiary starts to work on the project before an aid application was submitted, the beneficiary indicates that the incentive of a State aid was actually not necessary for the project. 572 Thus, the proposed aid would qualify as a pure operating aid and would have to be treated according to the respective applicable criteria. 159 Start of work means either the start of construction work or the first firm commitment to order equipment.573 160 Start of construction work happens at the latest with the beginning of excavations (so called ‘breaking the ground’). This ‘breaking the ground’ is an indication for the latest starting point of the construction work. But the construction work relevant in terms of State aid regulations could have been started much earlier. A start of the construction work after the ‘breaking the ground’ may only be considered if it is without any doubt that this ‘ground breaking’ was not related to reality at all and represented solely a (clumsy) occasion for a celebration. This fails if representatives of the financing banks or public representatives (Ministers, State Secretaries, (Lord) Mayors, head of departments, councillors or head officials) were invited to this ‘event’. Start of work does not include the purchasing of the real estate. For this reason, a production facility eligible for aid can be built on land that was purchased only recently or already acquired several years ago. In this case the land acquisition is excluded from 157

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Article 8 (4) lit. b sentence 2 GBER I. As for a premature start of the project see subsequent para. 191 et seqq. 567 Para. 38 sentence 2, half sentence 1 RAG 2007. 568 As for the term ad hoc aid: Article 2 No. 4 GBER I; COM, State Aid C 34/2009 (ex N 588/2008), Section 3.2. 2. Tiret – PETROGAL (footnote 158); See above para. 142. 569 Para. 38 sentence 2, half sentence 1 RAG 2007; Article 8 (2) GBER I. 570 Para. 38 sentence 5 RAG 2007; Article 8 (6) GBER I. 571 Knoblich (footnote 21) 85, 93. 572 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.893. 573 Para. 38 footnote 40 RAG 2007. 566

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aid.574 By contrast, if the land acquisition is promoted by a reduced purchase price, e.g. on the part of the selling municipality, the land acquisition can be considered as the start of the project. For the beneficiary, this involves the danger that the rest of the project will not be eligible for aid due to the lack of an incentive effect, unless relevant aid had been applied for in due time and beforehand. This exclusion of aid does not affect fiscal allowances, e.g. in Germany allowances under the German Investitionszulagengesetz (Investment allowances Act) in its current version.575 The first firm commitment to order equipment does not only comprise the actual 161 order but relates to possible preliminary contracts.576 These preliminary contracts are only important if they contain an commitment of the beneficiary to order and accept certain machines for a certain investment project. If there is no such commitment to take delivery, as is the case with an option contract, or if the obligation to take delivery is imposed in a rather general manner and does not specifically refer to the project at issue on that particular location, then it does not qualify as start within the meaning of para. 38 RAG 2007. In this case a company does have a real choice of site. It may decide to use the equipment on a different site, e.g. outside an assisted area. This does not apply when a company operates only one plant and this it is now an upgrading plant or an extension investment that is to be specifically installed in connection to the existing assets. In this constellation, a contractual commitment before submitting the application will result in an exclusion for aid. Apart from that an investment starts only at this point in time when the particular asset is ordered or when the production of the assets starts (i.e. by the beneficiary company itself without any order). Buildings are deemed to have been ordered when a mandatory contract effective in law or an equivalent legal act relating to its acquisition exists. The conclusion of a supply or service agreement or the start of construction works is considered to be the beginning of the establishment.577 This includes contracts with architects dealing exclusively with the detailed design of the building. Contracts regarding construction services or architects services aimed at examining the feasibility shall not be considered as service contracts whose conclusion might trigger the beginning of the establishment of a building.578 The preparation of a feasibility study is not regarded as start of work. 579 This 162 includes studies dealing with technical, topographical or geological issues. It also applies to studies relating to construction and architect services that are not dealing exclusively with the design of the building or the plants.580 It can be assumed that these services will only show later whether or not the project is eligible for (construction) approval. As for the question of when the project starts, it is not a matter of how detailed the feasibility study is, as this cannot be defined anyway. Important is only that the study deals with issues relating to whether and how the planned project will be feasible. This also applies if the studies, that merely prepare an investment, should be supported with subsidies. This is only permitted for SME though. The aid intensity for this can be up to 50%581. 574 With the same result: COM, State Aid N 357 a/2006 of 6 December 2006, para. 32 – Investment Allowance Act 2007; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.895. 575 See in detail above para. 155 and below para. 210-216. 576 Para. 38 footnote 40 RAG 2007:‘…the first firm commitment to order equipment’. 577 Commission., State Aid N 357 a/2006, para. 32 – German Investitionszulagengesetz 2007 (footnote 497, 574). 578 See forthwith para. 162. 579 Para. 38 footnote 40 half sentence 2, 51 RAG 2007. 580 A. A. Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (Fn. 298), Chapter 6, para. 4.895. 581 Para. 51 RAG 2007.

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With regard to regional aid for wage costs, the question of the incentive effect does not arise. Jobs can only be filled if they have been created before. This always requires a material investment in plants or equipment. Even a staff-intensive company that manages with small investments, such as a call centre, cannot be operated without a telephone system as investment, even if its comparatively inexpensive. Consequently, neither the RAG 2007 nor the GBER I contain specific provisions relating to the start of a project with regard to regional aid for wage costs.

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a) The incentive effect in the course of the decision process based on RAG 2007. aa) Regional aid not requiring authorization. Regional aid not requiring authorization (meaning a regional aid based on an authorized regional aid scheme) that meets all approval criteria of the aid schemes’ approval and therefore does not require a separate authorization as in Article 108(3) TFEU, has an incentive effect if the beneficiary has submitted the aid application before the start of the project and received a positive grant letter. Only when the beneficiary has found out that the granting authority will grant aid for the planned investment measure, i.e. when he has received a grant letter, he knows that he does not invest exclusively on his own risk. Strictly speaking, the incentive effect can only take effect when the beneficiary knows that his project will be supported and he subsequently carries out the investment. Instead of a grant letter, a written confirmation in the meaning of Section 38 VwVfG (German Act on administrative procedure) is sufficient insofar it shows the entitlement to a funding.

bb) Regional aid requiring authorization. Regional aid requiring authorization has an incentive effect like a regional aid not requiring authorization, if the beneficiary submitted the aid application before the start of the project and received a grant letter. However, this grant letter has to fulfil the following condition: either it has to be issued only after the Commission has approved the proposed aid or, where the grant decision is made before this authorization, the grant letter must be made subject to the Commission’s approving the aid. Any aid requiring authorization has to be submitted to the Commission for approval according to Article 108(3) TFEU. The same applies where the State aid is based on an aid scheme which is approved according to the RAG 2007 or which is exempted. 582 If aid is granted unconditionally before the approval, it is a formally illegal aid. Even a subsequent Commission approval does not change the formal illegality of the aid. 583 Regardless of the Commission’s decision regarding the compatibility with the common market, the aid is null and void (ex tunc) within the meaning of § 134 BGB584 or, to the extend as it was granted on the basis of public law, it is at least unlawful in the sense of § 48 VwVfG (German Act on administrative procedure). 166 Different options for remedying of non-compliance are discussed, e.g. according to § 141 BGB585 or § 242 BGB. The German Federal Court (BGH) has accepted a ‘repair solution’ within a law.586 Others are hostile to any possibility of a remedying of nullity.587 165

582

Arg. e para. 38 sentence 2 half sentence 1, footnote 39 RAG 2007. ECJ Cases C-199/06 – CELF [2008] ECR, I-469, para. 45; C-384/07 – Wienstrom; BGH EuZW 2003, 444, 445, para. II 2.a) bb) (2) at the end; Solte´sz, Hat sich das Europa¨ische Beihilferecht in der Krise bewa¨hrt?, in: Schwarze, Rechtsschutz und Wettbewerb in der neueren europa¨ischen Rechtsanwendung, 2010, 61, 64. 584 BGH EuZW 2003, 444, 445 Abs. II 2. a) bb) (2) at the end; BGH EuZW 2004, 254; BGH NVwZ 2004, 636 = WM 2004, 468; BGH, Judgement of 5 July 2007, IX ZR 256/06; JurisPK-BGB/Nassall, 2. Edition, 2005, § 134 Para. 143, 144; Palandt/Ellenberger, 70. Edition, 2011 § 134 Para. 3. 585 Fiebelkorn/Petzold EuZW 2009, 323. 586 BGH EuZW 2003, 444. 587 Pechstein EuZW 2003, 447, 448; for details in this controversy: Mu ¨ nchKommBGB/Armbru¨ster § 134 Para. 37, 38, 104. 583

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The considerations of the German Federal Court (BGH) are the starting point for the 167 question whether and how the effect of nullity can be removed. According to this, the aim is to enforce State aid control by all means and to prevent abuse by means of appropriate legal effects. This already excludes considering any general solutions pursuant to § 242 BGB. Also, there are no indications for a pending ineffectiveness. The approach that excludes any remedy is not convincing neither. As a matter of 168 course, the legislator can adopt a repair law. Thereby, he essentially sets aside parts of the legal provision directing the nullity. For this, the legislator can revert to the concept of § 141 BGB as stated by the German Federal Court (BGH). This however does not mean that § 141 BGB applies directly to these constellations. At first point there is a strong argument for a direct application of § 141 BGB. § 141 BGB provides that the confirmation of an annulled legal transaction by the person that initially made it, is to be considered as a renewal. This only refers to a renewal ex nunc but not ex tunc, arg. e. § 141(2) BGB. However, it is necessary for the renewal that the obstacle resulting in the nullity is removed by now. In this respect, there are serious doubts in case of a missed notification. After all, this usually refers to the validity of a subsidy contract and not to the performance of an individual act. With regard to void contracts, § 141(2) BGB contains a rule that is an interpretation rule on the one hand and a fiction inter partes on the other hand. According to this rule in case of the confirmation of a void contract in the doubt both contractual partners are obliged to grant each other what they would have if the contract would have been valid from the outset. This regulation does not arrange the validity ex tunc. Rather it states only, to carry out to achievement exchange in such a way as if there had been the validity from the outset. However, just this contradicts the jurisdiction of the ECJ. The Court assumes from the fact that a formally illegal aid, also if it may materially lawful cause it is compatible with the internal market, is to be booked at least with an interest. 588 In the phase of the formal illegality in the meaning of the jurisdiction of the ECJ the aid loads namely in such a way that the subsidy may be decorated in this time merely as a loan free of aid. On this loan, the beneficiary has to pay an interest subject to the method for setting the reference and discount rates as the Commission communicated,589 the so-called CELF interest.590 Hence, the intended legal result by using § 141(2) BGB cannot be reached. Furthermore, the provision of § 141(2) BGB applies ‘inter partes’ and not ‘inter omnes’. In addition, however, the subsidy control has in view just not only the two contracting partners, but first of all the protection of the internal market and with it also those of the competitors.591 Thus this way is also obstructed for a repair. In both cases the legal result of the nullity is connected with a recovery obligation592. This arises within the scope of the civil law already from § 812(1) sentence 1 of the first alternative German Civil Code (BGB) in connection with the thrift principle covered on public funds. Within the scope of the public right 588

ECJ, Case C-199/06, para. 52, 55 – CELF (footnote 583). Commission notice on the method for setting the reference and discount rates, OJ 1997 C 373/3 (reference notice 1997); Commission notice on technical adaptations to the method for setting the reference and discount rates, OJ 1999 C 241/9 (reference notice 1999); Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ 2008 C 14/6 (reference communication 2008). 590 Interest subject to the ECJ decision C-199/06, para. 52, 55 – CELF (footnote 583). 591 This followed till 1 December 2009 directly from Article 3 (1) lit. g) TEC, a rule which was canceled to the disadvantage of the member States in the Treaty of Lisbon. 592 See also Art. 14 Procedural Regulation (fn. 95); para. 47 Notice from the Commission towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid, OJ 2007 C/272/4 (Recovery Communication). 589

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Art. 13–16 169–172

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subject to § 48(1) VwVfG it follows from reduction to zero of the execution of discretionary power, based on the unity of the legal system. 169

cc) Ad hoc aid. The same applies to the incentive effect of an ad hoc aid based on the RAG 2007.593 Ad hoc aid based on the RAG 2007 is always subject to approval and therefore it must be notified to the Commission.594 In this respect an aid application and the grant decision is required before the start of the measure. As is the case for approval requiring aid based on an authorized or exempted aid scheme, ad hoc aid that is not based on an aid scheme can only be granted before the start of the project if the Commission has approved this aid or, where the aid was granted before the Commission took a decision on this matter, the grant must have been made subject to the aid’s approval by the Commission.595 If aid is granted before the approval and without this ‘Commission’s reservation’, it is considered as being formally illegal aid. In this case the legal effects outlined above shall apply.596

170

b) The incentive effect in the course of the decision process based on GBER I. aa) Authorization requiring aid that are based on an exempted scheme. Aid that is granted on the basis of a scheme exempted according to Article 3(1) GBER I and which is nevertheless subject to authorization, e.g. according to Article 6(2) GBER I, shall be covered by the scope of application of the RAG 2007.597 The assessment of its incentive effect follows para. 38 RAG 2007.598 Only those aids shall be exempt – and hence covered by the GBER I – that are meeting the conditions of the GBER I themselves, thus precisely not being subject to authorization.

171

bb) Exempted aid based on an exempted aid scheme. In order to establish an incentive effect for exempted aid based on an exempted aid scheme it is necessary to distinguish between SME and large enterprises, Article 8(2), (3) GBER I. These rules provide divergent prerequisites depending on the two different groups of beneficiaries in order to assume an incentive effect. SME within the meaning of Article 8(2) GBER I means undertakings fulfilling the criteria of the Commission’s SME Recommendation599, Article 2 No. 7, Article 2 Annex I GBER I. Large enterprises within the meaning of Article 8(3) GBER I means undertakings not fulfilling the criteria of the Commission’s SME Recommendation, Article 2 No. 8 GBER I.

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(1) SME within the meaning of Article 2 No. 7 GBER I. Art. 8(2) GBER I feigns an incentive effect for SME when aid is based on an exempted aid scheme and where it fulfils the prerequisites for exemption itself, thus, not exceeding the limit in Article 6(2) GBER I and provided that the beneficiary has submitted the aid application in the relevant Member State before the start of the project or activity. This rule does not just apply to proper SME-aids such as the aids for newly created small enterprises within the meaning of Articles 14 and 16 GBER I or for SME investment and employment aid within the meaning of Article 15 GBER I or other proper SME-aids referred to by Articles 20, 26, 27, 29, 33, 35 or 37 GBER I. Instead, it relates to all aid measures regulated in the special section of the GBER I, as long as the beneficiary enterprise is a 593

Arg. e. para. 38 sentence 2 half sentence 1 footnote 39 RAG 2007. Para. 64 footnote 60 RAG 2007. 595 Arg. e. para. 38 sentence 4 RAG 2007. 596 See above para. 165. 597 See above para. 129-133. 598 As for the RRIA (footnote 3): COM. State Aid N 203/2008, para. 18–21, 25 – Papierfabrik Spremberg (footnote 498); No N 671/2008, para. 62 – Mercedes-Benz, Ungarn (footnote 498). 599 SME Recommendation (footnote 342), within the scope of the GBER I re-issued as ANNEX I of the GBER I. 594

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SME within the meaning of Article 2 No 7, Annex I Article 2 GBER I.600 As regards the start of the project or activity please refer to the above mentioned para. 159-163. (2) Large enterprises within the meaning of Article 2 No. 8 GBER I. Art. 8(3) GBER I provides for large enterprises a far broader assessment of the incentive effect. This provision requires at first that the criteria of Article 8(2) GBER I are met, i.e. it requires an exempted aid scheme; aid fulfilling the exemption criteria601 and that the aid application was submitted before the start of the project. Further to this, it requires the Member State, i.e. the granting authority, to verify before the individual aid at issue is granted and regardless of the scale of the project and thus the investment volume, that the beneficiary has provided evidence in its documentation for the fulfilment of one or more criteria listed below: a) a material increase in the size of the project/activity due to the aid; b) a material increase in the scope of the project/activity due to the aid; c) a material increase in the total amount spent by the beneficiary on the subsidised project or activity; d) a material increase in the speed of completion of the project/activity concerned; e) as regards regional investment aids according to Article 13: the investment project would not have been carried out as such in the assisted region concerned in the absence of the aid.602 The purpose of this regulation is to impose on the beneficiary, which is a large enterprise, the obligation to analyse in an internal document the viability of the aided project or activity with aid and without aid.603 Further purpose is to verify such a change in investment behaviour due to the aid; and by that to monitor changes in the investment behaviour with regard to State aid. Appropriate documents may include draft decisions for the management, the management board or the supervisory board or similar documents. These documents always comprise a ‘business plan’. The latter should contain details establishing the incentive effect, i.e. it should give the reason for it and show what kind of incentive effect the aid has on the investment project, and it should be the result of an internal analysis based on the criteria mentioned in Article 8(3) GBER I. The documents should demonstrate the incentive effect by meeting at least one of the criteria mentioned. The indeterminate legal concept of ‘material’ referred to in Article 8(3) lit a) to d) GBER I requires further clarification. Considering that the starting point for the assessment of the incentive effect is based on economics and its ‘refined economic approach’604, a material change can be assumed when it comes to a significant, apparent or essential increase in the scope or the size of the project, a similar increase in the total amount or a similar increase in the speed of completion of the project. In economical stochastics any divergence of at the latest more than 5% is considered to be material.605 This value is included in the provision on the increase of market capacity, para. 68 lit. b RAG 2007.606 The criteria in Article 8(3) lit. e GBER I is recognized as a possible substitute criteria to the four options representing materialisations of the incentive effect referred to in 600 601

Mederer/Pesaresi/van Hoof/Fort/Nyssens (Fn. 3), Chapter 1, para. 4.149. This does not apply, if certain thresholds in Article 6 (2) GBER I are exceeded, see above para. 129-

133. 602

Article 8 (3) lit. e; para. 29 sentence 3 GBER I. Para. 29 sentence 1 GBER I. 604 State Aid Action Plan (footnote 98). 605 Fisher, Statistical Methods for Research Workers (first ed.), Edinburgh 1925, 173. 606 See under para. 380, 389, 396, 399, 406 and in particular 409. 603

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Article 8(3) lit. a to d GBER I, however, this shall only apply where the proposed aid is a regional aid. The deviation may refer to the choice of location, the investment volume, the range of products, the number of jobs, the vertical range of manufacture or other, similar parameter. (3) Critical reflection. For large enterprises as referred to in Article 2 No. 8 GBER I the following situation applies: as long as the proposed aid is based on an exempted aid scheme and does not reach the threshold of Article 6(2) GBER I, the enterprise is obliged to demonstrate the incentive effect as in Article 8(3) GBER I. If the aid exceeds this threshold, and thus requires authorization even though it is based on an exempted aid scheme, this obligation no longer applies. In this case, the provisions in para. 38 RAG 2007 apply. This result is difficult to comprehend: granting of regional aid is a generalized compensation for disadvantages that an enterprise takes on in relation to an investment in a non-assisted area.607 For those disadvantages it is irrelevant whether the compensation, i.e. the aid, is exempt. Furthermore and with regard to the desired primary-effect,608 the purpose of regional aid is to create an incentive for large companies distributing predominantly at a supra-regional basis to invest in an economically weaker region. In addition, the assisted areas609 have been determined by the Commission on the basis of objective criteria. Wishing to examine an additional incentive effect in this regard would call into question the procedure of the selection of areas for aid as well as the approval of the Member States’ regional aid maps. 179 As regards the further considerations that granting the full aid amount should be admissible up to an investment volume of EUR 50 million, moreover, it should be assumed that the disadvantages of investing in an assisted area were far lower for a large enterprise than those of SME‘s,610 hence the incentive effect would possibly require additional scrutiny where a large enterprise is granted the unadjusted aid rate; the following needs to be pointed out: the difference between a large enterprise and a SME is already taken into account by rising the assistance rates by 10% for medium-sized enterprises and by 20% for small enterprises611 according to Article 13(4) GBER I.612 Furthermore, exceeding the investment volume threshold of EUR 50 million leads to an adjustment of regional aid ceiling by 50%.613 This adjustment aims at limiting the incentive effect for large enterprises as follows from the considerations of the MSF 2002.614 Where the Commission itself assumes an incentive effect (likely to be too high), it makes little sense to require its demonstration by internal documents of the company. Thus, its verification can be waived in the context of regional aid. Notably, the significant reduction of aid intensity functioning as a general regulation aimed at limiting the incentive effect represents the counterpart of a company-specific assessment of the incentive effect. This limitation regulation came into force simply to avoid the assessment.615 The RAG 2007 have taken up these considerations 178

607 See above para. 1, 3 et seq., 23, 123, 146 and under para. 190, 237, 383, 386, 447 and para. 2, 22 No 2 criteria (footnote 21). 608 Concerning the primary effect, i.e. to increase the total income in the economic area in a direct and lasting manner through the development of additional sources of income by producing goods and services sold supra-regionally, Tetsch, Die Band-La¨nder-Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur, 1996, Chapter IV, Number 2.1. 609 See above para. 50 et seq., 102 et seq. 610 See Para. 13 MSF 2002 (footnote 73); Para. 39, 54 GBER I. 611 Article 2 Annex I GBER I. 612 This does not apply to regional aid in the transport sector, Article 13 (4) halfsentence 2 GBER I. 613 Para. 67 RAG 2007. 614 Para. 12 MSF 2002 (footnote 73). 615 Para. 10, 12 MSF 2002 (footnote 73).

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as well.616 Thus, it would only be logical to also eliminate the assessment of the incentive effect for regional aid in the case of large enterprises with an investment volume up to EUR 50 million resulting in aid rates that are by 10% or 20% lower than the ones for SME and in case of an investment that exceeds EUR 50 million617 resulting in an adjustment of the regional aid ceiling by 50%.618 That is true a fortiori because the assessment is basically an additional burden for the granting authorities only. It is normally considered that a large enterprise willing to choose a location in an assisted area has documented the related advantages and disadvantages taking into account a potential grant of aid. Apart from that, the assessment of the incentive effect concerns precisely those investment projects where the total aid does not exceed the amount which the enterprise may receive according to the rules of the relevant regional aid map, corrected by the adjustment of the regional aid ceiling provided for in Para. 67 RAG 2007 for investments with a volume exceeding EUR 100 million. In case of exceeding this amount, an examination by the Commission will be required anyway,619 for which these elements of the incentive effect won’t be relevant anymore.620 cc) Regional aid not based on an aid scheme (Regional ad hoc aid). (1) Non- 180 exempt regional ad hoc aid. Ad hoc aid according to Article 2 No 4 GBER I are individual aid and not awarded on the basis of an aid scheme. Ad hoc aid not covered by this regulation are still subject to the notification requirement in Article 108(3) TFEU.621 Also the Commission will examine the existence of an incentive effect in the context of the notification622 of the aid concerned on the basis of the criteria established in the applicable frameworks, guidelines or other Community instruments. 623 As regards non-exempt regional aid the incentive effect is assessed according to Para. 38 RAG 2007. (2) Exempt regional ad hoc aid. According to Article 3(3) GBER I ad hoc aid 181 fulfilling all the conditions of Chapter I as well as the relevant provisions of Chapter II of the GBER I shall be exempt from the notification requirement. As in case of an exempt aid based on an exempt aid scheme, the incentive effect of exempt regional ad hoc aid is determined in accordance with Article 8(2) in conjunction with Article 3(3), 13(1) sentence 2 GBER I624 as far as SME are concerned and according to Article 8(3) in conjunction with Article 3(3), 1(5), 13(1) sentence 2 GBER I where large enterprises are concerned.625 Generally, within the context of chapter I of the GBER I, ad hoc aid for SME can 182 always be exempted from the notification requirement. This follows from Article 6(1) GBER I. That means that this regulation does not apply to any individual aid whose grant equivalent exceeds the thresholds mentioned in Article 6(1) GBER I, regardless of 616

Para. 62 sentence 2 RAG 2007. Article 13 (2) sentence 1 GBER I, para. 102, 67 RAG 2007. 618 Granting a SME-bonus even in case of an investment volume that exceeds EUR 50 million was permitted until 31 December 2006, however this ceased to apply from the date of entry into force of the RAG 2007: para. 67 footnote 61 RAG 2007; Article 13 (4), 2 No 12 GBER I; Article 4 (1) sentence 2, 2 (1) lit. g RRIA (footnote 3). 619 Para. 64 sentence 1 RAG 2007, Article 6 (2) GBER I. 620 Para. 38 sentence 1 to 3 RAG 2007, for further details see above para. 129–133, 170. 621 Para. 7 sentence 1 GBER I. 622 Regarding the notification requirement concerning to ad hoc aids within the scope of the RAG 2007: Para. 64 footnote 60 sentence 1 RAG 2007; see above para. 169. 623 Para. 32 sentence 2 GBER I; Regarding the extent of verification concerning ad hoc aids for large investment projects: para. 64 footnote 60 sentence 2 RAG 2007. 624 Regarding the incentive effect in case of SME: see above para. 172. 625 See above para. 171, 173–179. 617

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183

184

185

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whether it is an ad hoc aid or an aid based on an aid scheme.626 Furthermore, the focus for regional aid is less on Article 6(1) GBER I but on Article 6(2) GBER I. For ad hoc aid in favour of large enterprises, the possibility of exemption from the notification requirement follows from Article 1(5) GBER I, however, this only applies to regional ad hoc aid within the meaning of Article 13(1) sentence 2 GBER I.627 Other rules do not preclude an exemption from the notification requirement of ad hoc aid. Within the context of chapter II of the GBER I, regional aid is only exempt from the notification requirement if it is used to supplement regional ad hoc aid within the meaning of Article 13(1) sentence 2 GBER I. This applies without distinction to the granting of regional ad hoc aid in favour of SME628 and in favour of large enterprises.629 The qualification of an ad hoc aid as a supplement to regional ad hoc aid requires among others, that the component of the supplementary aid does not exceed 50% of the total aid intensity to be granted. This will depend on the granted aid according to gross grant equivalents (GGE)630 at the time of the conclusion of the project and after the review of the use of funds by taking into consideration potential aid recoveries. Article 13(1) sentence 2 GBER I aims at the ‘regional ad hoc aid’, which normally requires an approval to ‘attach’ to another regional aid based on an aid scheme. However, the conditions of the supplementary regional ad hoc aid are subject to the regulations of the GBER I.631 For this reason, the supplementary regional ad hoc aid represents an appropriate route for municipalities to financially promote their local economies, e.g. in the context of promoting real estate acquisition for an investment project. Considering the legal consequences of the incentive effect, which refer to the start of the project as a point of reference, 632 there is always the risk of a total exclusion of aid that needs to be taken into consideration. There are no challenges as far as the supplemented (or supplementary) aid is exempt in itself, thus, if it is based on a scheme that is exempted according to the GBER I and which meets all requirements of the exemption. In this case the assessment of the incentive effect will be uniformly carried out according to Article 8 GBER I. Neither will there be any difficulties in case that the supplemented (or supplementary) aid is not exempt but based on an authorized aid scheme according to the RAG 2007. In this case the assessment of the incentive effect will be carried out in accordance to para. 38 RAG 2007 as regards the supplemented aid and in case of the supplementary aid according to Article 8 GBER I. This implies that investment projects of large enterprises may be subject to the assessment of the incentive effect in accordance to para. 38 RAG 2007 as well as in accordance to Article 8(3) GBER I. In case that the supplemented regional aid is a non-exempt but approved tax aid scheme without any discretion on the part of the authorities, the assessment of the incentive effect for the supplemented aid will be omitted according to para. 38 RAG 2007,633 by contrast an assessment of the incentive effect has to be carried out for the supplementary aid in favour of SME according to Article 8(2) GBER I and regarding 626 See for instance the English language version: ‘This Regulation shall not apply to any individual aid, whether granted ad hoc or on the basis of a scheme, the gross grant equivalent of which exceeds the following thresholds:…’ 627 According to the Commission, the incentive effect of ad hoc aid granted to large enterprises is considered to be difficult to establish, para. 32 sentence 1 GBER I. 628 Articles 3 (3), 13 (1) sentence 2 GBER I. 629 Articles 3 (3), 1 (5) 13 (1) sentence 2 GBER I. 630 Regarding the term gross grant equivalent (GGE) see above in detail Para. 83 and under para. 226, 228 and 233. 631 Article 13 (1) sentence 2, last half sentence GBER I. 632 See above para. 158 et seq., 165 et seq. 633 Para. 38 footnote 41 RAG 2007; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), para. 4.894.

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large enterprises according to Article 8(3) GBER I. An assessment of the incentive effect according to Article 8(4) GBER I can be ruled out already due to the lack of a legal entitlement to a supplement ad hoc aid. If the supplemented aid is exempt according to the RRIA634, the assessment of the 187 incentive effect shall be based on Article 5 RRIA, the one for the supplementary aid on Article 8 GBER I. Therefore, it is also possible for aid granted for investment projects of large enterprises to be subject to the assessment of the incentive effect in accordance with Article 5 RRIA regarding supplemented aid and Article 8(3) GBER I regarding the supplementary ad hoc aid. If the supplemented aid based on an approved or exempted aid scheme requires 188 authorization, a distinction needs to be made: where authorization is required by the conditions of an approval decision or where it is based on an exemption regulation concerning the supplemented aid, this requirement of authorization does not have a direct impact the supplementary ad hoc aid. In case authorization is required because the leading aid or both the supplemented and the supplementary aids amount to an intensity exceeding the threshold of Article 6(2) GBER I, the supplementary ad hoc aid will also be subject to an approval procedure with the effect that it is not exempt and excluded from the rules of the GBER I anymore. In the absence of a further exemption of the supplementary ad hoc aid apply again the general rules of the RAG 2007. Crucially, therefore, is the total amount of aid from all sources, i.e. from the supplemented and the supplementary aid.635 If the proportion of ad hoc aid exceeds the amount of 50% of regional aid granted 189 for a regional investment project, it won’t be considered a regional supplementary aid anymore but a simple regional ad hoc aid. In this respect the rules mentioned above in para. 194, 183 apply. Authoritative is the in fact granted aid and not the legitimately allowable aid. c) Critical reflection. In the context of the assessment of the incentive effect accord- 190 ing to para. 38 RAG 2007 it only matters whether or not a very large investment project as referred to in para. 64 RAG 2007 is concerned, regardless of whether a SME or a large enterprise invests; whereas in the context of Article 8 GBER I it is only a question of whether the investing enterprise is a SME or a large enterprise within the sense of Article 2 No. 7, 8 GBER I. Both provisions were established following the State Aid Action Plan, and both provisions aim at the same target: to avoid dead – weight effects by an assessment of the incentive effect. However, these approaches reveal that an assessment of the incentive effect beyond a mere control of a timely application is wrong, at least as part of an exemption regulation. With regard to regional aid and in particular in view of the generalized compensation of regional handicaps, 636 the criteria of the exemption regulation itself are devised in a way that they always allow to assume an incentive effect. Article 8(2) GBER I reflects this. This also applies to the regional supplementary ad hoc aid. Although the Commission holds that the incentive effect of ad hoc aid granted to large enterprises is considered to be difficult to determine, 637 with the instrument of supplementary ad hoc aid the Commission has found a means to avoid an assessment of the incentive effect for ad hoc aid.

634

RRIA (footnote 3). Article 6 (2) GBER I. 636 Regarding the generalized compensation of disadvantages, see above para. 3 et seq., 21, 23, 47, 123, 146, 178 and under para. 237, 383 and 447 as well as para. 2, 22 No. 2 criteria (footnote 21). 637 Para. 32 sentence 1 GBER I. 635

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Art. 13–16 191–193

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2. The incentive effect in case of aid granted at the discretion of the authorities after the start of the project (start of the project before authorization, premature start of the measure without impacting its eligibility for aid)638 191

a) Principle. In principle, it is not only necessary that the aid application has been submitted before the start of the measure, furthermore it can only start once the beneficiary has found out that the granting authority will promote this measure, i.e. when he has received a positive grant letter.639 Since a thorough grant decision requires multiple votes and possibly approvals at national level and under European law, it may take long before the grant decision will actually be taken and received by the beneficiary. In order to tide the investing company over this time and not to impair its further business development, the concept of the ‘premature start of the measure not impacting its eligibility for aid’ was introduced. According to this the granting authority can allow the applicant to start the measure before the grant decision is taken, without the grant being rejected due to a start of the project before the grant decision. 640 Depending on the administrative practice of the relevant local authority the authorization of a premature start of the measure not impairing its eligibility for aid can be given by the granting institution (development bank or public administration), the superior authority or by Ministerial approval. This always requires an aid application beforehand, even in case of a Ministerial approval.

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b) Premature start of the measure without impacting its eligibility for aid before entry into force of RAG 2007. Until the RAG 2007 became effective, the practice was that the applicant applying for funding of his investment from sources other than the Investment Allowances Act which grants him a legal entitlement to funding,641 received a letter regarding the receipt of the application from the granting authority. 642 This letter included the declaration stating that a positive funding decision was not precluded by the start of the project or, in case the funding was rejected, the rejection was not based on the early start of the measure. With this letter, the granting authority authorized the applicant to start the measure prematurely without impacting the projects’ eligibility for the applied aid. This applied regardless of whether the proposed grant was an aid to be based on an approved or exempted aid scheme or whether it had to be submitted individually to the Commission, either as ad hoc aid or for other reasons.643

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c) Premature start of the measure without impacting its eligibility for aid based on the RAG 2007. aa) General. According to para. 38 RAG 2007, the existing procedure cannot sufficiently ensure the avoidance of a deadweight effect in particular by the start of the measure after the applications’ submission but before the approval of aid. This provision imposes new conditions. It distinguishes according to whether the proposed grant constitute aid: 638

Regarding the incentive effect without a premature start of the project see above para. 157 et seq. See above para. 157, 164 et seq. 640 Number 4.2 sentence 3 RAG 1998; para. 38 sentence 2, 4, 5 RAG 2007. 641 § 1 (1) Investment Allowance Act 1999, introduced by Article 1 of the Law on the Continuation of Economic Assistance in the new La¨nder of 18 August 1997 (published in the Bundesgesetzblatt 1997 Part I, page 2070), amended by Article 1 of the Law of 20 December 2000 amending the Investment Allowance Law 1999 (InvZulG 1999), published in the Bundesgesetzblatt 2000, Part I, page 1850; § 1 (1) Investment Allowance Act 2005 (InvZulG 2995) of 17 March 2004, published in the Bundesgesetzblatt 2004 Part I, page 438. 642 According to Number 4.2 sentence 3 RAG 1998. 643 Knoblich (footnote 21), 85, 93. 639

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– based on an (approved) aid scheme and therefore is non-notifiable,644 or – based on an (approved or exempted) aid scheme, but individually notifiable to the Commission and requiring its approval645 or – based on a (non-approved or non-exempted) aid scheme646 or – to be granted as ad hoc aid, i.e. without an aid scheme647 or – based on a tax scheme and not based at the discretion of the authorities.648 bb) Non-notifiable aid based on an approved aid scheme. If the proposed grant of 194 aid is based on an approved aid scheme not requiring any further approval by the Commission, para. 38 RAG 2007 requires the authority responsible for administering the scheme to examine that an application for aid was submitted and in addition, to confirm in writing that, subject to detailed verification, the project in principle meets the conditions of eligibility laid down by the scheme before the start of work on the project.649 The eligibility refers to the impact of the investment with regard to the aid objectives; as regards regional aid, this refers to the national and intra-Community cohesion of the regional development. A central feature indicating that a project will not be able to achieve the objectives of regional aid, is an exclusion of aid. This includes the exclusion of sensitive sectors.650 In these sectors, there are usually significant structural overcapacities. The promotion of projects in these sectors would only foster predatory competition and not the economical recovery of a disadvantaged region. Thus, where aid is based on a regional aid scheme according to the RAG 2007, the cursory assessment of the eligibility of aid as laid down in para. 38 RAG 2007 only requires establishing that there is no general exclusion of aid. cc) Notifiable aid based on an approved or exempted aid scheme. In case of aid 195 based on an approved aid scheme, which is subject to individual notification to and approval by the Commission, hence a notifiable individual aid,651 confirmation of eligibility must be made conditional on the Commission decision approving the aid.652 This reservation does not impact the reliability of the confirmation of the premature start of the measure without impacting its eligibility. It is only there due to the fact that the detailed assessment that is to be reserved as a general rule in cases where notification is required, will be replaced by the decision of the Commission according to Article 2 Regulation on Procedure653. The same applies to aid based on an exempted aid scheme which however do not fulfil all conditions for exemption and are therefore not exempted, and instead require an approval.654 This rule applies even in case where the aid scheme on that the notifiable individual 196 aid is based, requires stricter conditions for the incentive effect, such as Article 5(1) RRIA655 or Article 8(3) GBER I. Even then, the proposed individual aid that is based on this aid scheme, but according to Article 108(3) TFEU subject to individual notification to and thus, approval by the Commission, only has to fulfil the criteria for the incentive 644

See para. 194. See para. 195. 646 See para. 197. 647 See para. 198. 648 See para. 204, 210 et seq. 649 Para. 38 sentence 2 RAG 2007. 650 See above Para. 120. 651 As for instance aid for a large investment project as in para. 24 MSF 2002 (footnote. 73); or in para. 64 RAG 2007. 652 Para. 38 footnote 39 RAG 2007. 653 Procedural Regulation (footnote 95). 654 Para. 7 sentence 3 GBER I. 655 RRIA (footnote 3). 645

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effect as laid down in para. 38 RAG 2007.656 The provisions regarding the incentive effect included in the exempted aid scheme ultimately serve to exempt an aid from the prior review by the Commission. Considering this, the rules regarding the incentive effect are stricter in the two exemption regulations than the ones provided in para. 38 sentence 2 RAG 2007, i.e. for aid that is subject to a prior review by the Commission. This differentiation is further indicated by the fact that the incentive effect for aid to be granted to a SME relating to a very large project and subject to notification, has to be based on para. 38 RAG 2007 and not just on Article 8(2) GBER I.657 There is no reason to further apply the rules of the exemption regulation to the assessment pursuant para. 38 sentence 2 Footnote 39 RAG 2007, in particular in the context of the assessment of an individual aid excluded from exemption according to Article 7(1) RRIA658 or Article 6(2) GBER I; the same applies to the alternative means of an exempted aid guideline. Moreover, where the requirements of an incentive in para. 38 sentence 2 Footnote 39 RAG 2007 are fulfilled by an aid that is based on an exempted aid scheme including further conditions for the incentive effect, it will not be transformed into an ad hoc aid, provided that all remaining conditions of the aid scheme are met. 197

dd) Aid based on a non-approved or non-exempted aid scheme. Aid to be granted on the basis of a non-approved and non-exempted aid scheme, is an aid based on an aid scheme that is neither approved nor exempt. Thus, such a proposed aid is considered a mere ad hoc aid.659

ee) Ad hoc aid. In the case of proposed ad hoc aid, the wording of para. 38 sentence 4 RAG 2007 requires that the competent authority must have issued a (written) letter of intent, conditional on Commission approval of the measure, to award aid before work starts on the project.660 This letter of intent is essentially the equivalent to a dilatory conditional approval in commercial transactions. Thereby, the Commission demands in principle that the granting authority issues the beneficiary an enforceable, binding promise in relation to ad hoc aid from the outset and regardless of the scope and intensity of the ad hoc aid. 661 In terms of the approval requirement this provision does not distinguish between an aid intensity of a project that, taken on its own, is already subject to the approval requirement, and an approval requirement based solely on the fact that it is an ad hoc aid. 662 199 Regarding the incentive effect, it is not clear whether is would be sufficient for the granting authority before the start of the project to issue a written confirmation of the eligibility conditional on the Commission decision approving the aid as provided for in para. 38 sentence 2, footnote 39 RAG 2007, instead of sending a letter of intent to award aid before work starts on the project as it is laid down in para. 38 sentence 4 RAG 2007 including the condition on Commission approval of the aid. The wording of para. 38 sentence 4 RAG 2007 could be taken to mean that this was not sufficient. It requires a confirmation of the granting authority before the start of the project and conditional on Commission approval of the aid. This impression is supported by the provision in para. 38 sentence 5 RAG 2007 according to which the project will not be eligible for aid if work begins before the conditions laid down in para. 38 sentences 1 to 4 RAG 2007 are fulfilled. 198

656 COM, State Aid N 203/2008, para. 18–21, 25 – Papierfabrik Spremberg (footnote 498); N 671/2008, para. 62 – Mercedes-Benz, Hungary (footnote 498). 657 See para. 207. 658 RRIA (footnote 3). 659 See above para. 147, 150, 153 and 154. 660 Para. 38 sentence 4 RAG 2007. 661 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.909. 662 See para. 64 footnote 60 sentence 1 RAG 2007.

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The purpose and rationale of the regulations must be taken as the starting point. The 200 regulations in para. 38 sentence 4 RAG 2007 are aimed at complying with the general rules concerning the incentive effect, even in those cases of aid where no approved or exempted aid schemes (funding directives) exist.663 Where aid was granted based on approved aid schemes, the Commission was already given the opportunity to examine these schemes and in principle, to establish the existence of the incentive effect of the aid granted according to these rules. About the same applies to the exempted aid schemes. They have to be equivalent to the provisions determined by the Commission in the relevant exemption regulation, such as the GBER I, and compliance with which enables it to be presumed that the incentive effect, in general, exists. That is exactly what is lacking in case of granting ad hoc aid. Therefore, the other aim of para. 38 sentence 4 RAG 2007 is to force the granting authority to notify the Commission of ad hoc aid in order to get the Commissions approval. Such a notification of ad hoc aid results in a comprehensive examination by the Commission. This effort that is put into the examination applies regardless of the fact whether the funded project is a very large project within the meaning of para. 64 sentence 1 RAG 2007 or a significantly smaller project, e.g. a project with an investment volume of less than EUR 5 million. In order to save the Commission resource consuming examinations of potential projects, the Member State must express its actual intention to grant the aid by a respective written confirmation conditional to Commission approval. However, this aim can also be achieved if the confirmation of the projects’ premature 201 start by the granting authority includes the confirmation of eligibility of the measure before the projects’ start conditional on the Commission decision approving the aid. 664 The substance and purpose of the provision in para. 38 sentence 2 footnote 39 RAG 2007 is to force the granting authority to submit the proposed aid to the Commission for assessment and approval, once it exceeds a certain amount of aid. In this regard, the objectives of the two provisions do not differ; in fact the objectives are the same. Furthermore, the regulatory measures aimed at meeting this objective of submitting the proposed aid to be granted to the Commission for assessment, do not differ either. The only difference is that para. 38 sentence 4 RAG 2007 requires a binding declaration of intent whereas para. 38 sentence 2 RAG 2007 refers to a confirmation of the eligibility. This difference however, does not affect the Commission assessment of the compatibility of the aid with the internal market. Regarding the incentive effect, the confirmation pursuant to para. 38 sentence 2 footnote 39 RAG 2007 results in reaching the same objectives in case of very large investment projects as the ones set out in para. 38 sentence 4 RAG 2007. Thus, it is not justified to reject the presence of the incentive effect of ad hoc aid in 202 such a case on the mere basis of form reasons, in particular considering the Commission’s approach of ‘substance over form’. This is all the more true as a Commission decision does not only refer to the eligibility but to the approval of the grant itself. Therefore, in terms of its content, a written confirmation to start the project prematurely without impacting the projects’ eligibility of ad hoc aid for a very large investment project, issued before the start of the project, actually always also fulfils the requirements for an approval of aid by a letter of intent, conditional on Commission approval of the measure, as laid down in para. 38 sentence 4 RAG 2007 and thus the requirements for the incentive effect within the meaning of this provision. This applies regardless of the fact that this kind of ad hoc aid already needs to be notified 663 664

Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.909. Para. 38 footnote 39 RAG 2007.

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individually to the Commission for approval in accordance to para. 64 sentence 1 RAG 2007 and which the granting authority issues under condition on Commission decision according to para. 38 footnote 39 RAG 2007. 203 This does not apply if the confirmation letter of the granting authority lacks the condition of eligibility. It would defeat the objectives of para. 38 sentence 4 RAG 2007 if the confirmation of the eligibility was given without reserving the Commission’s decision on the approval of the proposed grant of aid. This usually should be expected in case of ad hoc aid, that, if it was granted on the basis of an approved or exempted scheme, would not be be subject to the notification requirement. In such a case the confirmation by the granting authority would only refer to the eligibility but not to the Commission approval as a condition for granting the aid. 204

ff) Mandatory context of aid schemes. All aid schemes based on the RAG 2007 must include the two conditions mentioned in para. 38 RAG 2007 as separate, expressed own requirements of the respective aid scheme: namely the prior submission of the application and that the authority responsible for administering the scheme has subsequently confirmed in writing that, subject to detailed verification, the project in principle meets the conditions of eligibility laid down by the scheme before the start of work on the project.665 If the second element has not been incorporated, the grant of a premature start of the project without impacting its eligibility for aid is not permissible. This obligation is not applicable for approved regulations granting aid by law without the granting authority having any discretionary power, such as in case of tax laws. 666

205

gg) Critical reflection. In relation to the previous scheme667, the provision in para. 38 RAG 2007 increases bureaucracy considerably without providing a clear added value to any of the involved parties.668 Until now, the granting authority could determine already at the time of receipt of the mail (receipt of the application), whether the company had submitted an application for approval of premature start of the project and could grant this request without further assessment. It thereby achieved the objective of applying for aid first and of starting the project only after this, thus avoiding mere deadweight effects. With the entry into force of the RAG 2007 and the obligation of an immediate, at least cursory assessment of the eligibility, the applicant has not been provided with greater security. He only has to wait longer for a decision. The objective of avoiding any presumed deadweight effects cannot be achieved though. On the one hand, their existence is not evident in this constellation, as no aid has been granted as yet. On the other hand, the new regulation would not be able to avoid them. Regardless of whether the applicant received a letter authorizing in general the premature start of the project without impacting its eligibility for aid or whether it states in addition that in principle, his project would be eligible for aid (without having it verified or even decided though), he is always in the same situation: under the previous as well as under the new scheme there is always uncertainty as to whether he will in fact receive the amount of aid requested. This new scheme does not create any legitimate expectation in an actual funding nor does it grant the applicant any enforceable rights other than the right of not being denied funding for the reason that he already started the project after submitting the aid application but before deciding on the application. Para. 38 RAG 2007 came as a surprise to the Member states. 665

Para. 38 sentences 2, 3 RAG 2007. Para. 38 footnote 41 RAG 2007. 667 Number 4.2. sentence 3 RAG 1998. 668 This does not apply in case that the confirmation according to para. 38 sentence 2 footnote 39 RAG 2007 replaces the declaration referred to in para. 38 sentence 4 RAG 2007. 666

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d) Premature start of the measure without impacting its eligibility for aid based on 206 the GBER I. Art. 8 GBER I partially rectified these serious deficiencies of the RAG 2007 and the RRIA for those aid constellations that are exclusively based on the rules of the GBER I. aa) SME. As regards SME, Article 8(2) GBER I reverts to the core of the initial 207 provision of the RAG 1998669 effective until the RAG 2007 came into force, albeit with a different legal technique, and allows to return to the existing administrative practice. This rules provides by means of legal670 fiction that aid granted to SMEs, covered by this Regulation, shall be considered to have an incentive effect if, before work on the project or activity has started, the beneficiary has submitted an application for the aid to the Member State concerned. A further assessment of the incentive effect by the granting authority is no longer necessary in this respect. With that, an assessment aimed at approving a premature start of the project without impacting its eligibility is avoided, too. Subject to further national rules, the applicant can start his project immediately after receipt of his application, without having to wait for an approval of the premature start. In practice however and for reasons of legal certainty he will request such a confirmation, or at least an acknowledgement of receipt. Granting an explicit confirmation, which goes beyond the obligation laid out in Article 8(2) GBER I, does not add any further significance though, other than that the application cannot be rejected because of the start of the project after the application was submitted but before a decision, regardless on the outcome of the decision, was made on it. In case of aid in benefit of a SME concerning a very large project,671 the specific rules672 for notifiable projects are applicable.673 This also excludes the applicability of the GBER I.674 bb) Large enterprises. For large enterprises, i.e. enterprises not meeting the prere- 208 quisites of the Commission’s SME-Recommendation,675 Article 2 No. 8 GBER I, Article 8(3) GBER I requires further examining the incentive effect only as part of the examining and deciding on the application itself but not during the process relating to grant approval for a premature start of the project. Therefore, in case of large enterprises whose regional aid is determined by the rules of the GBER I only, reasons of aid legality no longer require to verify or confirm the premature start of the project. In practice however and for reasons of legal certainty, the undertaking will request an approval of the premature start of the project that does not impact the eligibility, or at least an acknowledgement of receipt of its aid application. For the scope of this approval and its legal effect, see para. 191, 205 and 207. Aid that is subject to the notification requirement, i.e. within Article 6(2) GBER I and para. 64 sentence 1 RAG 2007, is not covered by the GBER I676 and the specific rules for notifiable projects apply.677 cc) Ad hoc aid. As regards the premature start of a project to be granted ad hoc aid, 209 first of all, a distinction has to be made of whether it is a general ad hoc measure or a 669

Number 4.2. sentence 3 RAG 1998. Regulations are directly to be applied. Article 288 sentence 2 TFEU; Oppermann/Classen/Nettesheim, Europarecht, 4. Edition, Munich 2009, § 10 para. 16 et seq., 19, 111. 671 Article 6 (2); 2 No 12 GBER I. 672 As a general rule: para. 38 RAG 2007. 673 Para. 64 sentence 1 RAG 2007. 674 See above para. 126–133; the exemption of the aid scheme only replaces the approval by the Commission of this scheme. 675 SME-Recommendation (footnote 342). 676 See above para. 131–133. 677 Para. 38 and as a rule: para. 64, 68 RAG 2007. 670

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regional supplementary ad hoc aid. Granting of an ordinary ad hoc aid, even if it is an ordinary regional ad hoc aid, is not exempt, thus the rules according to para. 38 sentence 4 RAG 2007 apply.678 For supplementary regional ad hoc aid within the meaning of Article 13(1) sentence 2 GBER I other rules apply. This aid is exempt in case the beneficiary is a SME within the meaning of Article 2 No 7 GBER I as well as where the beneficiary is a large enterprise within the meaning of Article 2 No 8 GBER I, provided that they are fulfilling all criteria of the GBER I.679 According to the two provisions an explicit approval of a premature start of the project without impacting the eligibility is not required in regard to the incentive effect.680 Thus, these cases do not require to assess the incentive effect in the context of the premature start of the project. 681 As is the case for constellations not involving a premature start of the project, the assessment of the incentive effect is based on Article 8(2) GBER I as regards SME and Article 8(3) GBER I as regards large enterprises.682 This does not apply to aid measure requiring an approval for very large investment projects within the meaning of Article 6(2) GBER I and para. 64 sentence 1 RAG 2007. Such aid is not exempt according to the provisions of the GBER I, even in case of regional supplementary ad hoc aid, if the threshold of the maximum amount of aid as referred to in Article 13(1) sentence 2 in conjunction with Article 6(2) GBER I is exceeded. To this end, the total amount of aid from all sources has to be added,683 including the supplement regional aid. Hence, even in case of a premature start of the project, the incentive effect for this ad hoc aid has to be assessed in accordance with para. 38 sentence 4 RAG 2007.

3. The incentive effect in the context of an approved or exempt aid scheme with no discretionary power 210

a) General. These schemes are regulations which provide the beneficiary with an entitlement to receive the respective aid by law without any discretion on the part of the authorities.684 It is in these cases only that the beneficiary can be confident in advance that the granting authority will grant aid for his project if he fulfils the relevant legal conditions. This generally applies to tax aid schemes. Due to these exempt or approved tax aid schemes, a tax exemption or reduction is granted ‘automatically’ by law to qualifying expenditure without any discretion on the part of the authorities. 685 In Germany, this includes the Investment Allowances Acts valid for different periods. 686 They do not provide for tax reduction but for tax based funding relevant to competition and thus, State aid. The granting authority (in Germany the tax authorities) has assessed the facts presented by the beneficiary as to whether they meet the legal requirements for receiving aid. 678

See above para. 169, 180, 198. Article 3 (3), 1 (5), 13 (1) sentence 2 GBER I; see above para. 180–189. 680 See above para. 207 and 208. 681 See above para. 207 and 208. 682 In this regard see above para. 171 et seq. 683 Article 6 (2) GBER I. 684 Para. 38 footnote 41 RAG 2007: ‘automatically to qualifying expenditure without any discretion on the part of the authorities’. 685 Para. 38 footnote 41 RAG 2007. 686 Investment Allowance Act 1999 (InvZulG 1999, footnote 641); Investment Allowance Act 2005 (InvZulG 2005, footnote 641); Investment Allowance Act 2007 (InvZulG 2007) of 15 July 2006, published in the Bundesgesetzblatt 2006 part I, page 1614, amended by Article 2 of the German Law of 7 December 2008 in order to create a fiscal successor scheme and in order to amend the Investment Allowance Act 2007, Investment Allowance Act 2010 (InvZulG 2010), published in the Bundesgesetzblatt 2008 part I page 2350 (see above footnote 497). 679

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An absence of discretion cannot be assumed just because the granting authority has 211 limited its own discretionary power by means of official circulars (Erlasse) or by a respective administrative practice. As such it is not considered as an exclusion of discretion by law but only as an actual administrative practice of not exercising its discretion. The restriction of discretion resulting from such a compliance of the granting authority to its own acts and possibly applicable via the principle of equality is not identical with a legal entitlement to aid.687 The same applies where the superior authority orders that discretion must not be exercised. There is no legal entitlement to aid in this case. b) The incentive effect in the context of the RAG 2007. Due to the lack of discretion 212 on part of the authorities, an assessment or evidence of the incentive effect as referred to in para. 38 RAG 2007688 is not required in case of aid granted by law within the scope of the RAG 2007. However, para. 108 sentence 5 RAG 2007 provides that projects for which expenses were incurred before the date of publication of the scheme will not be eligible for regional aid. Thereby, for projects that are supposed to be financed by aid where an entitlement to granting exists by law, para. 108 sentence 5 RAG 2007 stipulates the principle: first scheme, then start. Para. 38 RAG 2007 was not referred to in any of the Commission’s consultation 213 papers. This provision took the Member States by surprise. In Germany for example, this caused some serious problems in regard to the short life of the individual Investment Allowance Acts.689 Usually, for large investment projects several years can pass between the time of the submission of an application and the termination of the project. Furthermore, aid based on Investment Allowances Acts will always be submitted and granted in the calendar year following the respective investment. 690 If a project happened to fall into the transition period between two Investment Allowances Acts, i.e. from the period of validity of an Investment Allowances Act to the validity period of its successor Act, any investments that were made during the validity period of the new act could not be supported by investment allowances due to the provision set out in para. 108 sentence 5 RAG 2007. The obsolete act was not applicable anymore and the new act became effective only after the start of the project. On the other hand, it was evident that each Investment Allowances Act was followed immediately by a successor act. To rectify the situation, the approval letters of the other granting authorities, in 214 particular the approval letters concerning investment grants made under the joint scheme for improving regional economic structures under Article 91 a (1) No 1 GG (German Constitution) had to award as well the expected amount of investment grants.691 Thereby the incentive effect was respected. Subsequently the funding was replaced by the investment grant. ‘Changing the funding source’ does not give rise to competition concerns and is allowed despite para. 108 sentence 5 RAG 2007; the undertaking received the regional aid granted by the approval letter even if it came from a different component of the budget or a different budget title of the same Member State. On the initiative of Germany, particularly with view to the Investment Allowances Acts, these legal effects, which were certainly unintended, have been 687 This is reflected in the RAG 2007 as well, which name the tax aid schemes as the only exception to the rule of assessing the respectve incentive effect: para. 38 footnote 41 RAG 2007. 688 Para. 38 footnote 41 RAG 2007. 689 InvZulG 1999, InvZulG 2005, InvZulG 2007, InvZulG 2010, (footnote 641). 690 § 7 Abs. 2 InvZulG 1991, § 7 Abs. 2 InvZulG 1993, § 7 Abs. 2 InvZulG 1996, § 6 Abs. 2 InvZulG 1999; § 5 Abs. 2 InvZulG 2005; § 9 InvZulG 2007; § 10 InvZulG 2010. 691 § 3 Abs. 1 S. 2 Nr. 2 InvZulG 2007 (footnote 686).

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rectified in Article 8(4) lit. b sentence 2 GBER I. In view of the above, this provision has to be applied analogously within the scope of the RAG 2007, or alternatively, the provision of para. 108 sentence 5 RAG 2007 has to be interpreted in the light of Article 8(4) lit. b sentence 2 GBER I.692 c) The incentive effect in the context of the GBER I. It is not necessary either within the scope of the GBER I to prove the existence of an incentive effect for exempt tax aid that is based on objective criteria, i.e. not requiring discretion on part of the granting authority, and which grants a legal right to receive the aid. However, in Article 8(4) lit. b sentence 1 GBER I, the GBER I contains a provision that is equivalent to para. 108 sentence 5 RAG 2007. This implies that within the scope of the GBER I, the incentive effect for tax schemes which are based on objective criteria and grant a legal right to receive the aid, has to be assessed insofar as the tax scheme must have been introduced, hence promulgated, before the start of the supported measure. Similar to para. 108 sentence 5 RAG 2007, every notice, including in a non-formal manner such as an internet publication, a notice issued by the legislator or by the entities engaged by the legislator with granting aid, e.g. the financial authorities, shall be considered a necessary as well as a sufficient condition.693 The principle that the scheme needs to be in existence before the projects’ start, applies within the scope of the GBER I as well. 216 As a result of the experience with para. 108 sentence 5 RAG 2007 and the RRIA 694, another important regulation, namely Article 8(4) lit. b sentence 2 GBER I, was included into the GBER I: if the aid provision is a fiscal successor scheme of an existing fiscal scheme, the incentive effect shall be considered to be present even if work on the aided project or activity has started before the successor fiscal scheme has come into force. The same applies in case that the Commission approved in an individual decision to claim aid from an aid scheme that has not been adopted yet at the time the decision was made.695 The rationale of this provision as a general rule is not limited to the GBER I, but also applicable by analogy to para. 108 sentence 5 RAG 2007.696 215

4. The incentive effect in case of a change in the legal basis 217

Where an undertaking has applied for aid which has been granted on the basis of a national aid scheme, the assessment of the incentive effect needs to be carried out according to the relevant provisions for these schemes. If it turns out later, e.g. in the course of a formal investigation procedure, that the aid scheme the granting was based on was no longer allowed to be applied, the question arises as to the rules according to which the incentive effect will be assessed. As a rule, this assessment is carried out according to the rules applicable to the actual granting of aid. If aid is granted based on a illegal aid scheme, such as a terminated scheme, this aid will be regarded as an ad hoc aid granted without aid scheme.697 As a consequence, the conditions for a premature start of the measure would be different as well. In case of aid based on an aid scheme, it is sufficient that possible grounds for exclusion are assessed and notified to the applicant; whereas ad hoc aid requires for the approval of a premature start of the project a granting of aid dilatory conditional on Commission approval of the mea692

See above para. 43. Arg. e. contr. para. 108 RAG 2007 reflecting a general principle regarding the practice of publication and the Commission requirements for publication. 694 RRIA (footnote 3). 695 Com., State Aid N 872/2006 of 30 January 2008, para. 23, 25 – Qimonda. 696 See above para. 43, 214 and 215. 697 Com., State Aid C 34/2009 (ex N 588/2008), Section 3.3, 8. Tiret – PETROGAL (footnote 158). 693

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sure.698 Consequently, an undertaking would only be shielded from unsuspected exclusions of aid if it insisted that the granting authorities carry out the assessments applicable to all imaginable aid constellations.699 However, this is not the case where as part of the approval of the premature start of 218 the project or of the granting of aid, procedural requirements were fulfilled which comply with the ones set out in para. 38 sentence 4 RAG 2007 concerning the incentive effect. The starting point is the aim and functioning of the provisions concerning the incentive effect in case of non exempt regional ad hoc aid. In order to comply with the general rules regarding the incentive effect, para. 38 sentence 4 RAG 2007 aims at forcing the granting authority to submit the non exempt ad hoc aid to the Commission for approval.700 It also needs to be a serious project of the Member State. Where these two conditions are met, even in case that the initial legal base for granting the aid had proved not to be viable and thus the initial granting of aid that was based on an approved aid scheme, however conditional on the Commission decision, has now turned out to be without any approved or exempt legal base, and hence qualifies as ad hoc aid; that does in fact fulfil the conditions for the incentive effect required by para. 38 sentence 4 RAG 2007.701 The aid is still conditional on the decision of the Commission in this case. This applies a fortiori in a case, where the granting authority only wishes to determine the final aid in the light of the Commissions decision,702 such as in the PETROGAL703 case. Considering this and the question that was left unanswered by the Commission in the PETROGAL case,704 i.e. in case of a change of the legal basis, a letter of approval of aid by the granting authority which is conditional on the Commission decision can be considered as a letter of intent within the meaning of para. 38 sentence 4 RAG 2007. If the competent authority issued this declaration only after work on the measure, for which the ad hoc aid was applied, had already started, the whole project will not be eligible for aid within the scope of the RAG 2007.705

5. Summary principles In summary, regarding the assessment of the premature start of the project without 219 impacting its eligibility for aid, the following can be established: a) If aid is based on the RAG 2007, an assessment of the incentive effect according to 220 para. 38 RAG 2007 is required, in particular in the context of the premature start of the project; b) If aid is based on the GBER I, such an assessment is avoided for SME. For large enterprises within the meaning of Article 2 No. 8 GBER I, there is no need for assessing the incentive effect in regard to the premature start of the project. Instead, it is replaced by the assessment referred to in Article 8(2) and (3) GBER I as part of the approval itself; c) In case of a regional ad hoc aid, no exemption applies. The provisions of para. 38 RAG 2007 are applicable once more; d) In case of a regional supplementary ad hoc aid which does not exceed 50% of the total amount of aid from all sources to be granted for the investment, the respective 698

Para. 38 sentence 2 RAG 2007 on one hand, and Para. 38 sentence 4 RAG 2007 on the other hand. Com., State Aid C 34/2009 (ex N 588/2008), Section 3.3, 10. Tiret – PETROGAL (footnote 158). 700 See above Para. 200. 701 See above Para. 201, 202. 702 Com., State Aid C 34/2009 (ex N 588/2008), Section 2.10, 4. Tiret – PETROGAL (footnote 158). 703 Com., State Aid C 34/2009 (ex N 588/2008) – PETROGAL (footnote 158). 704 Com., State Aid C 34/2009 (ex N 588/2008), Section 3.3, 10. Tiret – PETROGAL (footnote 158). 705 Para. 38 sentence 5 RAG 2007. 699

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rules for supplement and supplementary aid apply in both cases, for SME and large enterprises, Article 13(1) sentence 2 GBER I. Regarding the notification thresholds according to Article 6(2) GBER I, para. 64 sentence 1 RAG 2007, all related elements of aid are to be added up. If the thresholds are exceeded, the provisions of the RAG 2007 apply, namely para. 38 RAG 2007; e) The assessment of the incentive effect is avoided where aid is based on an exempt or approved fiscal measure that establishes a legal right to aid in accordance with objective criteria and without further exercise of discretion by the granting authority, Article 8(4) GBER I, para. 38 sentence 2, first half sentence, footnote 41 RAG 2007. It is required that the fiscal measure has been adopted before work on the aided project or activity has started, Article 8(4) lit. b GBER I, para. 108 sentence 5 RAG 2007. This condition shall not apply in the case of fiscal successor schemes; a project is still eligible if it started at the time when the previous fiscal scheme was effective, Article 8(4) lit. b sentence 2 GBER I directly or analogously within the scope of application of the RAG 2007.

E. The beneficiaries’ own contribution Where the aid is calculated on the basis of material or immaterial investment costs, or of acquisition costs of the capital assets directly linked to an establishment as referred to in para. 35 RAG 2007, Article 12(1) lit. b GBER I, aid can only be granted – regardless of the eligible amount of aid applying to the specific case – if the beneficiary provides a financial contribution of at least 25% of the eligible costs, either through its own resources or by external financing, in a form which is free of any public support. 706 This prevents the project from being funded entirely by a reduced (subsidised) interest loan. Similarly, these above mentioned 25% of eligible costs must not be funded nor ‘infected’ by public equity-capital loans or public participations (for instance public equity investments or risk capital measures) which do not meet the market economy investor principle, state guarantees containing elements of aid, as well as public support granted within the scope of the de minimis rule.707 The purpose of this provision is to ensure that the aided investments are viable and sound. 708 Where national regional aid maps allow for an aid intensity that exceeds 75%, the beneficiaries’ own contribution is reduced and shall only comprise the part that is excluded from aid. As a consequence, in outermost regions with a per capita gross national product (GNP) of less than 60% resulting in maximum intervention rate of 60% for large enterprises 709 and a maximum aid intensity of 80 per cent for small companies due to the 20% bonus for SME, 710 the beneficiaries’ own contribution is reduced to only 20 per cent.711 The beneficiaries’ own a contribution is irrelevant in case of regional employment aid according to Article 13(5), 12(3) GBER I or para. 36 second half sentence, 57, 58, 59 RAG 2007. 712 222 The beneficiaries’ own contribution free of State aid is calculated according to the eligible costs, and not according to the total investment costs. As for publicly guaranteed 221

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Article 13 (6) sentence 1 GBER I; Para. 39 RAG 2007. Para. 39 footnote 42 RAG 2007. 708 Para. 39 RAG 2007. 709 Para. 44, 45 first half sentence RAG 2007; Com., State Aid N 343/2006, para. 39 – France: Overseas territories (footnote 448); see above para. 85. 710 Para. 49 RAG 2007. 711 Article 13 (6) sentence 2 GBER I; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.896, footnote 3135. 712 Article 13 (6) sentence 1 GBER I; Para. 39 RAG 2007. 707

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loans, the part of the loan not comprised by the guarantee shall be excluded from the calculation. In case that 80% of an ‘aid-free’ loan granted by the main bank are guaranteed by the State and qualify as State aid, then the remaining 20% are considered to be free of State aid with regard to the beneficiaries’ own contribution.

F. Lock-in periods I. Lock-in periods according to the RAG 2007 In order to ensure that the intended regional effect of regional aid is in fact being 223 delivered, the Member States have to take appropriate measures to ensure that the aided investment is maintained for a minimum period of at least five years after its completion (so called lock-in period). Completion of large investment projects shall be documented by a final report to be submitted to the Commission.713 In addition, where the aid is calculated on the basis of wage costs according to para. 36 and 57 to 59 RAG 2007, the posts must be filled within three years of the completion of the works, para. 40 sent. 2 RAG 2007. Furthermore, each of the jobs created through the investment must be maintained within the region concerned for a (minimum) period of five years from the date the post was first filled.714 In the case of SMEs within the meaning of the SMERecommendation,715 Member States may reduce these binding periods to a minimum of three years.716 By including appropriate additional provisions in the granting decisions or funding agreements, compliance with these conditions is usually ensured. In individual cases this means that the aided undertaking may be bound for up to 8 years after the project is completed and possibly for more than a decade counting from the beginning of the project.

II. The lock-in periods according to the RRIA717 and GBER I The provisions of the RRIA and GBER I are to a very large extent identical. Article 224 4(2) lit. a RRIA as well as Article 13(2) sentence 2 GBER I in relation to tangible assets and Article 12(2) lit. d GBER I in relation to intangible assets, require that the investment must be maintained in the recipient region for at least five years, after the whole investment has been completed. In the case of SMEs, this binding period lasts at least for three years.718 With regard to the jobs that were directly created by the aided investment project719 and where the aid consisted in funding wage costs, the following conditions shall apply: the job creation must occur within three years of the completion of the investment, however, this does not necessarily mean that the jobs have to be filled.720 Furthermore, the newly created jobs shall be maintained for a minimum period of five years in case of large enterprises and for three years in the case of SMEs. 721 As the 713 Para. 40, 56 4. Tiret RAG 2007; as regards immaterial economic goods see para. 240; regarding the Commission requirement of a final report see e.g. Com., State Aid N 872/2006, of 30. January 2008, para. 37, 126 – Qimonda; N 674/2008 of 2. December 2009, para. 80 – VW Slovakia. 714 Para. 40 sentence 2 and 3 RAG 2007. 715 SME-Recommendation (footnote 342). 716 Para. 40 sentence 4 RAG 2007. 717 RRIA (footnote 3). 718 Article 4 (2) lit. a 2nd half sentence RRIA (footnote 3); Article 13 (2) sentence 2 GBER I. 719 Article 4 (3) and 9 RRIA (footnote 3); Article 13 (5), 12 (3) GBER I. 720 Article 4 (9) lit. a and b RRIA (footnote 3); Article 12 (3) lit. a GBER I. 721 Article 4 (9) lit. b RRIA (footnote 3); Article 12 (3) lit. c GBER I.

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aid for wage costs is based on estimated wage costs within the scope of application of the RRIA and the GBER I,722 the jobs may remain vacant as long as they are created and in fact available, which is different to the provisions in para. 40 sentence 2 RAG 2007 as mentioned above.

III. Additional provisions 225

In order not to adversely affect technological change and thus the competitiveness of undertakings, a mere retaining of economical activity in the region is considered to comply with the lock-in period. Therefore, the replacement or change of plant or equipment is not prevented within the lock-in period.723 Thus, within the lock-in period it is permitted to change the product and to install new production installations, to transfer the site within the assisted region or to merge two production facilities within the assisted region. Aid for the new exchange plants is excluded though. Instead, it a comparison must be made between the respective values in order to avoid over-funding (double funding), i.e. in case the replacement equipment has a lower value than the equipment to be replaced or that has been replaced already. Where installations are discarded, disposed of or scrapped within the lock-in period and without being replaced by replacement investment, the related aid is not compatible with the common market and must be reimbursed. In the first place, the reimbursement should be based on the ratio of the agreed lock-in period to the actual period of compliance. This ratio indicates the minimum amount of reimbursement. This amount may increase if the funded asset had been disposed of after a period of use and achieved a disproportionately high price. If at mid term, a funded asset is disposed of at a price of 60% of the assisted acquisition price, the proportion of aid to be returned for this asset amounts to 60% instead of 50%. Where the asset is scrapped or disposed of at a price of 20% of the assisted acquisition price, the proportion of aid to be returned remains at 50%. There is no need for a reimbursement in case that a funded item is not used for some time or in the context of business development where the respective economical activity is retained and the items are held at disposal and can be used again at short notice, as the situation requires.

G. Aid intensities The aid intensity is defined in terms of intensity compared with reference costs, expressed as gross grant equivalents (GGE) in percentage of hundred.724 If on the 1 August 2010 aid amounting to 20 TEUR shall be granted for an eligible investment of 100 TEUR to be paid on the 2 August 2010, the aid intensity amounts to 20 of hundred or 20% GGE. If, on the other hand, on the 1 August 2010 aid amounting to 20 TEUR shall be granted and paid on the 2 August 2011, hence in 12 months time, for an eligible investment of 100 TEUR that is only due to be granted in 12 months, then the investment and the intended aid are to be discounted at an interest rate applicable at the time of grant, present value as on 1 August 2010.725 227 The discounting is calculated in accordance with the Commissions’ method for setting the reference rate.726 Accordingly, the discount rate refers to the base rate727 as 226

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Article 4 (3) RRIA (footnote 3); Article 13 (5) GBER I. Article 13 (2) sentence 3 GBER I; Article 4 (2) last sentence RRIA; para. 40 footnote 43 RAG 2007. 724 Para. 41 sentence 1 RAG 2007. 725 Para. 41 sentence 2 RAG 2007; Article 2 (1) lit. h RRIA (footnote 3); Article 4 (1), 2 GBER I. 726 1997 reference rate notice; 1999 reference rate notice; 2008 reference rate notice. 727 Para. 41 sentence 1 RAG 2007. 723

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published on the Commissions’ website728. Until the 1 July 2008, the published rate of interest was applicable. This rate of interest included already a top-up of 75 basis points, i.e. 0.75%.729 In this respect, no further general margins were necessary. 730 Since 1 July 2007 a new method for setting the reference rate applies. This reference rate is based on a different basis and does not include any margin. Therefore, for an investment whose present value calculation is based on a date after the method change date, the reference rate and a fixed margin of 100 basis points, equal to 1 per cent point, applies. 731 As at 1 August 2010, the published base rate for Germany is 1.24%, and consequently, the applicable discount rate is 2.24%. In the example above, the discounted value of the eligible costs amounts to EUR 97 760 and the discounted value (present value) of the aid amounts to EUR 19 552. The relevant date is usually the date of granting, i.e. the date of issue of the grant 228 letter or the date of the conclusion of the subsidy contract. The calculation of the discounted rate of the investment costs is based on this date. This does not apply if aid has been individually notified and submitted for approval. For aid which is individually notified to the Commission, the GGE is calculated at the moment of notification. 732 This distinction applies even if aid is payable in several instalments. 733 By way of derogation from para. 41 sentence 3 and 5 RAG 2007, the interest rate to be used for discounting purposes and to calculate the aid amount in a soft loan is the reference rate applicable at the time of grant.734 In cases where aid is awarded by means of tax exemptions or reductions on future taxes due, discounting of aid tranches takes place on the basis of the reference rates applicable at the various times the tax advantages become effective. 735 This provision does not cover the German Investment Allowances Acts. Assistance 229 based on these acts is not considered as a tax exemption or reduction, but as a tax credit, and thus a regular grant, such as in Article 91 a (1) No 1 German Grundgesetz even though equipped with a legal entitlement. In this respect the provisions of para. 41 sentence 6 RAG 2007 apply. Granting of investment allowances without prior notification fall within the scope of para. 41 sentence 6, 2nd alternative RAG 2007. It should be borne in mind that the Investment Allowances Acts do not provide for a grant letter to be issued, but for annual individual decisions.736 As for subsequent accumulation of the amounts to be disbursed in tranches and the calculation of the investment allowances to be paid in the following year, the provisions of para. 41 sentence 8 RAG 2007 apply mutatis mutandis. The accumulation has to be based on the reference rates in force at the time of the decision on the relevant investment allowance together with the top-up of 100 basis points, unless the previous notices on reference rates are applicable resulting in dropping the margin top-up.737

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http://ec.europa.eu/competition/state_aid/legislation/reference_rates.html. Para 5, 1. Tiret 1997 reference rate notice; Notice on the website of the COM.: ‘The rates hereafter are calculated in accordance with the previous reference/discount/recovery rate communications and include already a top-up of 75 basispoints. Normally no further top-ups are necessary.’ http://ec.europa.eu/compelilison/state_aid/legislation/reference_rates.html. 730 Com., State Aid C 34/2008 final decision of 6 July 2010, para. 57 – Deutsche Solar. 731 Section ‘Notice’, 1., 2. and 4. Tiret, 2008 reference rate notice (footnote 589). 732 Para. 41 sentence 4 RAG 2007. 733 Para. 41 sentence 6 RAG 2007; for calculation examples see decisions: Com., State Aid N 810/2006 of 18 July 2007 – AMD; State Aid N 872/2006 – Qimonda (footnote 695); State Aid N 863/2006 of 13 June 2007 – Avancis. 734 Para. 41 sentence 7 RAG 2007. 735 Para. 41 sentence 8 RAG 2007. 736 See above footnote 686, 690. 737 Section ‘Publication’ 4. Tiret, Notice on reference rate 2008 (footnote 589); see above para. 227, 228. 729

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Decisions on investment allowances for investment projects in the investment period of 3 March 2009 to 20 February 2010 are issued in 2010 and 2011 738 For investment costs in year 2009 the accumulations and discounts are based on the interest rates effective at the time of the decision on the allowance 2010, and for the costs in year 2010 according to the interest rates effective at the time of the decision on the allowance 2011. However, accumulation and discounting may not even be required at all for the investment allowance. This is acceptable for the purposes of State aid since by granting the allowances in the year after the investment was made the approval process avoids granting the investment expenditure before the beneficiary has actually made the investment. Not calculating the interest rates in this constellation means that the aid will always be reduced by the amount of the reference rate. Hence, already by way of calculation a failure of carrying out the accumulation cannot result in exceeding the maximum aid rates. 231 Where an aid has been notified to the Commission for adjustment of profit (ratified), the discounting of the investment rate has to refer to the date of the notification.739 This discounted amount of investment constitutes the base for the calculation of aid as well as for the investment allowance. In this respect, the investment allowance is considered a regular grant.740 The accumulation for all aid elements shall be calculated at the interest rate equal to the previous discounting. For the purpose of State aid, it is not relevant under which budget title the Member State chooses to grant regional aid. It is particularly irrelevant, whether the resources granted are items under the Federal or a Land budget and whether they are granted under one or several titles. Decisive is only that the total amount of aid does not exceed the rates of assistance as foreseen and approved in the relevant national regional aid map. 232 Where a project only becomes notifiable under para. 64 RAG 2007, Article 6(2) GBER I or Article 7 lit. e RRIA741 as a ‘single investment project’ within the meaning of para. 60 RAG 2007 because of another investment project, i.e. in the same establishment within a period of 36 months, the total amount of the project, i.e. comprising the initial project as well as the later investment, shall be calculated at the discount rate effective on the day of the start of the initial project. 742 If that day happened to be before the 1st July 2008, the reference rates published on the Commission’s website shall apply solely. The reference rate for an overall project that started in September 2006 is 4.36%. For dates from the 1st July 2007 onwards, these rates shall increase by 100 basis points. That means for an overall project starting in March 2009, the reference rate applicable is 3.47% plus 100 basis points, amounting in 4.47%. Regarding the treatment of different aid intensity ceilings that occur within a single investment project as referred to in para. 60 RAG 2007 due to a modification of the assisted area status or a modification of the national regional aid map, please refer to para. 319, 332 and 377. 233 The aid intensity expressed in GGE is the grant equivalent before tax. Its counterpart, the practice of calculating the aid intensity after tax, expressed in net grant equivalents (NGE) has been discontinued by the Commission following the judgment of the Court of First Instance.743 This change is of little importance for Germany, due to the fact that 230

§ 10 InvZulG 2010 (footnote 497, 686, 690). Para. 41 sentence 4 RAG 2007. See above para. 229. 741 RRIA (footnote 3). 742 Com., State Aid C 34/2008, para. 57 – Deutsche Solar (footnote 730). 743 GC Case T-298/97- Alzetta [2000] ECR II-2319, para. 89. Para. 41 footnote 44 RAG 2007; see above para. 83. 738 739 740

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the regional aid map so far had almost always been notified and approved by using the GGE.744

H. Eligible aid I. Summary on eligible aid 1. Regional investment and employment aid Regional aid generally occurs in form of regional investment or regional employ- 234 ment aid. They promote the setting-up of a new establishment; 745 the acquisition of the capital assets directly linked to an establishment, where the establishment has closed or would have closed had it not been purchased;746 the extension of an existing establishment, diversification of the output of an establishment into new additional products or a fundamental change in the overall production process of an existing establishment in an assisted area;747 or a net increase in the number of employees directly employed in the establishment concerned.748 At the same time it is necessary to reduce the potential negative effects of any relocation. To this end, the allocation of grants is made subject to the condition on the maintenance of the investment and the new jobs in a less-favoured area for a minimum period (lock-in period).749

2. Regional operating aid In exceptional cases, such aid may not be enough to trigger a process of regional 235 development, if the structural handicaps of the region concerned are too great. In such cases regional investment aid may be granted as regional operating aid.750 However, this form of regional aid is essentially not covered by the exemption mechanism of the GBER I. It only applies in the context where the operating aid relates to aid aimed at promoting newly created small enterprises.751

3. Regional aid for newly created small enterprises Finally, the RAG 2007 provide for the first time for a specific support for the creation 236 of new small businesses by means of operating aids in disadvantaged areas, with differentiated aid ceilings according to the regions concerned. 752 Article 14 GBER I provides for an exemption from the notification requirement for these operating aid.

744 Com., State Aid C 47/1999 – Aid Map 2000–2003 (footnote 86); N 641/2002 – Aid Map 2003–2006 (footnote 86); only the regions Hameln – Pyrmont, City of Hof, City of Passau and the labour market region of Berlin were excluded, N 641/2002, para. 16. 745 RAG 2007, para. 34; Article 12 (1) lit. a GBER I. 746 Article 12 (1) lit. b GBER I; Para. 35 RAG 2007; see also Section 4.4. RAG 1998, amended by Para 96 Rescue and restructuring guidelines 1999 (footnote 521). 747 Article 12 (1) lit. a GBER I; Para. 34 RAG 2007. 748 Article 12 (3) lit. c GBER I; Para. 40 sentence 2, 58 RAG 2007. 749 Article 13 (2) sentence 2 GBER I; Para. 40 RAG 2007; see above Para. 223–225. 750 Number 1 and 4.15 RAG 1998, amended by the modification of the guidelines on state aid for regional purposes, OJ 2007 C 258, p.5; para. 6 RAG 2007; for more details see para. 463 et seq. 751 Article 14 (5) GBER I. 752 Para. 7, 84–91 RAG 2007; exempt from notification by Article 14 GBER I.

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II. Regional investment and employment aid753 1. General principles 237

Regional investment aid is designed to assist the development of a region by granting a generalised offset of disadvantages which are related to an investment specifically targeting the assisted region as compared to other, economically prosperous regions, to the benefit of those enterprises creating employment in this region. 754 Thus, all regional guidelines as well as the RRIA755 use the term ‘initial investment’ for eligible productive regional investment projects.756 It is only the GBER I that avoids using the term initial investment in its definitions in Article 2, 12 GBER I as well as in the further provisions of Article 13 GBER I, and instead only refers to investments. Thereby, the exemption regulation reflects the reality and abandons the existing fiction of an assumed ‘initial’ investment, such as an investment into extension schemes or the acquisition of an establishment threatened with closure.

2. Eligible investments 238

The eligible investment costs serve as an assessment basis for regional investment aid. Eligible are investments in tangible and intangible assets757 as well as wage costs for employment directly created758 relating to the setting-up of a new establishment, the extension of an existing establishment, diversification of the output of an establishment into new additional products or a fundamental change in the overall production process of an existing establishment.759 This enumeration of eligible individual investment projects is very similar to the enumeration of the previous guidelines. 760

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a) Investment in tangible assets (regional investment aid). ‘Material assets’ means assets relating to land, buildings and plant, machinery and equipment.761 With regard to regional aid in the transport sector expenditure on the purchase of transport means (movable assets) are excluded from aid, thus, they are not exempt either. 762 This regime aims to reduce aid in the transport sector only. This means that a truck belonging to a manufacturing company and used for deliveries, both, to customers and for its own purposes as well as for the company transport, remains eligible for aid. As long as such an undertaking does not carry out the transport for third parties, it won’t be considered as active in the transport sector. However, if the focus of a company or of a permanent establishment shifts from manufacturing to logistics, i.e. if it is no longer a question of transporting its own products to the customer but instead transporting the products of other undertakings, the purchase of transport means will not be eligible for aid. Aid 753 Article 2 No 17 GBER I defines the term of investment aid in relation to regional aid as ‘regional investment and employment aid under Article 13’. 754 See above para. 1, 3 et seq., 21, 23, 30, 47, 76, 123, 146, 178, 190; Recital 40 GBER I. 755 RRIA (footnote 3). 756 Section I.6. of the 1998 Commission Communication on the method for the application of Article 92 (3) (a) and (c) to regional aid (OJ 1988 C 212, p.2); No. 4.1, 4.3, 4.4, 4.5, 4.10, 4.11, 5.1, 5.7, 23, 24. 41 RAG 1998; Para. 33, 34, 35, 36, 50, 57, 60, 96 RAG 2007; Article 2 (1) lit. c, g, 4 (1), 2, 5, 7 and Recital 12, 15 RRIA (footnote 3). 757 Article 12 (1) lit. a, 2, 13 (5), 6 GBER I, para. 34 sentence 2 and 3, 36, 56 RAG 2007. 758 Article 12 (3), 13 (5) GBER I, para. 36, 57, 59 RAG 2007. 759 Article 12 (1) lit. a GBER I, para. 34 RAG 2007. 760 Number 4.4 (1) RAG 1998 (footnote 2). 761 Article 2 Nr. 10, 13 (4) second half sentence GBER I; Para. 34 sentence 2 RAG 2007. 762 See Article 2 No 10 sentence. 2 GBER I, para. 50 footnote 48 RAG 2007.

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aimed at increasing the transport capacity for an in-house haulage company, even if it was hived off into a company of its own, should be eligible to the extend that it carries its own products only. b) Investments in intangible assets (regional investment aid). Intangible assets 240 comprise patents and patent rights, licences, know-how or unpatented technical knowledge.763 The concept of ‘licences’, while lacking a precise definition, includes in particular designs.764 For SMEs, the full costs of investments in intangible assets may be taken into consideration. For large enterprises, such costs are eligible only up to a limit of 50% of the total eligible investment costs for the project. 765 This means for large enterprises that only half of the costs invested into a pure technology transfer are eligible for aid. In case that the maximum aid ceiling applicable to regional aid is 30%, the support rate amounts only to 15%.766 Moreover, in order to be considered eligible costs, intangible assets shall fulfil at least 241 all the following conditions767 – they must be used exclusively in the establishment receiving the aid; – they must be regarded as amortizable assets; – they must be purchased from third parties under market conditions; – they must be included in the assets of the firm and – they must remain in the establishment receiving the aid for at least five years (three years for SMEs).). This aims at ensuring that the aided intangible assets remain associated with the recipient region eligible for the regional aid and that they are not the subject of a transfer benefiting other regions, especially other regions not eligible for regional aid. 768 While the objective of ensuring that the aid remains associated with the recipient 242 region eligible for the regional aid is an explicit goal of the regional guidelines 769 as far as it refers to ‘volatile assets’ such as ‘know how’, the condition of the purchase from third parties under market conditions aims at avoiding to acquire intangible goods within the own group at inflated prices and to sell them and thereby creating an ‘eligibility perpetuum mobile’. If a patent was developed jointly by several shareholders of a group and subsequently sold to a common subsidiary, the shareholder do not qualify as third parties within the meaning of these provisions. Nevertheless, this group specific risk is not clearly recognizable anymore, where the existing know-how held by only one shareholder shall be sold to an undertaking held in equal parts by another shareholder. Consequently, the RAG 2007 do not exclude the eligibility of the purchase costs of the intangible asset, at least at a rate of 50%. From the point of view of the other shareholder, the first shareholder is regarded as a third party within the meaning of this provision. In addition, the other shareholder ultimately pays half of the expenditures by means of his share in the common group and therefore has a considerable self-interest in not paying more for the intangible asset than necessary. This is even the more true in case that the share in the joint venture, i.e. the jointly held subsidiary, held by the first shareholder is of less value than the one of the other shareholder. 763

Article 2 No 11 GBER I, para 34 sentence 4 RAG 2007. Article 31 (1) Council Regulation (EC) No 6/2002 of 12 December 2001 on the Community Design, OJ 2002 L 3 p.1 (Community Designs Regulation,); § 15 (2) sentence 1 German Patentgesetz; § 22 (2) sentence 1 German Gebrauchsmustergesetz; § 31 (1) German Geschmacksmustergesetz. 765 Article 13 Abs. 7 S. 7 und 8 GBER I; Para. 55 RAG 2007. 766 (cost/2) × 30% maximum aid ceiling corresponds to a support rate of 15%. 767 Article 12 (2) GBER I; Para. 56 sentence 2 RAG 2007. 768 Para. 56 sentence 1 RAG 2007. 769 Para. 56 sentence 1 RAG 2007. 764

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Article 12(2) lit. b GBER I calls for a more comprehensive assessment. This provision requires that the intangible assets must be purchased from third parties under market conditions without the acquirer being in a position to exercise control, within the meaning of Article 3 of the EC Merger Regulation,770 on the seller, vice versa. This means that the assessment of the criteria ‘by third parties’ has to be based on Article 3 of the EC Merger Regulation.771 According to Article 3(4) EC Merger Regulation, the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity shall constitute a concentration within the meaning of Article 3(1) lit. b EC Merger Regulation.

c) Investments in wage costs (Regional employment aid). aa) General. National regional investment aid is designed to assist the sustainable development of the most disadvantaged regions, i.e. the eligible areas, by supporting investment and job creation.772 Thus, regional aid includes regional employment aid773 by means of subsidising wage costs over a period of 24 months774 for employment directly created by the investment project (wage subsidies).775 Where an undertaking wishes to claim both subsidies, the objects of aid, supporting investment in tangible and intangible assets as well as wage subsidies, usually relate to the same investment project. Thus, for a cumulative application restrictions apply.776 245 A distinction has to be made between regional employment aid and the general employment aid, i.e. support in form of wage subsidies for the recruitment of disadvantaged or disabled workers according to section 9 GBER I.777 These provisions are also applicable outside of the assisted areas, in contrast to the regional wage subsidies.778 In addition, contrary to the regional wage subsidies, general employment aid779 does not depend on investment. 244

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bb) Regional employment aid within the meaning of the RAG 2007. According to para. 36, 40 sentence 2, 57, 58 and 59 RAG 2007 regional aid is calculated in reference to wage costs for jobs directly created by the investment project.

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(1) Creation of jobs. Job creation within the meaning of the RAG 2007 means a net increase in the number of employees directly employed in a particular establishment, i.e. the concerned establishment, compared with the average over the previous 12 months.780 There has to be a net increase in the number of employments. The assessment of the net increase is based on the comparison of the difference between the number of existing and future employees in the relevant establishment. Considering the objectives of regional employment aid, the mere physical existence of a job781, i.e. where a post is available but has not been filled, cannot be decisive; only its actual filling

770 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ 2004 L 24 p. 1 (‘EC Merger Regulation’). 771 Article 12 (2) lit. c GBER I. 772 Para. 3 RAG 2007; Section 1 (3) and 4 RAG 1998; para. 3 RRIA (footnote 3); para. 40 GBER I; see also above para. 237. 773 Regarding this term: Article 2 No 17, 13 (1) GBER I; para. 72 footnote 67 RAG 2007. 774 Article 13 (5) GBER I; para. 59 RAG 2007. 775 Article 12 (3) GBER I, para. 36, 57 RAG 2007. 776 Regarding the cumulation of aid related to the same investment project see para. 258. 777 These provisions is the succession provision of the VO 2204/2002 (footnote 154). 778 Article 40, 41, 42 GBER I. 779 Explicitly in section 4.11 and footnote 32 RAG 1998. 780 Para. 58 RAG 2007. 781 In contrast to Article 12 (3) lit. a and c GBER I.

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by staff782 shall be considered authoritative. This comparison is carried out on the basis of number of annual labour units (ALU).783 The concept of annual labour units (ALU) has been comprehensively defined784 by 248 Article 5 of the Annex to the Commissions’ SME-Recommendation785. The very essence of this definition is repeated by para. 58 footnote 52 RAG 2007. According to this, the ALU corresponds to the number of employees who worked full time within the enterprise in question or on its behalf during the entire reference year under consideration. The work of persons who have not worked the full year or those who have worked part-time, and the work of seasonal workers, are counted as fractions of ALU. The staff consists of: employees; persons working for the enterprise being subordinated to it and deemed to be employees under national law; owner-managers; partners, engaging in a regular activity in the enterprise and benefiting from financial advantages of the enterprise. Consequently, managing directors or members of the management board are counted as employees, but not the members of supervisory or advisory groups, i.e. members of the board of directors. Apprentices or students engaged in vocational training with an apprenticeship or vocational training contract are not included as staff. The duration of maternity or parental leaves is not counted 786 and will therefore not be included in the ALU. For example, the ALU for a parent on parental leave counts as 0 ALU within the 12 month reporting period. A job is deemed to be directly created by an investment project if it concerns the 249 activity to which the investment relates.787 It is an investment-related wage cost promotion, so that the wage subsidies are linked to the investment project.788 Thus, jobs created following an increase in the utilisation rate of the capacity created by the investment are deemed to be directly created by an investment project as well.789 These are the jobs created in the investing enterprise as a further result of the investment, such as by operating additional working shifts, but also in distribution, the human resources department or in the corporate owned cafeteria. This does not include the jobs indirectly created by the investment, i.e. jobs created with other enterprises.790 While the 12 months prior to the start of the investment project are used as a 250 reference period,791 there is also a reference to a certain time in the future, e.g. a minimum of three and a maximum of eight years after the projects end, that is after completion of the investment.792 Thereby the RAG 2007 specify the reference period left open by number 4.12 RAG 1998.793 Any jobs lost, including jobs that were not taken up by anyone,794 during that 12-month period must be deducted from the

782 Arg. e. contr. para. 58 sentence 1 RAG 2007, regarding the newly created employments: para. 40 sentence 2 RAG 2007. 783 Para. 58 footnote 52 RAG 2007. 784 This definition can be found in Annex I GBER I with an identical wording, see above footnote 342. 785 Article 5 Annex SME-Recommendation (footnote 342). 786 Annex Article 5 SME-Recommendation (footnote 342). 787 Para. 36 footnote 38 RAG 2007. 788 Explicitly in section 4.11 and footnote 32 RAG 1998. 789 Para. 36 footnote 38 RAG 2007. 790 Para. 58 sentence 1 RAG 2007; however, they were still relevant in para. 3.10 No 3 MSR-1998 (footnote 53). 791 Para. 58 sentence 1 RAG 2007; Article 12 (3) lit. b GBER I. 792 Para. 40 sentence 2–4 RAG 2007; Article 12 (3) lit. a, c GBER I. 793 Number 4.12 sentence 1 RAG 1998: ‘Job creation means a net increase in the number of jobs in a particular establishment compared with the average over a period of time.’ 794 This follows from para. 58 sentence 1, 40 sentence 2 RAG 2007.

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apparent number of jobs, that is existing jobs or jobs created or taken up 795 during the same period.796 Such a definition holds true as much for an existing establishment as for a new establishment.797 If a newly set up company or a newly established establishment whose investment costs are low in relation to the personnel costs, as is the case of a call centre for example, claims wage subsidies, then all jobs directly created by this investment or all jobs that have to be filled by staff within a period of three years after completion of the investment are eligible for aid. On the average, the actual employment in this case over the previous 12 months was 0 ALU. 798 251 The same applies in case of the acquisition of an establishment threatened with closure or which has already closed within the meaning of para. 58 RAG 2007. The definition of job creation set out in this provision, requiring a net increase in annual work units compared with the average over the previous 12 months, as well as limiting of aid to this very increase in numbers cannot be made subject to a reinterpretation, not even for this purpose. Wage subsidies are only attractive for the company taking over if the establishment was closed for a whole year. The same applies within the scope of application of the RRIA.799 It is only Article 12, 13 GBER I which allow for a different meaning.800 (2) Wage costs. The wage cost means the total amount actually payable by the beneficiary of the aid in respect of the employment concerned. This comprises the gross wage (that is wage before tax),801 and the compulsory social security contributions.802 The compulsory social security contributions are the statutory or in collective agreements determined costs for the social security, such as the social security contributions.803 253 The aid is based on a forecast. The eligible expenditures for this regional employment assistance are calculated on the base of estimated 804 wage costs of the jobs directly created by this investment, i.e. the arising805 wage cost of the person hired, calculated over a period of two years.806 This period means the time of employment.807 254 In contrast to what the wording of para. 36 and 57 RAG 2007 suggests, the estimated wage costs are not the costs that will ultimately be subsidized. Only the actual wage costs will be subsidized. This follows already from the provision stating that wage cost means the total amount actually payable by the beneficiary of the aid in respect of the employment concerned.808 However, where the aid is calculated on the basis of wage costs, the posts must be filled within three years of the completion of the works, i.e. within three years of the completion of the investment project.809 This forecast merely aims to grant the aid, i.e. the authorisation or the conclusion of a funding agreement. 252

795 RAG 2007, para. 58 sentence 1 ‘employees directly employed’; regarding the different approach to direct and indirect jobs: para. 3.7 and 3.10 No 3 MSF-1998 (footnote 53). 796 Para. 58 sentence 2 RAG 2007. 797 Para. 58 footnote 53 RAG 2007. 798 Para. 58 footnote 53 RAG 2007. 799 Article 2 (1) lit. k RRIA (footnote 3). 800 See Para. 265. 801 Para. 57 footnote 51 RAG 2007; see as well Article 2 No 15 lit. a GBER I. 802 Para. 57 footnote 51 RAG 2007; see as well Article 2 No 15 lit. b GBER I. 803 See also Number 4.13 footnote 35 RAG 1998. 804 Article 13 (5) GBER I; change in the terminology used: para. 36 RAG 2007: ‘(estimated) wage costs’; Para. 57 RAG 2007: ‘expected wage costs’. 805 Para. 36, 57 RAG 2007; Article 13 (5) GBER I. 806 Para. 59 sentence 1 RAG 2007. 807 Para. 40 sentences 2–4, 59 sentence 1 RAG 2007. 808 Para. 57 footnote 51 RAG 2007. 809 Para. 40 sentence 2 RAG 2007.

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The payment of aid can be made subject to the submission of the employment contracts that were effectively concluded. At the latest at the time after the completion of the investment project and as part of the check on the use made of the funds, the exact amount of the grant will be determined by means of the wage costs of the person hired, calculated over a period of two years.810 (3) Staffing. The intended aided posts must be filled within three years of the 255 completion of the works.811 In order to endure a real and sustained contribution to regional development aid must be made conditional, through the conditions attached to the aid, or its method of payment, on the maintenance of the jobs created through the investment in question in the region concerned for a minimum period of (at least) five years from the date the post was first filled (lock-in period). 812 In the case of small and medium sized enterprises within the meaning of the Commissions’ SME-recommendation,813 Member States may reduce these lock-in periods to a minimum of three years. 814 This is similar to the lock-in periods in the context of an investment project aimed at promoting investments in tangible and intangible assets.815 These conditions are guaranteed by respective ancillary provisions in the granting decisions or by respective agreements in grant agreements. In individual cases this may result in a binding the aided enterprise for up to 8(3+5) years after completion of the project and possibly even for more than a decade from the time when the project started. In case of noncompliance with the lock-in periods, i.e. where the post were not filled over a period of three years in case of SMEs and five years in case of large enterprises, the aid must be recovered, either entirely or proportionate to the relevant years. It is permitted to fill the posts with temporary workers. This follows firstly from 256 Article 5 sentence 1 of the Annex to the SME-Recommendation. 816 Temporary workers are employees working in the concerned enterprise. Furthermore, a regional employment promotion of temporary workers achieves the pursued regional aid targets, that is the support of a sustained development of particularly disadvantaged regions. Thus, eligible costs are the gross wage costs paid by the user undertaking. Temporary workers are eligible for aid only once though: either by the user undertaking or by the firm, that provided the employees, the user firm. Where the user undertaking as already received aid, the user firm will not be eligible for aid for filling the job with temporary workers. The same applies to the case where employees of a group were first funded, followed by their outsourcing into a group owned employment agency and subsequently re-‘hired’ by the group. (4) Maximum aid intensity. The allowed maximum aid intensity for regional 257 employment aid (wage subsidies)817 is equal to the intensity allowed for general investment aid, i.e. the maximum aid rates applicable in the area in question as indicated by the national aid maps approved by the Commission818, which are also applicable to regional investment aid.819 This means in particular that the 20% bonuses for small enterprises and the 10% bonuses for medium-sized enterprises are also 810

Para. 59 sentence 1 RAG 2007. Para. 40 sentence 2 RAG 2007. 812 Para. 40 sentence 3 and 4 RAG 2007. 813 SME-Recommendation (footnote 342). 814 Para. 40 sentence 4 RAG 2007. 815 Para. 40 sentence 1 RAG 2007. 816 SME-Recommendation (footnote 342). 817 Regarding this term see above para. 244. 818 Regarding the regional aid map: see above para. 102 et seq., 106, 107. 819 Para. 59 sentence 2 RAG 2007. 811

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applicable in the context of regional employment aid.820 However, the individual reductions of aid, such as provided for in para. 67 RAG 2007 for large investment projects within the meaning of para. 60 RAG 2007, have to be taken into account as well as the dropping of the SME-bonuses as far as a large investment project is concerned, thus where the eligible volume exceeds the amount of EUR 50 million.821 (5) The accumulation of regional investment aid for tangible and intangible assets with regional investment aid in form of regional employment aid. The intensity ceiling laid down in the regional aid maps must be respected where regional investment aid for a project is combined with regional employment aid, and hence cumulated.822 The condition of compliance with these maximum aid intensities ‘is deemed to be met if the sum of the aid for the initial investment, expressed as a percentage of the investment, and of the job creation aid, expressed as a percentage of wage costs, does not exceed the most favourable amount resulting from application of either the ceiling set for the region in accordance with the criteria indicated at section 4.1 [RAG 2007] 823 or the ceiling set for the region in accordance with the criteria indicated at section 4.3. [RAG 2007]824.825 This rather unclear provision can be found with a clearer wording but with identical content826 in the multi-sectoral framework 2002827 as well as in Article 13(5) GBER I. This is based on the fact that both investments promote the same project: investment in material and immaterial assets often aims at creating and filling jobs. Thus, the filling of jobs cannot be assisted further by an additional regional employment aid. Essentially, regional employment aid constitutes only a fall-back possibility in case that wage costs exceed the other eligible investment costs. Therefore, it is first necessary to calculate the total amount of aid for the investment in tangible and intangible assets and separately, the total amount for the regional employment aid based on the expected wage costs. The higher value of the two is the ceiling for the absolute grant. 828 Accordingly, the eligible expenditure amount will be determined in such a way as not to exceed the higher investment amount resulting from the method of the job creation (and filling) or the initial investment method (tangible and intangible assets), subject to the intensity ceiling laid down for the region.829 259 This amount can then be allocated to the two different types of aids, the regional investment and the regional employment aid of the project in question. 830 Where an undertaking intends to invest EUR 40 million in tangible and intangible assets and by thus, to create additional employment for 100 women workers, with each of them receiving a gross monthly salary of EUR 9,000 including social security contributions, the calculation, based on a regional aid intensity of 30%, is as follows: total amount of aid for the investment in fixed assets: EUR 40 million × 30% equals EUR 12 million; total amount of aid for the 100 women workers: 100(women workers) × 9 000(EUR monthly salary) × 24(months) × 30% equals EUR 6.48 million. This means that in this 258

820

Para. 59 sentence 2 in conjunction with para. 49 RAG 2007. Para. 67 footnote 61 RAG 2007. 822 Para. 72 RAG 2007. 823 Para. 33 to 41 RAG 2007. 824 Para. 60 to 70 RAG 2007. 825 Para. 72 footnote 67 RAG 2007; this provisions is similar to para. 61 RAG 2007. 826 Hancher/Ottervanger/Slot/Junginger-Dittel/Dittel, EC State Aids, Chapter 14, para. 14–007, footnote 25. 827 Para. 21 footnote 8 MSF-2002 (footnote 73). 828 Para. 21 footnote 8 MSF-2002 (footnote 73). 829 Para. 61 RAG 2007; see also para. 21 footnote 8 sentence 4 MSR-2002 (footnote 73); Article 13 (5) GBER I. 830 ‘a mixture of both’, Article 13 (5) GBER I. 821

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example, a mixture of regional investment aid and regional employment aid may be granted up to an amount of EUR 12 million. An aid amount exceeding EUR 12 million or even EUR 18.48 million would be unlawful. Thus, double funding is avoided. Otherwise, a project would receive full funding for the acquisition of capital goods as well as the expenditure for the employees working with these goods. cc) Regional employment promotion according to the rules of the block exemption regulations, specifically according to Article 12, 13 GBER I. The aid is based on a forecast, similar to the RAG 2007.831 The eligible expenditures of this regional employment promotion are calculated in reference to the estimated 832 wage costs for jobs directly created by the investment project, arising for the person hired, calculated over a period of two years.833 Wage cost is defined in Article 2 No. 15 GBER I.834 Accordingly, wage cost means the total amount actually payable by the beneficiary of the aid in respect of the employment concerned.835 Thus, only costs that actually incurred shall be aided. As regards forecast and the practice, see above para. 253, 254. However, further to the definition in Para. 57 footnote 51 RAG 2007, they include costs for child care and parent care costs. 836 Similar to the provisions of the RAG 2007,837 Article 12 and 13 GBER I require for exempted regional employment aid that: – employment shall be created within three years of completion of the investment; 838 – the investment project shall lead to a net increase in the number of employees in the establishment concerned, compared with the average over the previous 12 months839 and – the employment created shall be maintained during a minimum period of five years in the case of large enterprise and a minimum period of three years in case of SMEs.840 The number of employees is defined in Article 2 No. 13 GBER I as follows: ‘the number of annual labour units (ALU), namely the number of persons employed full time in one year, part-time and seasonal work being ALU fractions.’ Thereby, it matches essentially the definition provided for in para. 58 sentence 1 footnote 52 RAG 2007. However, Article 5 of Annex I GBER I contains a much more comprehensive definition. It reproduces the terms of Article 5 Annex of the SME-Recommendation of the Commission.841 Regarding the details of the AWU please refer to the comments above under para. 248. The rules set out in Article 2 No 13 to 15, 12(3), 13(5), 8 GBER I allow for a larger scope/discretion relating to aid as compared to the RAG 2007. Unlike that provided for by para 40 sentence 2 RAG 2007, Article 12(3) lit. a GBER I seems not to require that the jobs created need to be filled. It is sufficient that the employment shall be created within three years of completion of the investment, thus established and made available for the time of the lock-in period842.843 Notwithstanding this, the calculation can only be 831

See above para. 253, 254. Article 13 (5) GBER I; regarding the terminology see above para. 252-254. 833 Article 13 (5) GBER I; para. 36, 57, 59 RAG 2007. 834 Article 2 No 15 lit. a and b GBER I; see also para. 57 footnote 51 RAG 2007: see above para. 252. 835 Article 2 No 15 sentence 1 GBER I. 836 Article 2 No 15 lit. c GBER I. 837 Para. 40 sentence 2 to 4, 58 RAG 2007. 838 Article 12 (3) lit. a GBER I. 839 Article 12 (3) lit. b GBER I. 840 Article 12 (3) lit. c GBER I. 841 SME-Recommendation (footnote 342). 842 Article 13 (5) GBER I; regarding the term see above para. 223 et seq. 843 Article 12 (3) lit. a GBER I, para. 40 sentence 2 RAG 2007. 832

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based on those wage cost actually payable by the beneficiary of the aid. 844 Therefore, in order to receive the full amount of funding, it will not be sufficient to fill a job only temporarily. The full funding requires the job to be filled for at least 24 months845 and that the job is provided and offered until the expiry of the lock-in period. 265 Art. 12(3) lit. b GBER I requires only a net increase in the number of employees compared with the average over the previous 12 months. Unlike that provided for in para. 58 RAG 2007, Article 12(3) lit. b GBER I does not require to limit the basis for the payment of aid, that is the number of eligible jobs, to this net increase. The important fact is, that there is a net increase at all. This condition is met where the number of jobs after the investment passed the average number of jobs in the previous 12 months by at least one job. The number of eligible jobs can go beyond this net increase. However, the net increase itself as well as the job concerned must be maintained for the time of the relevant lock-in period.846 This is in accordance with the rules relating to the general employment promotion in Article 40, 41 GBER I.847 This liberty as well as the definition of job creation that is detached from the increase in annual work units848 and instead based on the creation of employment concerning the activity to which the investment relates, provide for the necessary flexibility within the context of the acquisition of an establishment threatened with closure or which was already closed. If in these cases the calculation was based on a precise difference of employees, it would always be more advantageous for the purchaser to wait for the closure of the establishment and the lay off of all employees over a period of 12 months before he takes over the establishment. This, however, is clearly at odds with the objectives of aid and would present an unnecessary challenge for regional development. 266 The useful instrument of regional wage subsidies can only be applied to a significant degree, if it provides a real alternative to the existing investment promotion for material and immaterial assets. An appropriate area would be the acquisition of an establishment threatened with closure or which was already closed. While the costs for the acquisition are usually relatively low, there are significant risks associated with the acquisition. Thus, regional aid to employment costs represents an appropriate incentive to promote the continuation of such an establishment. This requires however, that all jobs that were taken over with the acquisition of the establishment will be considered as newly created jobs. This is also justified by the fact that if the establishment was actually to be closed and then reactivated after a period of 12 months, all jobs would be regarded as newly created and therefore eligible for aid. It is only consequent to imply this already at a stage that the company still has its business relations.

3. Eligible investment purposes 267

The objective of regional aid is to strengthen economically weaker regions, i.e. the assisted areas, by means of promoting job creation with a supra-regional distribution if possible. These jobs are usually created in establishments. 849 Thus, all regional aid regulations are aimed at establishments yet to be set up or at existing establishments. 850 844

Article 2 No 15 sentence 1 GBER I; see above para. 261. Article 13 (5); 2 No 15 GBER I. 846 Article 13 (5), 12 (3) lit. c, 2 No 15 GBER I. 847 Article 40 (4), 41 (4) GBER I. 848 In a similar way: para. 58 RAG 2007, Article 2 (1) lit. k RRIA (footnote. 3). 849 See above para. 1, 3 et seq., 21, 23, 47, 76, 123, 146, 178, 190, 237, 244; regarding the supraregional distribution see above para. 178 as well as Tetsch, Bund-La¨nder-Gemeinschaftsaufgabe (footnote 608), Chapter IV, Number 2.1. 850 Para. 34 RAG 2007, Article 12 (1) GBER I; Article 2 (1) lit. c RRIA (footnote 3): in view of Article 43, sentence 1; 44 (2) GBER I, the following section always refers to the expired provisions of the RRIA (footnote 3) as well. 845

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Establishments are the focus of all development interests. They have to be set up in a certain assisted area or an area ineligible for aid or they are located there and accommodate the investment assets. Thus, they determine the aid ceilings, they are taken into account for the costs as well as the calculation of the number of jobs and they represent the starting point for the assessment of whether or not an investment is to be considered as a large investment project within the meaning of para. 60 RAG 2007. a) Establishment. Establishment means any local premises or the entirety of assets 268 and staff that are at the non-temporary disposal of an undertaking designated on a continuing basis to manufacture products or to provide services. In this regard, the conclusions and principles developed within the rules of national commercial company851 or fiscal law852 apply. Thus, a craftsmen’s workshop qualifies as an establishment, but not the location where the service is provided to the customer, e.g. a repair or maintenance, even if regularly recurring.853 b) Setting-up. Setting-up of a new establishment is to be understood in a wide sense.854 269 It includes the set up of a new establishment in form of a ‘greenfield investment’855 as well as putting an existing establishment into operation that had been closed for a while856. Setting up doesn’t require a building measure. Regarding the set up of a new establishment it is sufficient to transport production facilities to an existing building with the purpose of their use and putting them into service. This applies regardless of the fact that production might be underway elsewhere in this building (trade units or draftmen’s courtyards). All it requires is an identifiable or demarcated area allocated to the individual companies. c) Extension. The term of extension of an existing establishment857 is to be under- 270 stood in a wide sense as well. This is particularly true bearing in mind the modification of the definition by the introduction of the concept of ‘diversification of the output of an establishment into new, additional products’ and the new version of ‘a fundamental change in the overall production process of an existing establishment’ in para. 34 RAG 2007 and its adoption by Article 2(1) lit. c (i) RRIA858 and Article 12(1) lit. a GBER I.859 With a view to cohesion, within the European Union as well as within the respective Member State, the objective of regional aid is to induce the respective undertakings to invest in an assisted area, to create jobs and preferably to remain at this location. For this purpose, it is necessary to maintain their economic competitiveness by compensating for the site specific disadvantages. Thus, an investment by extension of an existing establishment includes the extension of the companies premises, the extension or setting up of production or storage facilities, as well as the purchase of new machines or new intangible assets. It is irrelevant whether these assets serve for the extension in the product range or the production of successor models of existing products. 860

See for instance: Baumbach/Hopt, HGB, Kommentar, 33rd Edition 2008, § 1 Para. 23, § 13 Para. 5. § 12 Abgabenordnung; see Klein/Gersch, AO, Kommentar, 9th Edition 2006, § 12 Para. 3 et seq. 853 BFHE 222 (2009), 14, 18 et seq. 854 Para. 34 RAG 2007; Article 2 (1) lit. c i RRIA (footnote 3); Article 12 (1) lit. a GBER I. 855 Regarding this term: Section 3.2 Motor vehicle framework 1997 (footnote 18). 856 Article 12 (1) lit. b sentence 1 GBER I; para. 35 RAG 2007. 857 Para. 34 RAG 2007; Article 2 (1) lit. c i RRIA (footnote 3); Article 12 (1) lit. a GBER I. 858 RRIA (footnote 3). 859 In favour of a restrictive interpretation: Hancher/Ottervanger/Slot/Junginger-Dittel/Dittel (footnote 826), Chapter 14, para. 14–004. 860 In favour of an open interpretation: Mederer/Pesaresi/von Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.884. 851 852

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d) Diversification of production. Investment within the meaning of extension of an existing establishment shall comprise regularly the diversification of the output into new, additional products, too. Any new, additional product necessarily involves the extension of an existing establishment provided that its production requires an (eligible) investment. Thus in practice, the item ‘diversification’, individually mentioned under para. 34 RAG 2007 and Article 12(1) lit. a GBER I, does not have an independent significance.

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e) Fundamental change in the overall production process. By contrast, the fundamental change in the overall production process of an existing establishment is not entirely covered by the term ‘extension’ or ‘diversification’. Therefore, it has become necessary to mention this option explicitly among the examples of an initial investment. Apart from a change in the production process, fundamental change means primarily rationalization and modernization.861 This can involve a reduction in activity and in particular job loss. This loss can be compensated by an expected increase of the gross domestic product as well as the preservation, i.e. the safeguarding of the remaining existing jobs. This shows that the term ‘initial investment’ as in para. 34 RAG 2007 and in Article 2(1) lit. c RRIA,862 and even more so the more general term of ‘investment’ in Article 12(1) lit. a GBER I, is to be interpreted in a broad way.

f) Acquisition of an establishment. Investment projects eligible for aid include the acquisition of an establishment threatened with closure or which was already closed and of the capital assets directly linked to this establishment. 863 For the acquisition of capital assets directly linked to this establishment to be eligible for aid, it requires that the establishment was already closed or would have closed had it not been purchased by an independent investor, thus that it was threatened by closure.864 It is therefore irrelevant, whether the acquired establishment belonged to a healthy firm or to a company in difficulty865.866 That is particularly so where the entire company including all of its establishments is to be acquired. Furthermore, it is necessary that the purchaser is independent from the seller867 and that the acquisition is done on market terms.868 This aims at avoiding funding of inflated purchase prices. In order to establish this fact, a report of an independent chartered accountant is considered as sufficient. It is not necessary to carry out an open, unconditional and transparent tendering procedure. If however, the establishment is acquired by an enterprise in difficulty, it must be demonstrated in particular that the condition of a transaction on market terms is fulfilled. 869 274 Art.12(1) lit. b sentence 2 GBER I provides that in the case of business succession of a small enterprise in favour of family of the original owner(s) or in favour of former employees (Management Buy Out), the condition that the assets shall be bought by an independent investor shall be waived. Thereby, this provision goes beyond the regulation of the RAG 2007 and RRIA870 and extends the promotion of family takeovers or 273

861

Explicitly in that way: Number 4.4. (1) RAG 1998. RRIA (footnote 3). 863 Article 12 (1) lit. b sentence 1 GBER I; Article 2 (1) lit. c (ii) RRIA (footnote 3); para. 35 RAG 2007. 864 Article 12 (1) lit. b sentence 1 GBER I; Article 2 (1) lit. c (ii) RRIA (footnote 3); para. 35 RAG 2007. 865 Para. 9, 10, 11, 12 rescue and restructuring guidelines 2004 (footnote 137). 866 Para. 96 rescue and restructuring guidelines 1999 (footnote 521); even if it related to Number 4.4. (2) RAG 1998. 867 Article 12 (1) lit. b sentence 1 GBER I; Article 2 (1) lit. c (ii) RRIA (footnote 3); para. 35 RAG 2007. 868 Article 13 (7) sentence 1 GBER I; Article 4 (5) sentence. 1 RRIA (footnote 3); para. 34 sentence 3, 52 sentence 2 RAG 2007. 869 Arg. e. contr. Para. 96 sentence 3 rescue and restructuring guidelines 1999 (footnote 521). 870 RRIA (footnote 3). 862

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takeovers by other persons that are associated with the relevant enterprise in a particular way. Thus, the focus is not on building an existence for the acquirer, but on safeguarding the continuation of the small company by creating a sustainable environment by those persons that are familiar with its history and the particularities of the small enterprise as well as its target market; its employees and its potential for development and growth. Because of their emotional attachment to the small enterprise one would expect them to aim at its long-term stability instead of its short term profitability. This is a benefit for the enterprise in question and thus, by contributing to job preservation, the concerned region directly benefits from it as well. The disposition of assets will be necessary in any case, including the case of an 275 acquisition according to Article 12(1) lit. b sentence 2 GBER I. The sole acquisition of the shares of an undertaking is not sufficient. 871 This in itself is not an acquisition of assets, and hence does not constitute an investment supporting the regional development, but instead, it is a capital investment as it is normal for a ‘share deal’872.873 The sole acquisition of the shares of an undertaking particularly lacks the direct relation to a certain establishment, perhaps located in an assisted area, also in relation to the investments made there and jobs. Thus, funding such an investment is simply operating aid and thus, excludes regional investment aid.874 In case of takeovers of an establishment, it is not required that the assets acquired 276 shall be new;875 however, the assets for whose acquisition aid has already been granted prior to the purchase, e.g. investment allowances, should be deducted from the eligible costs.876 They shall not be taken into account for the purposes of the statement of eligible items or, otherwise they will be valued with EUR ‘0’. To the extend that the acquisition of an enterprise or an establishment involves further (initial) investments, these expenditures shall be added to the cost of the purchase.877 A special arrangement applies to cases where a recovery of aid is expected or to those 277 cases of aid for acquisition of items that have been funded previously already. In both cases, it is necessary that the buyer acquires free of aid. By doing so, he can avoid liability for certain in the first case; as for the second case, he does not benefit anymore from a previous funding and thus, there is no risk of a double funding. The prerequisite for an acquisition free of aid is a consideration in the form of the actual unaided market price at the moment of the acquisition. In order to achieve this actual market price and to protect the acquirer within the course of the recovery procedure for State aid, or to be granted aid for the acquisition in accordance with the general rules, the acquisition should be carried out following an open, transparent and unconditional tender procedure.878 In this case, it can always be assumed that the actual unaided market price for the enterprise or the establishment and the directly associated assets was established, so that the buyer has acquired the assets free of aid. In this case, aid that was granted (potentially illegally) to the purchaser is included in the yield from the sale representing 871

Article 12 (1) sub (2) GBER I; Article 2 (1) lit. c (ii) RRIA (footnote 3); para. 35 footnote 37 RAG 2007. Weitnauer, Der Unternehmenskauf nach neuem Kaufrecht, NJW 2002, 2511, 2512. 873 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.883. 874 Com., State Aid N 377/2006 of 20. December 2006 Para. 40 – Spain; as regards operating aid see para. 463 et seq. 875 Article 13 (7) sentence 5 GBER I; Article 4 (8) sentence 1 RRIA (footnote 3); para. 54 sentence 1 RAG 2007. 876 Article 13 (7) sentence 6 GBER I; Article 4 (8) sentence 2 RRIA (footnote 3); para. 54 sentence 2 RAG 2007. 877 Article 13 (7) sentence 2 GBER I; Article 4 (5) sentence 2 RRIA (footnote 3); para. 52 sentence 1 footnote 49 RAG 2007. 878 ECJ Case C-390/98 – H. J. Banks [2001] ECR I-6117, p.1, para. 17, 77; Heidenhain/Quardt § 54 para. 30 et seq.; Borchardt ZIP 2001, 1301, 1305. 872

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the substitute for the aided items in line with the market while but it is not included in the acquired enterprise.879 This also includes the acquisition of insolvency assets. In this case as well, the primarily granted aid is included in the trade sale which is then subject to general rules.880 The insolvency administrator shall maximise the sales revenue of a sales item, regardless of whether he disposes of the entire enterprise, individual items thereof or only an individual material or immaterial asset.881 The same applies to a case where the acquisition did not relate to the business as a whole but only to business related assets of the purchaser, this however to an extend which formally might not correspond to the sale of the entire business, but where all essential parts are included, which are necessary for continuing the old business from a business point of view and therefore an objective market player perceives it as the sale of an entire business from an economic viewpoint.882 278

g) Replacement investments in form of operating aid. A simple replacement investment such as the replacement of faulty technical equipment through machines, shall not fall under the mentioned eligible (initial)883 investments. Such expenditures are thus excluded from eligible costs from the point of view of regional investment aid.884 They have to be added to the ‘cost of the day-to-day operation’ and might be eligible by means of operating aid.885 Also excluded from aid is a plant or equipment which has to be purchased as a replacement886 within the so called lock-in periods due to rapid technological change, so the time limits within which the economic activity is retained in the region concerned for the minimum period887. Replacement investments do not turn an investment into an eligible investment project within the meaning of para. 34 sentence 1 RAG 2007, Article 2(1) 1 lit. c; 4(1) RRIA or Article 13(2) sentence 2 GBER I.

4. Appropriate forms of assistance 279

Investment aid can be granted, as almost all the other State aid, in the form of straight grants, interest rebates, soft loans (low-interest loans, unsecured loans, subordinated loans888), state guarantees,889 exemptions or reductions in taxes, social security or other compulsory charges, or the supply of land, goods or services at favourable prices or public equity investments, risk capital measures or an alternative provision of capital on favourable terms.890 In principle, what matters is that the public 879 GC, Case T-318/00 – CDA Albrechts, [2005] ECR II-4179, para. 330 (purchase price in line with the market). 880 ECJ, Case C-277/00 – SMI [2004] ECR I-3925, para. 80, 95 (a sale under judicial control is sufficiently open and transparent). 881 Arg. e. § 60 InsO; Nerlich/Ro ¨ mermann/Abeltshauser, Insolvenzordnung, Kommentar, Loseblattsammlung, 17. Lfg. 2009, § 60 para. 21. 882 Ehricke, Ru ¨ ckzahlung gemeinschaftsrechtswidriger Beihilfen in der Insolvenz des Beihilfeempfa¨ngers, ZIP 2001, 489, 491 et seq.; Com., OJ 1999 L 292/27, 39 para. 104 and Article 7 (3) – Gro¨ditzer Stahlwerke; State Aid C 42/1998 of 21 June 2000, OJ 2000 L 318/62 para. 118 and Article 2 (3) – CDA Albrechts; State Aid C 45/1997 of 11 April 2000, OJ 2000 L 238/50, 57 para. 48 and Article 3 (3) – SMI. 883 Para. 33, 34 RAG 2007; Section 4.4 RAG 1998; Article 2 (1) lit. c, 4 (1) RRIA (footnote 3); see above para. 237 and below para. 280. 884 Para. 34 sentence 5 RAG 2007. 885 Para. 34 footnote 36 RAG 2007. 886 Arg. e. Article 13 (2) sentence 3 GBER I; Article 4 (2) sentence 5 RRIA (footnote 3); para. 40 sentence 1 footnote 43 RAG 2007. 887 Article 13 (2) sentence 2 GBER I; Article 4 (2) lit. a RRIA (footnote 3); para. 40 RAG 2007; see above para. 223 et seq. 888 See in general: Com., State Aid N 689/2009 of 6 July 2010 – KfW. 889 See Knoblich (footnote 21), p. 85, 99, 100. 890 See also para. 37 RAG 2007.

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support results in a favourable cost-benefit ratio for the beneficiary, i.e. that he receives the same benefit at less costs and effort or that he draws more benefits at a given cost and effort than he would without the public support. This applies for the RAG 2007 as well as for the RRIA and the GBER I. It is, however, not always clear who actually benefits from it, and in particular in the case of granting guarantees. Number 2.2 of Guarantees Notice 2008891 implies in particular circumstances an aid to the lender and number 2.3 to the borrower. In addition to the discharge of declaration and set off for state guarantees according to §§ 20 b No 1, 20(2) sentence 1 No 1 lit. d KWG 892 it is also referred to § 765 BGB893. This provision does not even require that the main debtor has taken notice of the good deed of the guarantor in benefit of the lender. 894 Already for this reason a triangular construction borrowed from the legislation of the order referred to in para. 783 et seq. BGB with an underlying debt and a coverage relationship as discussed in the literature895 is not convincing. In the case of guarantee, both things are lacking: it is only the main bank that turns to the public authorities and asks for the state guarantee, and the decision is only effective for the bank, and it is only the bank that receives the guarantee document. There is no need for the final borrower to be involved into this transaction at all. Hence, the two-step theory does not produce an outcome which deviates from that. Also, prior to that, the main bank can freely and independently decide on the interest rate that it requests from the final borrower. The bank is only bound after the guarantee has been given by the public authority, however, this only refers to the terms and conditions, i.e. ‘how’ and not ‘if’. Despite of the guarantee document, the bank may terminate the contract to the final borrower at any time according to the general rules. Also, after returning the guarantee document, e.g. for reasons of aid that is unlawful on procedural grounds and thus invalid896 according to § 812(1) sentence 1, first alternative BGB, it is entirely up to the bank to decide whether or not, and under which terms and conditions the credit may be continued with the end borrower. This is also appropriate in this case. In practice, no one understands the enterprise better than its main bank that is involved with the enterprise over a period of many years. It is not justifiable to pass through the flaw of an invalid guarantee to the loan. It is not the loan itself that is aided, such as in case of loan awarded by the public authorities or by a third party appointed by the public authority, i.e. the KfW or regional development institutes (Landesfo¨rderinstitute), instead only individual or additional public security is granted.

5. Aid for large investment projects a) Large investment project. Para. 60 RAG 2007 provides that a ‘large investment 280 project’ is an ‘initial investment’ as defined by these guidelines with an eligible expenditure above EUR 50 million. This amount is calculated at prices and exchange rates on the date when the aid is granted – or in the case where individual notification is required, e.g. for (very) large investment projects within the meaning of para. 64 RAG 891 Commission notice on the application of Article 87 and 88 of the EC Treaty to state aid in the form of guarantees, [2008] OJ C 155/10 (Guarantees Notice 2008). 892 German Banking Act, Gesetz u ¨ ber das Kreditwesen vom 9. September 1998, Bundesgesetzblatt BGBl. I S. 2776 (Kreditwesengesetz – KWG). 893 German Civil Code, Bu ¨ rgerliches Gesetzbuch in der Fassung der Bekanntmachung vom 2. Januar 2002, BGBl. I S. 42, 2909; 2003 I S. 738. 894 Palandt/Sprau, 70th edition 2011, § 765 Para. 3. 895 Mu ¨ ko/Nu´~ nez Mu¨ller Fin. Trans., para. 182; Koenig/Haratsch, Staatliche und kommunale Bu¨rgschaften auf dem Pru¨fstand des EG-Beihilferechts – Neue Tendenzen, ZHR 169 (2005) p. 77, 87. 896 See above para. 165, 168.

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2007 or individual ad hoc investment aid897, at prices and exchange rates at the date of the notification.898 Similar to this, Article 2 No 12 GBER I defines the term ‘large investment project’ as an investment in capital assets with eligible costs above EUR 50 million, calculated at prices and exchange rates on the date when the aid is granted. Article 2 No 12 GBER I avoids using the prefix ‘initial’ in reflection of real life circumstances.899 b) Principle. Due to the provisions of the RAG 2007 as well as the later adopted provisions of the RRIA and the GBER I, these projects are made subject to a special control whose scope and intensity depends on the respective investment volume or the respective aid amount. 282 Large investment projects with an investment volume exceeding EUR 50 million are individually notifiable within 20 working days from the day on which the aid is granted by the competent authority900.901 The Member State shall provide the Commission with the summary information requested in the standard form laid down in Annex II of the RRIA, in Annex II of the GBER I or Annex III of the RAG 2007. The Commission will make summary information available to the public through its website.902 It is only the investment volume which is relevant for this control but not the aid intensity. The determining factor for it is that the threshold of EUR 50 million of eligible investment costs is exceeded. 283 Regional investment aid awarded in favour of large investment projects shall be notified to the Commission according to Article 108(3) TFEU, if the total amount of aid from all sources exceeds 75% of the maximum amount of aid an investment with eligible costs of EUR 100 million could receive, applying the standard aid threshold in force for large enterprises in the approved regional aid map on the date the aid is to be granted, i.e. at the time of the decision or the notification. 903 This does not refer anymore to the investment volume but instead it relates exclusively to the total amount of aid. The latter is set into relation to the maximum allowable aid amount for an investment project of EUR 100 million according to the national aid map. As part of the examination pursuant to Article 108(3) TFEU, the Commission examines primarily the market power of the beneficiary undertakings as well as the resulting impact for the common market.904 281

284

c) Development. The provisions in para. 60–70 RAG 2007, Article 13(10) GBER I are the outcome of a long process.

285

aa) ECSC Treaty and sectoral approach. Based on the ECSC treaty905, the Commission initially limited the options of awarding aid for individual sectors. This mainly included the so called sensitive sectors.906 For these cases, the Commission did not distinguish between the investment volume or the amount of aid. 897

Para. 64 footnote 60 sentence 1 RAG 2007. Para. 60 footnote 54 RAG 2007, the same applies according to Article 2 (1) lit. g RRIA (footnote 3). 899 See above para. 237, 278. 900 Regarding this see Article 9 (4) GBER I. 901 Para. 65 sentence 1 RAG 2007; Article 2 No 12, 6 (2), 9 (4) GBER I; formerly Article 8 (2) RRIA (footnote 3). 902 Para. 65 sentence 2 RAG 2007; Article 8 (2) sentence 2 RRIA (footnote 3). 903 Para. 64, 67 RAG 2007; Article 6 (2) GBER I; Article 7 lit. e RRIA (footnote 3). 904 Para. 68–70 RAG 2007; and the Communication from the Commission concerning the criteria for an in-depth assessment of regional aid to large investment projects, OJ C 223 of 16 September 2009, p.3; see also para. 377 et seq. 905 Treaty establishing the European Coal and Steel Community of 18 April 1951 (footnote 42). 906 Regarding the sensitive sectors see above Para. 15, 120, 194. 898

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bb) Horizontal approach, the multi-sectoral framework 1998. With regard to the 286 coverage of the other sectors and following its announcement in 1994, 907 the Commission abandoned this purely sectoral approach to the benefit of an essentially horizontal approach and in 1998, it put its first multi-sectoral framework for large investment projects into force.908 This framework required a notification according to Article 93(2) EC (now: Article 108(2) TFEU), if the total investment costs of a project exceeded ECU (EUR) 50 million, the intended aid intensity exceded the half of the aid intensity as laid down in the approved regional aid map, and where the planned aid amount for every job created or safeguarded is at least ECU (EUR) 40.000. A project was individually notifiable as well if the planned total amount of aid was at least ECU (EUR) 50 million.909 This was the first time, the Commission described a large investment project within a set of State aid rules. This framework was applicable as long as no specific, sectoral rules existed910 and covered at once all those sectors for which no previous regulation existed. At the same time, it replaced the Community framework on aids to the textiles industry911 and thus started to reduce sector-specific regulations. 912 It contained a model to calculate the reduction of the total amount of eligible aid as laid down in the national aid maps for the mentioned investments. The reduction scale covered an aid intensity for the relevant project in between 1 down to only 0.15 times of the planned aid intensity for the relevant assisted area.913 cc) Extension of the horizontal approach, the Multisectoral framework on regional 287 aid 2002. The Multisectoral framework on regional aid 2002 (MSF-2002) 914 modified the definition of a large investment project915 and, pre´cising the aim of a more restrictive policy towards regional aid916, it distinguished between investment projects with an eligible aid amount of above EUR 50 million and above EUR 100 million.917 Furthermore, it contained special provisions for an increased use of structural funds resources918 and for sensitive sectors919. It pursues the approach taken by the previous framework of 1998, that is to include the sensitive industrial sectors within this framework.920 It does however impose even stricter criteria for some of the sensitive sectors, such as the synthetic fibres sector921, the steel industry922 and the motor vehicle sector.923 With regard to the eligible investment volume, the regional aid intensity ceilings had 288 to be lowered to 50% where the eligible expenditure is above EUR 50 million and to 907 Com., ‘An industrial competitiveness policy for the European Union’ – Communication to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, COM (94) 319 final. 908 MSF-1998 (footnote 53); further details and critical reflection: see above para. 17–19. 909 MSF-1998 (footnote 53), para. 2.1. 910 MSR-1998 (footnote 53), para. 1.3. 911 Textile-Framework (footnote 44). 912 Para. 1.3 MSF-1998 (footnote 53). 913 Para. 3.10 MSF-1998 (footnote 53); for further details and how the framework has proved its worth in practice, see above para. 17–19. 914 MSF-2002 (footnote 73), [2002] OJ C 70/8; for further details and critical reflection, see also above para. 20–22. 915 Para. 21 and 36 MSF-2002 (footnote 73). 916 Para. 8 MSF-2002 (footnote 73). 917 Para 21, 22 footnote 9 and Para. 24 MSF-2002 (footnote 73). 918 Para. 25 MSF-2002 (footnote 73). 919 Para. 27, 29 and 42 MSF-2002 (footnote 73). 920 Para. 30 MSF-2002 (footnote 73). 921 Para. 42 lit. b MSF-2002 (footnote 73). 922 Para. 27, 39 MSF-2002 (footnote 73). 923 Para. 42 lit. a MSF-2002 (footnote 73).

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34% if the eligible expenditure is above EUR 100 million.924 It also involved a provision aimed at preventing possible circumvention of the before mentioned rules and to escape these cuts of the aid ceilings by creatively splitting the investments in several parts whose volume would not reach the threshold of EUR 50 million or EUR 100 million.925 289 Regarding the notification obligation, the framework solely and for the first time referred to the absolute aid allowed to be granted on the basis of the ceilings laid down in the relevant regional aid map.926 The decisive factor for the notification obligation according to Article 108(2) TFEU was the aid intensity at the time but not the investment volume. The threshold of EUR 100 million applied in this context as well. Taking into account the adjustments according to para. 21 MSF-2002, the allowable aid amount for an investment of EUR 100 million with a regional aid ceiling of 35% was EUR 26.25 million. Only in case of exceeding the aid amount of EUR 26.25 million in an assisted area with an aid intensity of 35%, the Commission had to be notified of the concerned project. Even though it exceeded the investment threshold of EUR 100 million, the investment project was not subject to the notification obligation referred to in para. 24 of the framework, as long as the aid granted for it did not exceed the amount of EUR 26.25 million. This was the case where the regional aid granting authority did not provide the maximum aid amount, and instead only granted an aid intensity of less than 30%. 290 It was also allowed to increase the regional aid ceiling adjusted according to para. 21 of the framework by the SME-bonus referred to in Article 4(3) lit. b of the SME Exemption Regulation927. This SME bonus was not included in the adjustments process of the aid ceilings leading to lower aid ceilings.928 However, the SME bonus could only be granted to a project with an eligible investment volume above EUR 25 million with approval of the Commission, Article 6 of the SME Exemption Regulation. It was based on the assessment of the SME quality but not on an assessment of the entire regional aid. Section 3.13 sentence 2 of the extension decision regarding aid granted according to the joint scheme ‘for improving regional economic structures’ did not lead to any different results. 929 Had the individual notification requirement that relates to an investment volume of only EUR 25 million, been interpreted in a sense that required the Commission to carry out a full assessment of the regional aid, including the question of whether the starting amount exceeds the aid ceiling in force and whether the aid was granted based on an approved scheme, it would have resulted in a discrimination against the SME towards large enterprises. A large enterprise had received aid according to the amount approved in the national aid maps without being subjected to the individual notification requirement for the same eligible investment costs.930 The conclusion e contrario would be though that for an investment volume that exceeds the amount of aid that is eligible for an investment project of EUR 100 million according to the regional aid ceiling in the approved regional aid map, a full, thus comprehensive assessment of regional aid had been carried out. 924

Para. 21, 22 MSF-2002 (footnote 73). Para. 49 MSF-2002 (footnote 73). 926 Para. 21, 24, 51 MSF-2002 (footnote 73). 927 SME Exemption Regulation (footnote 21). 928 Com., State Aid N 856/2006 of 13 June 2007 – PLL. 929 Com., State Aid N 642/2002 of 1 October 2003, 2003 OJ C 284/2 – Extension decision regarding aid granted according to the joint scheme ‘for improving regional economic structures’ in favour of undertakings in Regional aid areas according to Article 87 (3) a) and c) EC on the basis of Part II of the 31st Framework. 930 Com., State Aid N 324/2004 of 22 September 2004, para. 13–15 – Cyclics; N 457/2004 of 2 March 2005, para. 13 footnote 6 – Q-Cells; N 560/2004 of 20 April 2005, para. 15 footnote 5 – Holzstadt; N 122/ 2005 of 3 May 2005, para. 13 footnote 6 – CSG Solar; N 407/2006 of 6 December 2006, para. 20 footnote 9 – FRP; N 217/2007 of 11 December 2007, para. 29 footnote 10 – Signet Solar; N 385/2007 of 28 November 2007 para. 19 footnote 7 – Arise. 925

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In addition, para. 25 MSF 2002 provided a cohesion bonus of 15% to the aid to be 291 granted. However, this possibility of increasing the aid intensity for large projects by the multiplication factor of 1.15 related to the aid to be granted was conditional on the project to be a major project within the meaning of Article 25 of the General Regulation governing the Structural Funds 1999931 and in addition, the rate of co-financing from structural funds resources must be in line with the provisions laid down in Article 26 of the same Regulation, namely, the rate of co-financing must be at least 10% of the total public expenditure, if the project is located in an area eligible for aid under Article 87(3)(c) of the Treaty and at least 25% of the total public expenditure if the project is located in an area eligible for aid under Article 87(3)(a) thereof. The success of this procedure remains limited. This is mainly due to the fact that a very large project, i.e. a project with an investment volume (significantly) above EUR 100 million, was subject to two different approval procedures: one the hand, there was the procedure before the DG Competition according to the multi-sectoral regional framework 2002 and on the other hand, there was the approval procedure before the DG Regional development according to Article 26 of the General Regulation governing the Structural Funds 1999. 932 Both procedures aimed at different objectives though: the DG Competition focussed on the breach of the single market whereas the DG Regional development focussed on the best possible investment of the structural funds granted. Moreover, the Commission does not decide as a single uniform authority, instead each Directorates-general submits its own matters, so that several Directorates-general may decide differently on the same matter. 933 In spite of Article 1(1) SME Exemption Regulation934, the framework regarded 292 regional aid for the synthetic fibres industry as not compatible with the internal market.935 The resulting disregard for the hierarchy of norms is only possible because the Member States bow to the appropriate measures proposed by the Commission. 936 As long as the European law courts due to the duration of proceedings do not provide effective legal protection and as long as the Member States are subject to the Commissions monopoly of the right of initiative according to Article 107(3) lit. e, 109 TFEU, the Commission can override even the regulations in this way. The framework considered regional aid to the steel industry as not compatible with the 293 common market either.937 It did however allow regional aid for small and medium sized steel enterprises up to the limit of large individual aid grants within the meaning of Article 6 SME-Exemption Regulation938, 939 According to this provision, large individual aid grants for small and medium sized enterprises means aid volume of more than EUR 15 million.940 In addition, a grant is already considered a large individual grant within the meaning of this provision, if an aid intensity of more than 50% of the maximum aid ceiling as set out in the approved aid map941 is awarded to an investment volume of more than EUR 25 million in an assisted region or, for investments in a non-assisted region, if the 931

The General Regulation governing the Structural Funds 1999 (footnote 90, 116). Com., State Aid, Final Decision, C 21/2008 (ex N 864/2006) of 17 June 2009, 2009 OJ L 237/15, para. 112 – Sovello, EverQ. 933 Com., State Aid C 21/2008 (ex N 864/2006), Article 1 and 2 – Sovello, EverQ (footnote 935). 934 SME Exemption Regulation (footnote 21). 935 Para. 42 lit. b MSF-2002 (footnote 73). 936 See above para. 45. 937 Para. 27 sentence 4 MSF-2002 (footnote 73); with the notable explanation that ECSC steel companies functioned without recourse to investment aid, and thus have integrated this factor in their strategies and are used to it, para. 27 sentence 1 and 2 MSF-2002. 938 SME Exemption Regulation (footnote 21). 939 Para. 27 sentence 5 MSF-2002 (footnote 73). 940 Article 6 lit. b SME Exemption Regulation (footnote 21). 941 Article 6 lit. a (ii) SME Exemption Regulation (footnote 21). 932

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maximum aid ceilings referred to in Article 4(2) SME Exemption Regulation are awarded to small enterprises at an amount of 15% or 7.5% in case of medium sized enterprises. If the investment volume did not reach the threshold of EUR 25 million, the maximum intervention rates could be granted up to a subsidy value of EUR 15 million. This follows from the wording in Article 6 SME- Exemption Regulation. 294 Following the modification of the Multi-sectoral Framework in November 2003 942, the framework stated that with regard to the sensitive sector of the motor vehicle industry, an aid intensity based on the general rules and up to an amount of EUR 5 million shall be compatible with the internal market; for amounts exceeding EUR 5 million, only an adjusted aid intensity of 30% of the relevant regional aid ceiling was considered compatible. This meant that for an investment of EUR 50 million in an assisted area with an applicable regional aid ceiling of 20%, an absolute aid intensity of (EUR 25 million × 20% + EUR 25 million × 20% × 0,3) and thus of (EUR 5 million + EUR 1.5 million), amounting to EUR 6.5 million. 295 The Commission did not set up a ‘blacklist’ of sectors where serious structural problems prevail with the exception of the steel industry943 as it had originally planned to do by 31 December 2003. In the notice of modification944, the Commission cautiously dissociated itself from such a list and finally abandoned the sectoral approach. 945 d) RAG 2007. aa) Overview. In the interests of simplification and transparency, the provisions of the 2002 Multi-sectoral framework (MSF-2002) have been integrated into the RAG 2007 as far as large investment projects are concerned.946 This includes above all the adjustment of aid intensity by 50% for an investment volume above EUR 50 million and for an investment volume above EUR 100 million an adjustment by 66% resulting in 34% of the maximum regional aid ceiling.947 The RAG 2007 also integrated in substance a provision from the MSF-2002 which was aimed at preventing large investment projects from artificially dividing into sub-projects so that they would not reach the respective ceilings.948 297 What has also been retained are the different points of reference for lowering the aid ceilings and the notification obligation for large investment projects. These refer only to the respective eligible expenditure for a project949 and regarding the notification requirement, it depends on whether the project should be awarded with an absolute aid intensity that exceeds the allowable aid amount that an investment with eligible expenditure EUR 100 million can receive based on the relevant allowable regional aid intensity 950.951 298 Granting of an ad hoc aid always requires a prior notification and approval within the scope of application of the RAG 2007,952 as is the case according to the previous rules953. 296

942 Commission communication on the modification of the Multisectoral Framework on regional aid for large investment projects (2002) with regard to the establishment of a list of sectors facing structural problems and on a proposal of appropriate measures pursuant to Article 88 paragraph 1 of the EC Treaty, concerning the motor vehicle and the synthetic fibres sector, 2003 OJ C 263/3 (Notice of modification regarding the MSF-2002). 943 MSF-2002 (footnote 73), para. 31 previous version. 944 Notice of modification regarding the MSF-2002 (footnote 73). 945 Notice of modification regarding the MSF-2002 (footnote 73), (5), para. 31, 32 new version; Para. 63 footnote 59 RAG 2007. 946 Para. 62 sentence 2 RAG 2007; Heidenhain/Jestaedt § 15 Para. 48. 947 Para. 21 MSF-2002 (footnote 73); para. 67 RAG 2007. 948 Para. 49 MSF-2002 (footnote 73); para. 60 footnote 55 RAG 2007. 949 Para. 21 MSF-2002 (footnote 73); para. 67 RAG 2007. 950 Para. 24 MSF-2002 (footnote 73); para. 64 RAG 2007. 951 Para. 67, 65, 64 sentence 1 RAG 2007. 952 Para. 64 footnote 60 RAG 2007. 953 Number 2 RAG 1998; para. 6 sentence 2, 24 sentence 1 footnote 10, 42 lit. a footnote 21 MSF-2002 (footnote 73).

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There is no option of granting SME bonuses to large investment projects anymore. 954 299 bb) In detail. (1) Large investment project. (a) Definition. Regarding the defini- 300 tion of a large investment project within the meaning of Para. 60 RAG 2007, please refer to para. 280. (b) The Commission’s position in regard to large investment projects. In principle, 301 the Commission regards investment projects which exceed an investment volume of EUR 50 million, this is large investment projects955, rather critically.956 Undertakings that are able to invest such volumes are often not tied to the region (i.e. they consider alternative sites)957 and thus independent in their behaviour as well as financially958 strong, and they possess a strong bargaining power.959 It is in particular the mobility of these investment projects that raises fears that Member States might enter into an outbidding competition960 and by doing so, leading to a spiral of increasingly generous promises of aid,961 which favoured only the richer Member States and regions.962 In addition, the Commission considers it as overcompensation where enterprises receive aid intensities for their large-scale investment projects according to the maximum aid ceilings in the relevant assisted areas.963 In her opinion, this is a very likely cause of paradoxical effects such as inefficient location choices 964 and, since aid is a costly transfer from taxpayers in favour of aid recipients, net welfare losses. 965 Consequently, the Commission limits aid for large investment projects.966 The arguments that were given to justify the attitude towards large investment 302 projects remain unproven though. Furthermore, it raises the question of how an intraCommunity subsidy race among Member States can be avoided by lowering all different regional aid ceilings in the relevant assisted areas by the same factor. By doing so, it is only the subsidy volume that is lowered, whereas the relations of intervention of the individual regions towards each other are maintained. In addition, it concerns with the considerations of the Commission to the efficiency of the transfer achievements as well as to the net welfare losses around purely fiscal-political arguments, but not considerations relevant for competition, and thus touching the functioning of the common market. Moreover, the possibility of a free choice of location is just an essential condition for the grant of regional State aid.967 In its position towards large enterprises, the Commission does not sufficiently consider 303 their mobility, also with regard to sites outside the European Union.968 This was not always like this. The motor vehicle framework 1997969 provided the possibility of comparing a site 954 Para. 67 footnote 61 sentence 2 RAG 2007; Article 13 (4) second half sentence GBER I; as regards the legal situation until 1 January 2007 see above para. 290. 955 Article 2 No 12 GBER I, para. 60 RAG 2007, para. 21, 22 MSF-2002 (footnote 73); Number 2.1. MSF-1998 (footnote 53). 956 Para. 8 MSF-2002 (footnote 73). 957 Ziffer 2.1. MSF-1998 (footnote 53); Para. 15 MSF-2002 (footnote 73). 958 Para. 13, 18 MSF-2002 (footnote 73). 959 Para. 15 MSF-2002 (footnote 73). 960 Number 1.2 MSF-1998 (footnote 53). 961 Number 1.2. MSF-1998 (footnote 53); Para. 16 MSF-2002 (footnote 73). 962 Number 1.2. MSF-1998 (footnote 53). 963 Para. 12, 15, 16 MSF-2002 (footnote 73); Para. 3 criteria (footnote 21). 964 Para. 17 MSF-2002 (footnote 73); Para. 3 criteria (footnote 21). 965 Para. 17 MSF-2002 (footnote 73); Para. 3 criteria (footnote 21). 966 Para. 67 RAG 2007. 967 See above para. 5 and below para. 303, 387. 968 Para. 15 MSF-2002 (footnote 73). 969 Section 3.2.a) (2) Motor vehicle framework 1997 (footnote 18).

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within the EEA with a site outside the EEA970 in order to determine the aid based on this so called ‘cost-benefit-analysis’.971 In this case, the Commission particularly regarded the mobility as an essential prerequisite for awarding regional aid.972 (2) Reduction of the aid intensity for large investment projects. In two successive Multi-sectoral frameworks on regional aid for large investment projects in 1998 973 and 2002974, the Commission had significantly reduced the allowable maximum aid intensities for large investment projects. Therefore the flat and generalised reduction of the subsidy value (grant equivalent) within the scope of the MSF-2002 was considered the equivalent for abstaining from a concrete assessment of the incentive effect. 975 ‘In the interests of simplification and transparency, the Commission has decided to integrate the provisions of the 2002 Multi-sectoral framework (MSF-2002)’ and thus the reduction mechanism ‘into the Regional aid guidelines for the period 2007-13.’976 305 Therefore for regional investment aid in favour of large investment projects apply significant reductions of the maximum aid intensities as admitted in the national regional aid maps for the individual regions. 306 The following table can be found in para. 67 RAG 2007: 304

307

Eligible Expenditures

Adjusted aid ceiling

Up to EUR 50 million

100% of regional ceiling

For the part between EUR 50 million and EUR 100 million

50% of regional ceiling

For the part exceeding EUR 100 million

34% of regional ceiling

Thus, the allowable aid amount for a investment project above EUR 50 million will be calculated according to the following formula: maximum aid amount = R × (50 + 0.50 × B + 0.34 × C), where R is the unadjusted regional aid ceiling, B is the eligible expenditure between EUR 50 million and EUR 100 million, and C is the eligible expenditure above EUR 100 million. This is calculated on the basis of the official exchange rates prevailing on the date of the grant of aid, or in the case of aid subject to individual notification, on the date of notification.977 The same rules applicable for the time of discounting according to para. 41 RAG 2007 shall apply.978 Starting point for calculating the modified maximum aid amount is always the admissible aid ceiling for large enterprises according to section 4.1.2 RAG 2007979, i.e. according to para. 42 to 48 RAG 2007 and thus, according to the approved regional aid map.980 970

European Economic Area (EEA), see above footnote 1, 369. Section 3.2. (2) Motor vehicle framework 1997 (footnote 18); since the globalisation was not very advanced yet in 1997 in the Motor vehicle sector, the cost-benefit-analyses (CBA) comprised only the EEA as well as the former Middle- und Eastern European States (MEEL). 972 Section 3.2.a) (3) Motor vehicle framework 1997 (footnote 18). 973 1998 OJ C 107/7. 974 2002 OJ C 70/8; modified by the Notice of modification regarding the MSF-2002, 2003 OJ C 263/3 (footnote 942). 975 Para. 12 MSF-2002 (footnote 73); see above para. 23. 976 Para. 62 RAG 2007. 977 Para. 67 sentence 2 and 3 RAG 2007. 978 Para. 41 RAG 2007, see above para. 226-228. 979 Para. 67 sentence 3 and 67 footnote 61 RAG 2007; Section 4.1.2 of the RAG 2007 includes para. 42 to 48 RAG 2007; see above para. 83 et seq. 980 Regarding the regional aid map see above para. 102-118. 971

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This means that only 50% of the admissible aid intensity is allowable for investment projects with eligible expenditures above EUR 50 million.981 Consequently, if the regional aid intensity is 15% GGE, the amount of the investment that exceeds EUR 50 million is only eligible for 7.5%. For large investment projects with eligible costs above EUR 100 million, the maximum aid intensity is only 34% of the generally admissible aid intensity according to the aid map.982 In an area with a regional aid intensity of 15% GGE and calculated on the basis of the maximum aid intensities, the aid relating to the part of the investment that exceeds EUR 100 million amounts only 5.1% GGE. In contrast to the notification obligation according to para. 64 RAG 2007, this adjustment mechanism – similar to the information requirement according to para. 65 RAG 2007 – refers to the investment volume that is eligible and in fact to be granted. The aid volume is not relevant in the adjustment context. It is, however, relevant if the Member State notifies to the Commission in order to get an approval of the regional aid map with an aid intensity which is significantly lower and thus deviates from the ‘entitled’ aid intensity. This reduced aid intensity, approved in the regional aid map, is the starting intensity for all further reductions.983 It needs to be distinguished between the admissible intervention rates pursuant to para. 42–48 RAG 2007 and the aid intensities that were notified and approved in the national regional aid map and finally the intervention rates foreseen in the individual national aid scheme. No impact to the reduction mechanism has an actual lower aid intensity granted as it is approved in the national regional aid map for the region concerned. This demonstrated the following example: A project with an eligible investment volume of EUR 110 million should not get the full aid intensity of 30% as approved in the individual regional aid map; perhaps because it does not meet any additional national requirements which the national granter combines with the full rate. Due to these requirements it is supported only by an intervention rate of 25%. This results in the following: For the first EUR 50 million the company receives 25%

EUR 12.5 million

For investments between EUR 50 million and EUR 100 million it receives 30% × 0.5

EUR 7.5 million

308

309

310 311

312

(Because 30% × 0.5 is less than For the amount above EUR 100 million up to EUR 110 million there is 30% × 0.34 The total amount of aid therefore is

EUR 1.2 million EUR 21.02 million

Instead of the maximum amount possible of EUR 23.52 million. However, the Member State may also decide that the reduced aid ceiling, in the 313 example only 25%, is to be provided for the reduction mechanism. This the Member State has to notify. In that case for an eligible investment of EUR 110 million there would be an aid amount of total EUR 19.6 million.984 981

Para. 67 RAG 2007. Para. 67 RAG 2007. 983 Com. State Aid N 641/2002, para. 10 and 11 – Regional State aid map for Germany 2004–2006 (footnote 86). 984 This amount consists of EUR 12.5 + 6.25 + 0.85 million. 982

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In contrast985 to the RAG 1998986 and the MSF-2002987, the RAG 2007 does not allow to grant a SME bonus to large investment projects. Both the RAG 2007 and the GBER I expressively exclude an additional aid for investment volumes exceeding EUR 20 million.988

(3) Notification. The Obligation to notify depends on the aid volume, in contrast to the reducing mechanism. An individual notification within the meaning of Article 108 (3) TFEU is despite the reducing of the intervention rates required when the provided aid by using existing approved or exempted aid schemes exceeds the maximum amount of aid, which may be granted due to the approved national regional aid map for an investment of EUR 100 million989.990 Therefore, an investment project with an eligible investment volume of more than EUR 100 million, thus a very large investment project991, do just not require notification, when the total amount of aid from all sources does not exceed the maximum amount that an investment project with eligible expenditure of EUR 100 million can receive according to the rates and rules in para. 67 RAG 2007.992 Is the beneficiary content with the amount of aid he would receive for a total investment of EUR 100 million due to specific regional aid ceiling approved in the regional aid map, there is no notification request. This can be effected in avoiding of subsidy if the aid exceeds the amount for EUR 100 million. But this can also be achieved by giving a lower subsidy rate for the whole investment project. 316 Therefore, the investment of EUR 110 million in the example 993, requires no notification under para. 64 RAG 2007. A regional aid ceiling of 30% allows to grant regional aid up to an amount of EUR 22.5 million without notification. Due to the selected reduction from 30% to only 25% maximum intervention amount the sample company receives, as shown above, a subsidy of only EUR 21.02 million. This amount is less than the permitted maximum amount of EUR 22.50 million and does not require an approval in the sample region. Would the aid ceiling in the regional aid map defined only with 20%, the company with a total investment of EUR 110 million could receive without a notification only EUR 15 million. With an approval the maximum amount would be EUR 15.68 million. Any further aid in this sample would not be approved already cause it exceeds the basic rate of the aid intensity. 317 A request of notification is based solely on the aid amount provided for the investment project. The investment volume has only the function to determine the amount of aid. When a national regional aid map permits a regional maximum aid intensity of 15% GGE, a Single investment project would be subject to notification when it should receive a funding amount of more than 11.25 million EUR. 318 The calculation according to para. 67 RAG is as follows: 315

In case of 15% GGE, the share of up to EUR 50 million:

EUR 7.50 million

the share from EUR 50 million to EUR 100 million:

EUR 3.75 million

in total:

EUR 11.25 million

985

See above para. 290 and 299. RAG 1998 (footnote 2). 987 MSF-2002 (footnote 73). 988 Para. 67 footnote 61 sentence 2 RAG 2007; Article 13(4) second half sentence GBER I. 989 Para. 67 RAG 2007. 990 Para. 64 sentence 1 RAG 2007; the same applied according to para. 24 MSF-2002 (footnote 73). 991 Regarding the term of a very large investment project: Hancher/Ottervanger/Slot/Junginger-Dittel/ Dittel (footnote 826). 992 Para. 64 sentence 1 RAG 2007. 993 See above para. 311–313. 986

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This method also applies to these cases where for example due to a change in the 319 permissible aid ceilings individual subprojects of a Single investment project pursuant to para. 60 RAG 2007 were promoted with different aid intensities, also different “basic subsidy rates”.994 Thus, if a project in 2009 with an eligible investment volume of EUR 70 million takes place and in 2011 occurs on the same site an extension investment with an eligible investment volume of EUR 30 million, so the total investment volume of this Single investment is EUR 100 million. Is this project in a Statistical effect region995 with a permitted funding rate of 30% until 31.12.2010 and decreases the subsidy rate since 1/1/2011 to only 20%, so the notification-free maximum aid volume is nominal, without consideration of the interest996, with EUR 21 million997 as follows: The following table has been taken from para. 64 RAG 2007. It presents the rates for 320 the aid intensities for the regional aid maps which need to be notified within the meaning of Article 108(3) TFEU: Aid intensity according to the regional aid map in % GGE.

10%

15%

20%

30%

40%

50%

Amount subject to notification*

EUR 7.50 million

EUR 11.25 million

EUR 15.00 million

EUR 22.50 million

EUR 30.00 million

EUR 37.50 million

* The notification is only required if these rates are exceeded. 998

That also excludes an (additional) subsidy by the de minimis-Regulation of 2006. 999 321 That means, also under use of de minimis subsidies it is inadmissible to grant aid for the same project to the maximum value, demonstrated in the figure para 320 above, on top without a notification. Finally, Ad-hoc-aid within the meaning of RAG 2007 is always to be notified to the 322 Commission. Ad-hoc-aid, is the aid just not based on a scheme.1000 It is regarded as having a “clear impact on trade and competition”.1001 Therefore the Commission requests for ad-hoc-aid for large investment projects a precise justification in order to assess the impact to the regional development.1002 Outside the RAG 2007, however, merely additional regional Ad-hoc-aid within the meaning of Article 13(1) sentence 2 GBER I or Article 3(3) RRIA do not require prior notification. (4) Single project. These significant aid-reductions for large investment projects and 323 the notification requirement bear the risk, that these large projects may be split up into

994

Com., State Aid, Final Decision, C 34/2008, para. 57 footnote 14 – Deutsche Solar (footnote 730). Para. 18–20, 46 RAG 2007; see above para. 63, 64, 84 and 91. 996 Para. 41 RAG 2007, see above para. 226–233. 997 See below para. 333, 376. 998 Para. 64 sentence 1 and 2 RAG 2007. 999 Para. 75 RAG 2007; Article 2(2), (5) Regulation (EC) No. 1998/2006 of the Com. of 15 December 2006 on the application of Articles 87 and 88 EC-Treaty to de-minimis aid, OJ 2006 L 379/5 (De-minimis Regulation 2006). 1000 Arg. e contr. para. 71 1st tiret, 106 RAG 2007; Article 2(1) lit. d RRIA (footnote 3); Article 2 No. 4 GBER I. 1001 Para. 64 footnote 60 RAG 2007. 1002 In detail see above para. 209. 995

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several smaller single projects in order to avoid the exceeding the thresholds and thus the reduction of the aid.1003 324 Para. 60 sentence 2 RAG 2007 seems to contain a ‘statutory’ fiction. On the other hand, it has subjective elements, for example the intention to escape the guidelines. The recipient can provide evidence that he did not have this intention. Therefore, the rule in para. 60 sentence 2 RAG cannot be regarded as a fiction but as a rebuttable presumption.1004 325 The rule comprises of two objective elements: ‘Period of three years’1436 and ‘fixed assets combined in economically indivisible way’1005, as well as the subjective element ‘intention to escape the rules’.1006 (a) Period of three years. The rule derives from para. 49 sentence 3 MSF-2002. 1007 Initially it was unclear whether the period of three years was a static or dynamic period.1008 Furthermore the beginning and the ending of the period were not clear. In discussion was, to let start the period at the end of the initial project. This would have led to a potential non-ending chain of projects. Following this idea, from the date on which the investment-threshold of EUR 50 million or EUR 100 million would have been exceeded, possibly with the first major investment project, regional aid for further investments for this company would become unattractive. In particular, so regional aid would have lost its justification: It would have been neither possible to contribute substantially to the economic development of an assisted region nor to provide companies, established in a less developed region, a real disadvantage compensation for to continuing the investment. At the same time the discussion demonstrates that arose doubts concerning compliance with the Community law principle of clarity and definiteness.1009 327 In practice, the Commission clarified this provision, starting with its decision to AMD1010 and continued in its decision to Qimonda1011 and developed the formula ‘beginning — beginning’. This means that time between each beginning of the projects is relevant. Is between the two relevant beginnings a period of more than 36 months, the Commission assumes that the two projects don’t constitute one single project. 1012 As the beginning counts only the relevant, actual start of work on the project in the meaning of para. 38 RAG 2007.1013 328 The same applies if a project includes several subprojects. If a project comprises several dependent sub-projects, the relevant start of work on the whole project counts. Only for this project start the premature start is allowed, may be combined with the 326

1003 Para. 64 footnote 60 sentence 2 RAG 2007; this risk realized in the scope of the motor vehicle framework 1993 (footnote 46) with a split of a large single project to over 30 smaller individual projects in the case SEAT: Com. State Aid C 34/1995 (ex NN 63/94 and N 222/95), OJ 1995 C 237/2, 5, 8, 9. 1004 Solte ´z/Scha¨dle EuZW 2008, 134. 1005 See para. 326 et seq. 1006 See para. 335 et seq. 1007 MSF-2002 (footnote 73). 1008 Overview of the previous discussion: Solte ´sz/Marquier EuZW 2004, 587 et seq. 1009 ECJ, Case C-30/89 – France [1990] ECR I-691, para. 23; Solte ´sz/Marquier, EuZW 2004, 587, 589. 1010 Com., State Aid N 810/2006 – AMD (footnote 733). 1011 Com., State Aid N 872/2006 – Qimonda (footnote 695). 1012 Com., State Aid N 810/2006 para. 46 – AMD (footnote 733); State Aid N 872/2006 para. 62 footnote 21 – Qimonda (footnote 694); Opening Decision C 31/2009 (ex N 113/2009), OJ 2010 C 64/15, para. 66 – Audi Hungaria; State Aid Final Decision C 21/2007 (ex N 578/2006) of 30 April 2008, OJ 2008 L 295/34 para. 70 – IBIDEN; Final Decision C 21/2008 (ex N 864/2006) of 17 June 2009, OJ 2009 L 237/ 15 para. 78 footnote 35 – Sovello, EverQ. 1013 Para 38 footnote 40, 60 RAG 2007; see above para. 159–163.

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statement that the project in principle meets the conditions of eligibility, para. 38 sentence 2 RAG 2007.1014 If two projects cannot economically be separated within the meaning of para. 60 footnote 55 RAG 2007, they are subject to the same rules. With regard to the period of time the beginning of the first sub-project is relevant. If later a third project takes place, so for a possible inclusion in the existing whole project, is decisive the beginning of the first part of the whole project and the start of the new project concerned, in the example the third project. In contrast to this the beginning of the second subproject is irrelevant. Another view would not correspond to the truth of life.1015 If in 2006 an a)-area with a maximum aid intensity of 40% an enterprise invested an eligible volume of EUR 90 million in the same year, this investment could be granted an aid of EUR 28 million. If this undertaking invested additional EUR 20 million in 2007 in a true extension, the calculation is based on 110 Mio. EUR. If the maximum aid was still 40%, the undertaking could be granted an aid of EUR 31.36 million. As it had already received EUR 28 million, it can only be granted EUR 3.36 million for the extension. This calculation faces difficulties if another intervention rate applies to the second project at the time of granting the aid. If the maximum intensity is reduced to 30% since 1 January 2007, the whole investment can be granted in 2007 with EUR 30,52 million. Although the enterprise was aided in 2006 for the first project with EUR 28 million, the aid already granted for the first project remains untouched. The aid for the second project is calculated on the basis of the new intervention rate of 30%. The new intervention rate has to be reduced according para. 67 RAG 2007 1016, thus the undertaking can be granted for the extension only with EUR 2.52 million. All amounts are nominal amounts.1017 In case of tax aid, as for example investment allowance, it is also the beginning of the project and not the time of the granting which is relevant. The aid can be claimed as there is a legal basis without any discretion. This claim comes into existence on the merits and related to the respective intervention rate with the value of the measure. If a project which is subject to a tax aid started in 2009 with an intervention rate laid down in the aid map of 30% and took until March 2011, the tax aid could have amount to 30% in the years 2009, 2010 and 2011. This also applies if the maximum intervention rate was reduced to 20% by 1 January 2011. However, if both projects have been notified and approved by the Commission according to Article 108(3) TFEU as a single investment with two sub-projects, the aid rates conform to the approval. These are calculated on the basis of the rules which applied at the time of the notification.1018 The basic rates of the time of the beginning of the first subproject apply to determine the present value. 1019 With this method, the

1014 Several sub-projects in more than one funding-period: Com., State Aid N 863/2006 of 13 June 2007, para. 10, 11, 35, 36 – Avancis. 1015 Com., State Aid No C 34/2008, para. 56, 57 – Deutsche Solar (footnote 730); sceptical and enquiring: Heidenhain/Jestaedt, § 15 para. 52, 53. 1016 Com., State Aid C 34/2008, Final Decision para. 56, 57 footnote 13- Deutsche Solar (footnote 730): for the amount between EUR 90 million and EUR 100 million the aid is nominal EUR 10 million × 30% × 50% = EUR 1.5 million. To the extend of EUR 110 million an aid amount of EUR 10 million × 30% × 34% = EUR 1.02 million is permissible; see above para. 226, 319 et seq. and below para. 376. 1017 For discounting to the actual cash value pursuant to para. 41 RAG 2007 see Com., State Aid, Final decision C 34/2008 para. 57 footnote 13 – Deutsche Solar (footnote 730) and above para. 226 et seq. 1018 Para. 63 footnote 58 RAG 2007. 1019 Communication on the reference value 1999 and Communication on the reference value 2008 (footnote 589).

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332

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Art. 13–16 334–337

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Commission ensures certainty for the undertakings and the Member States. However, prior investments notified only with the new project subject to para. 60 RAG 2007, remain untouched. They are a temporal and calculatory checkpoint in order to calculate the additional aid.1020 (b) Fixed assets combined in economically indivisible way. Like the determination of the ‘period of three years’, this element also aims to prevent dividing large projects into smaller sub-projects in an artificial manner. The following four criteria apply. 335 The technical connections,1021 their functional connections,1022 their strategic connections1023 as well as their direct proximity1024.1025 The economic indivisibility is to be assessed regardless of the underlying ownership situation. The fact, if a project is carried out by one or more undertakings does therefore not have any impact on the of the economic indivisibility.1026 334

aa) Significant decisions of the Commission. The Commission has not yet conclusively decided how these links and immediate geographic proximity are defined within the RAG 2007. This far, in its Dell Poland1027 decision, the Commission has examined the criteria that are relevant for timely investment projects of multiple undertakings at one location and within the same sector (cluster). In an additional (opening) decision1028, the Commission hinted at the criteria under which she would doubt that an investment projects constitutes one or more projects as an economically indivisible entity within the three-years period. 337 The decision to Dell was based on a project of the lead investor Dell and the investments of two suppliers of the lead Investor, located in an immediate geographical proximity. Both suppliers were selected by Dell following a tender to provide product and logistic Services. In this case the Commission decided, the investment of the three companies do not form a single investment project in the meaning of para. 60 footnote 55 RAG 2007. The two suppliers, located nearby the lead-investment are not controlled (directly or indirectly) by Dell. They were selected by a selection procedure. The agreements between the purchaser and its suppliers foresee that in case of nonfulfilment the agreements will be terminated and a new tender will be organised. There are no provisions of exclusivity on any side – the suppliers are free to provide services to any other company and the purchaser is free to choose other suppliers. There is also no physical link between the projects. In particular, there is no ‘back-and-forth’ processing of semi-finished goods. Finally, there is no single technical function. The accessory kits are separate stand-alone products that are integrated with the purchasers products 336

1020

Com., State Aid C 34/2008, Final Decision para. 56, 57 footnote 13 – Deutsche Solar (footnote 730). See below para. 360. 1577 Para. 60 footnote 55 sentence 2 and 3 RAG 2007. 1022 See below para. 361. 1023 See below para. 364. 1024 See below para. 367. 1025 Para. 60 footnote 55 sentence 1 RAG 2007. 1026 Para. 60 footnote 55 sentence 2 and 3 RAG 2007. 1027 Com., Opening Decision C 46/2008 (ex N 775/2007) of 10 December 2008, OJ 2009 C 25/9, para. 46–50 – Dell, Poland. In the Dell-case the Commission terminated the formal investigation procedure with a final decision. Therein the Commission referred to its considerations in the opening decision and found that no statements concerning the character of the project being an individual projects were made. Hence, it will remain in line with its opinion stipulated in the Opening Decision, Com., State Aid, Final Decision C 46/2008 (ex N 775/2007) of 23 September 2009, OJ 2010 L 29/8, para. 125, 126 – Dell, Poland. 1028 Com., Opening Decision C 34/2008 (ex N 180/2008) of 16 July 2008, OJ 2008 C 217/19, para. 37– 39 – Deutsche Solar. 1021

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during the finale productions stage. The investment of the purchaser would be possible without the investments of the suppliers. The investment decisions were taken independently. The subsequent agreements were entered into between each individual investor and the Polish authorities, and are not mutually dependent on each other. Furthermore, there is not a clearly identified common aim. The suppliers’ business objective is to sell their product for use in a variety of applications in other end products. The products manufactured by each enterprise in the cluster are to be viewed as unique products that are sold and marketed separately on the market. The investors in the cluster are not aiming at producing the same end product. Therefore, there do not exist any sufficient technical, functional and strategic links in order not to consider the suppliers’ investments as part of a single investment project of the purchaser in the meaning of para. 60 footnote 55 RAG 2007.1029 The opening decision to Deutsche Solar1030 was based on a ‘greenfield’-investment 338 of the undertaking with a timely distance of approximately one and a half years and with that within the three-year period and at a distance of about 5 kilometres from the place of the initial investment.1031 Within the opening decision, the Commission only identified minimal technical and functional links. The employees active in production are different in both investments. There appears to be no shipment of intermediate products between the two investments as the products are not in a vertical relation to each other. Moreover, each plant has its own production facility and its own machinery to produce its own capacity of solar wafers. However, employees in management, sales and distribution are overlapping and it is unclear if more functions would be the same for the two investments. Moreover, since the two investments will produce the same product, they concern the same kind of production process using similar machines, equipment and techniques at both plants. The suppliers of the machines/equipment and the suppliers of raw materials of the two new investments might thus also typically be the same. The latter elements can be considered as at least some kind of functional and technical links.1032 A distance of 5 km between two production sites could be regarded as within 339 immediate geographic proximity. The strategic links are rather strong as the two plants will produce manufacture the same product. The products can be sold on the same market and have the same life cycle. With that, the strategic planning is for both ne investments. Furthermore, investments are taken almost at the same time. The management, which are normally in charge of strategic decisions, are overlapping. Lastly, strategic location considerations such as the processing of silicon in the region and the availability of skilled staff are for both plants the same. 1033 The Commission’s cluster-decision of Dell1034 is rather precisely in line with its 340 previous decision to the Polish electronics-cluster LG Philips. 1035 These decisions were made according to para. 49 MSF 20021036 4 months after the publishing of the new RAG 2007 in the Official Journal.

1029 Com., Opening Decision C 46(2008 para. 42–50 – Dell, Poland (footnote 1032); Com., Final Decision C 46/2008 para. 125, 126 – Dell, Poland (footnote 1032). 1030 Com., Opening Decision C 34/2008 (ex N 180/2008) – Deutsche Solar (footnote 1033). 1031 Com., Opening Decision C 34/2008 (ex N 180/2008), para. 38 – Deutsche Solar (footnote 1033). 1032 Com., Opening Decision C 34/2008 (ex N 180/2008), para. 37 – Deutsche Solar (footnote 1033). 1033 Com., Opening Decision C 34/2008 (ex N 180/2008), para. 38 – Deutsche Solar (footnote 1033). 1034 Com., Opening Decision C 46/2008 – Dell, Poland. 1035 Com., State Aid N 245/2006 of 19 July 2006 – Philips, Poland. 1036 MSF 2002 (footnote 73).

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Within its decision of LG Philips1037 and the associated additional 7 decisions1038, the Commission stated that the in total 8 undertakings settled in the same location formed a cluster similar to those existing in Asia producing LCD-TV modules. No comparable state aid rules exist there. Consequently the 8 investment projects are not ‘artificially’ separated in several subprojects in order to escape the State aid rules. 1039 342 In addition there is no indication that LG Philips’s investment would be impossible without the seven other investments in close geographical and temporal proximity. The divisibility of the investments is also confirmed by business realities in Asia. The geographical proximity of the investments in the cluster was influenced by the Polish authorities. Moreover, the main reasoning for the companies to set up as a cluster is to achieve economic efficiencies. It also leads to innovation advantages and provision of companies access to a larger share of qualified personnel. The investment decisions have been taken independently and subsequent agreements entered into between each individual investor and the Polish authorities are not mutually dependent on each other. The components manufactured by the investors in the cluster are not linked technically. They constitute separate and stand alone products in their own right that can be (and often are) produced separately from a wide variety of raw materials. Moreover, all manufactured products can be (and eventually will be) sold and marketed separately. The projects are not functionally linked by any preferential supply or exclusivity agreements. The various investors are free to set prices in the way they see fit and, since both LG Philips and the other investors on adjacent sites, procure or sell the products in question in Asia (to each other, but also to and from third parties). In addition, companies in the cluster will also manufacture products to be sold solely outside the cluster. In a first period the dependence on sales within the cluster will be important, but never exclusive. The undertakings in the cluster have several suppliers and customers. According to the company projections, LG Philips will sell more than 50% of its production outside the cluster. The dependence of the remaining component producers in the cluster on sales to LG Philips will significantly diminish overtime. The group of component producers in the cluster are expected to supply to LG Philips in the range of around up to 80% of their overall production 3–4 years after the start of production. There is no physical link between the projects as conveyors for example. The various goods and components are being produced in separate discrete processes in each project. In particular, there is no “back and forth” process by which a product would be semi-finished by one company, provided to another for further processing and returned to the first company for completion. Shipping occurs over public roads and not through private means. Each of the companies will operate its own warehouses for raw materials and products and will independently manage and decide on its production processes and capacity usage. Furthermore, the investments do not have a clearly identified common aim. The suppliers’ business objective is the sale of their own products that may eventually be used for a variety of applications like formulation into other end products The products manufactured by each individual investor are to be viewed as unique products that are sold and marketed separately on the market. The aim of each of the investors in the cluster is not to produce the same end product. 341

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Com., State Aid N 245/2006 – Philips, Poland (footnote 1040). Poland had also registered the other cluster participants: Com., State Aid N 246/2006 – Dong Seo Display; N 247/2006 of 19 July 2006 – SMT; N 248/2006 of 19 July 2006 – Dong Yang Electronics; N 249/ 2006 of 19 July 2006 – Heesung Electronics; N 250/2006 of 19 July 2006 – LG Chem; N 251/2006 of 6 August 2007 – LG Innotek; N 256/2006 of 19 July 2006 – LG Electronics Wroclaw Household appliances and N 257/2006 of 6 August 2007 – LG Electronics Wroclaw. 1039 Com., State Aid N 245/2006, para. 17, 60 – Philips, Poland (footnote 1040). 1038

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Consequently, all the investment projects in this cluster are assessed individually. Hence, it concerns not a single, but separate capital projects. Although four of the eight involved undertakings – LG Chem, LG Innotek, LGE and LG Philips – are part of the Korean LG Corporation with reciprocal shareholding up to 69.8%, they are independent from each other. The independence is ensured by the fact that three of the four undertakings are listed on the Korean Stock Exchange and were under the obligation to comply with strict requirements concerning transparency and independence. 1040 The Commission does not decide consistently and in the same way. So is the decision 343 Deutsche Solar very different from the previous Q-Cells decision1041. The Q-Cells decision was also handed approximately four months after the announcement of the RAG 2007. Based on the auxiliary criteria described in the MSF-2002 1042, the Q-Cells Commis- 344 sion decision states clearly that the two investments in question started within a period of less than three years. But the two production sites are separated by 1.5 km, and there is no direct physical link between the two sites. Shipping occurs – if at all – by public roads and not through private means such as internal conveyor belts. The various goods and components are being produced in separate, discrete processes in each project. In particular, there is no ‘back and forth’ process by which a product would be semifinished at one plant, provided to another for further processing and returned to the first for completion.1043 Furthermore, there is no indication that the new investment would be impossible without the old investment. Both investments have their own land, buildings and equipment. Administration is separate. The only function that seems to be performed at the same time for the two plants is the strategic and operational management. And there is no supply link between the two investments. The new project is able to survive without the old project. The divisibility of the investments is also confirmed by business realities in this fast moving and worldwide sector. New investments are made at a fast rate and on a worldwide scale.1044 Thus, although the projects seem to have the same technical function and a common aim (production of solar cells), the other criteria of the definition of a production site (economic indivisibility, physical and functional link) are not fulfilled. Therefore, the current project should not be considered as a single investment project with the earlier project. 1045 One year later the Commission decided similarly in the EverQ-case.1046 Following a 345 formal investigation procedure, the Commission stated that-the two immediately adjacent projects do not constitute a single project within the meaning of para. 49 MSF-2002.1047 Both projects are separate production facilities with separate fixed assets and with separate access to the public road network. Both production facilities cover the complete production chain for solar modules, starting from wafers, via cells to modules. There are no physical links between the ‘series of fixed capital items fulfilling a precise technical function’ that constitute the two production facilities. Every plant could be sold separately, and could be run separately without requiring any physical changes in the production process. Indeed, the two plants have some’ centralised services and produce the same product, using the same production process, machines and equipment and the suppliers of machines, equipment and raw materials are also typically the 1040

Com., State Aid N 245/2006, para. 58, 61–74 footnote 19 – Philips, Poland (footnote 1840). Com., State Aid N 850/2006 of 10 July 2007 – Q-Cells. 1042 Para. 49 MSF-2002 (footnote 73). 1043 Com., State Aid N 850/2006, para. 39 – Q-Cells. 1044 Com., State Aid N 850/2006, para. 40 – Q-Cells. 1045 Com., State Aid N 850/2006, para. 41 – Q-Cells. 1046 Com., State Aid C 21/2008, para. 107 – Sovello, EverQ (footnote 935). 1047 MSF-2002 (footnote 73). 1041

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same and maintenance or management of spare parts is organised centrally. However, it is true that typical elements that would demonstrate functional links between the ‘series of fixed capital items fulfilling a precise technical function’ that constitute the two production facilities are not present in this case. For example, there is no supply relationship between the two projects, no common technical infrastructure (e. g. power plant or similar) nor an exchange of intermediate products. Both plants constitute autarkic production lines.1048 Moreover, the projects are independently economically viable. There is no indication that the first project (a pilot project) is not economically divisible from the second project (a volume project). Furthermore, the Commission notes that alternative locations for the second project, in Europe and in the US, had been considered by the management of the beneficiary company. Finally, the advantage is only approximately EUR 10 million of extra aid for the setting-up of two separate investments compared to reduced aid for a single investment project. This advantage has to be balanced against the total costs. All calculations suggest that there is no economic incentive to ‘artificially’ split the two investment projects.1049 346 Thus the decisions of the Commission diverge in the procedure of Deutsche Solar 1050 on the one band and the procedures of Q-Cells1051 and EverQ1052 and the cluster decisions1053 on the other hand. This incongruity can not be explained by a change of the legal provisions from the MSF 20021054 to the RAG 2007. bb) Ratio legis of the provisions in RAG 2007. In the interest of simplification and transparency, the RAG 2007 absorbed the provisions of the Multi-sectoral Frameworkon regional aid for large investment projects from 2002.1055 Thus at the same time and directed to the prevention of misuse, the RAG 2007 assumed the rules on the assessment of several investment projects as in one or in several sites made, hence the difference between a single investment project or several investment projects. In particular, with para. 60 footnote 55 RAG 2007, only some individual misleading wordings were eliminated or clarified, without, however, changing the content of the rules itself.1056 348 The starting point for the criterion ‘fixed asset that constitutes an economically indivisible entity’ are particularly experience-based 1057 fears, by a clever division of large investment projects in a number of smaller, parallel or sequentially performed initial investment or through appropriate corporate or contractual structures to be able to escape substantial reductions in subsidies or even the approval requirement referred to in Article 108 (3) TFEU. This also includes by a proper choice of the company’s permanent establishment concept, and thus the creating at least at first glance of independent facilities, to avoid a notification or a reduction of the subsidy rates. 349 Therefore, it is an object to prevent circumvention of these rules. This includes in particular, to assess the economic indivisibility regardless of ownership. 1058 This should 347

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Com., State Aid C 21/2008 (ex N 864/2006), para. 86, 87 – Sovello, EverQ (footnote 935). Com., State Aid C 21/2008 (ex N 864/2006), para. 104, 105 – Sovello, EverQ (footnote 935). 1050 Com., Opening Decision C 34/2008 – Deutsche Solar (footnote 1033). 1051 Com., State Aid N 850/2006 – Q-Cells (footnote 1045). 1052 Com., State Aid C 21/2008 – Sovello, EverQ (footnote 935). 1053 Com., State Aid N 245/2006 – Philips, Poland (footnote 1040); Opening Decision C 46/2008 – Dell, Poland (footnote 1032). 1054 MSF-2002 (footnote 73). 1055 Para. 62 RAG 2007. 1056 Hancher/Ottervanger/Slot/Junginger-Dittel/Dittel (footnote 826), Chapter 14, para. 14–007, footnote 26. 1057 Com., State Aid C 34/1995 (ex NN 63/94 und N 222/95), OJ 1995 C 237/2, 12 – SEAT. 1058 Para. 60 footnote 55 sentence 2 RAG 2007. 1049

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deprive the undertakings of the opportunity to escape through appropriate company structuring, the reduction mechanisms or the notification. On the other hand, the Commission considers that clustering, i. e. the establishment of several companies of the same or closely related industry in close geographical proximity constitutes a very meaningful regional economic development and should be particularly supported. 1059 cc) Development and content of para. 60 RAG 2007. The correct interpretation of the four criteria mentioned in para. 60 footnote 55 RAG 2007 can be deduced from the previous developments. So already former provisions were in force to counteract an artificial subdivision of an investment project into individual sub-projects or on the other side to consider several projects in favour of individual companies to one project in order to participate in the same aid-rates. 1060 Following the experience with the Spanish car manufacturer SEAT1061 based on the notification duty pursuant to the motor vehicle framework 19891062, the motor vehicle framework 1997 contained first considerations to the exclusion of avoidance schemes. Accordingly, a notification was required for any aid that was intended to be granted, even under approval aid schemes, a single project or an overall project of one or several undertakings in the car manufacturing industry. The notification pursuant to Article 93(3) ECT (now Article 108(3) TFEU) was required before granting if at least one of the following thresholds is exceeded: – expressed as the nominal amount of the investment project (total costs of the project): 50 million ECU, or – expressed as the total gross aid for the project, whether State aid or aid from Community instruments (Structural funds and framework programmes), irrespective of the form and objectives of the measure: 5 million ECU.1063 Then the Commission examined the projects of the manufacturers and each tier one supplier1064 to determine the compatibility of each proposed aid.1065 Furthermore, the motor vehicle framework 1997 stipulates that an investment project should not be artificially broken down into several sub-projects or spread over several financial years in order to avoid the obligation to notify.1066 On the assumption of an overall project the Commission explained that a manufacturer may, on the actual site of the investment or in one or several industrial parks in fairly close geographical proximity, integrate one or more projects of first-tier component suppliers for the supply of modules or sub-systems for the vehicles or engines being produced. An ‘overall project’ means one which groups together such projects. 1067 However, the 1059 Com., State Aid N 245/2006 of 19 July 2006, para. 65 – Philips, Poland; N 299/2007 of 25 June 2008, para. 62 – Sharp; Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.951. 1060 Motor vehicle framework 1997 (footnote 18, Sec. 2.2 a). 1061 Com., State Aid C 34/1995 (ex NN 63/94 und N 222/95), OJ 1995 C 237/2, 5, 8, 9 – SEAT. 1062 Motor vehicle framework 1989 (footnote 46), Sec. 2.2. 1063 Motor vehicle framework 1997 (footnote 18), Sec. 2.2. a). 1064 A ‘first-tier component supplier’ means a supplier, whether independent or not, supplying a manufacturer, sharing responsibility for design and development, and manufacturing, assembling or supplying a vehicle manufacturer during the manufacturing or assembly stage with subassemblies or modules. As industrial partners, such suppliers are often linked to a manufacturer by a contract of approximately the same duration as the life of the model (for example, until the model is restyled). A first-tier component supplier may also supply Services, especially logistical Services, such as the management of a supply centre; See. 2.1 .d) Motor vehicle framework 1997 (footnote 18). 1065 Motor vehicle framework 1997 (footnote 18), Sec. 2.2. a). 1066 Motor vehicle framework 1997 (footnote 18), Sec. 2.2. a) (footnote 14). 1067 Motor vehicle framework 1997 (footnote 18), Sec. 2.1. e).

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framework does not assume an overall project in every case. So it stated, an investment of one first-tier component supplier is integrated within the definition of the global project if at least half the output resulting from that investment is delivered to the manufacturer concerned at the plant in question.1068 Lastly, the framework requires a clarification of the criterion ‘at the actual site of the investment or in one or several industrial parks in fairly close geographical proximity’. This proximity could inter alia take the form of a fixed link (for example, automated conveyor belt) allowing the delivery of modules directly into the car factory.1069 This was achieved with the establishments of the respective supplier on the premises or in immediate proximity of the vehicle manufacturers’ premises. It can be inferred that for the overall assessment of individual investment components it depends, if there is a suspicion of an artificial splitting of an investment project, whether at least one project is referred to the other. This is the case if one project would not make sense without the other. So a supplier who is not directly or indirectly linked to the manufacturer via a conveyor belt, a lorry connection or a production line, has no reason to connect itself so closely with its customers that it would be considered as a tier one supplier, possibly artificially, integrated in its investment project. Thus, decisive for an overall assessment is the economic indivisibility of the individual projects. These thoughts of the motor vehicle framework 1997 have been included in the MSF19981070 for the first time concerning regional aid regulation irrespective of the sector. They have led to the following rule: ‘An investment project should not be artificially divided into sub-projects in order to escape the notification obligation’.1071 However, this framework did not have any assessment criteria. Hence, the provisions of the motor vehicle framework 1997 were transferred. 1072 The MSF-20021073 has adopted the rules of the motor vehicle framework 1997 for the motor vehicle industry1074and has it developed to all other sectors of the economy. 1075 It stipulates that an investment project should not be artificially divided into subprojects in order to escape the provisions of this framework. For the purpose of this framework an investment project includes all the fixed investments on a site, made by one or more undertakings, in a period of three years. And for the purpose of this framework, a production site is an economically indivisible series of fixed capital items fulfilling a precise technical function, linked by a physical or functional link, and which have clearly identified aims, such as the production of a defined product. Where two or more products are produced from the same raw materials, the production units of such products will be deemed to constitute a single production site.1076 In the interest of simplification and transparency, the RAG 2007 adopts the provisions of the MSF-2002.1077 In particular, para. 60 footnote 55 RAG 2007 does not entail substantive change to the existing rules. These rules shall only eliminate or clarify some ambiguous wordings.1078 1068

Motor vehicle framework 1997 (footnote 18), Sec. 2.1. e) Abs. 3. Motor vehicle framework 1997 (footnote 18), Sec. 2.1. e) footnote 13. 1070 MSF-1998 (footnote 53). 1071 Para. 6.4 Sec. 2 MSF-1998 (footnote 53). 1072 Com., State Aid C 35/2001 (ex N 84/2001), OJ 2002 L 329/10, para. 48 – BBE and BBG Bilbao, Spain. 1073 MSF-2002 (footnote 73). 1074 Para. 42 lit. a and Annex C MSF-2002 (footnote 73). 1075 Para. 49 MSF-2002 (footnote 73). 1076 Para. 49 sentence 2–5 MSF-2002 (footnote 73). 1077 Para. 62 RAG 2007. 1078 Hancher/Ottervanger/Slot/Junginger-Dittel/Dittel (footnote 826), Chapter 14, para. 14–007, footnote 26. 1069

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Both rules, para. 49 MSF-2002 and para. 60 RAG 2007, relate the criterion of 359 economic indivisibility to the fixed assets of the undertaking. This results also from the more clearly worded French version of para. 60 RAG 2007.1079 Therefore, for the acceptance of an economic indivisibility it is to determine whether there is a link of economically indivisible elements of fixed assets. Hence the core element of this rule is, that the one investment project without the other, economically speaking, is inconceivable but at least nonsensical1080 or incomplete – and so a torso. An artificial separation will therefore have the effect at least the one part of the investment being economically incomplete without the other. In order to assess whether the first project without the second is or remains a torso, the RAF 2007 provide the aforementioned four criteria.1081 Technical links: As already applied in the motor vehicle framework 1997, by 360 technical links common supply or disposal lines, lorries, ropeways, conveyor belts or similar links between two manufacturing facilities are understood. In that regard, it is the most immediate and most direct way of connecting two sites. Is one manufacturing site planned in a way that it is technically dependent on the other, it would simply be incomplete without the other establishment. Hence, if a permanent establishment, as planned, has to connect to the energy or water supply to another establishment, the plant is incomplete without this access. The same applies if the manufacturing site for the production needs certain raw materials or parts that are supplied directly by the other plant, such as a glass factory needs quartz sand to be supplied from the other establishment through a pipe directly into the glass tank or one site is connected to the other via a steam bridge.1082 In principle, it concerns around these links that have already been described for the acceptance of an overall project in the motor vehicle framework 1997.1083 This also means that the presence of such a technical link always results in the assumption of economic indivisibility. But this also follows that the other way around, for example neither the same production processes, nor the production of the same products, even on identically constructed machines, nor the use of the same raw materials nor the use of the same distribution channels, do constitute the assumption of a direct technical link, such as a completely or partially shared management. 1084 Insofar the one project, the one facility is technically not incomplete without the other one, not a shell. In the case of a real ‘greenfield’- investment a technical link is generally excluded. As also excluded the Commission considers technical links in that case when the project to assess, possibly residing on the campus of a previous project, serves the production of projects incompatible with the products manufactured in the previous project.1085 Functional links: A functional link requires that the one project depends on 361 functions of the other project. This is the case where one project is involved in the manufacturing process of the other. These may be fixed and interconnecting supply 1079 Para. 60 sentence 2 RAG 2007: ‘… un grand projet d’investissement sera considéré comme un seul projet d’invetissement lorsque l’investissement initial est… constitué par une combinaison économiquement indivisible d’éléments de capital fixe’. 1080 Germany in: Com., Opening Decision State aid C 34/2008, para. 36 – Deutsche Solar (footnote 1033). 1081 Para. 60 footnote 55 sentence 2 and 3 RAG 2007; also see above para. 336. 1082 Com., State Aid N 203/2008 of 24 March 2009, para. 49 – Papierfabrik Spremberg. 1083 Sec. 2.1. lit. e footnote 13 motor vehicle framework 1997 (footnote 18). 1084 Also see Com., State Aid N 850/2006, para. 40 – Q-Cells (footnote 1045); left undecided in Com., Opening Decision C 34/2006, para. 37 a. E. – Deutsche Solar (footnote 1033). 1085 Com., State Aid N 872/2006, para. 70 – Qimonda (footnote 695); but this is more referring to missing strategic links, see below para. 364.

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Art. 13–16 362–364

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relationships that cannot be dissolved at any time1086, the exchange of intermediate products, and the integration into the production process of the other or other comparable services.1087 Integration into the production process of the other site can be found, for example, in testing processes, intermediate treatments such as cleaning, degreasing, grinding, painting, forming, curing or similar steps before a further separate process stage. In the case of these ‘back and forth’ processes 1088, one project is also incomplete without the other. Without these solid intermediate steps of the other plant in the production process the establishment cannot manufacture in the long run. The site is dependent on the other establishment, hence a shell without the other one. 362 Here also becomes apparent that the use of the same production processes and techniques or identical machines for manufacturing in two independent manufacturing sites can just not lead to functional link. The same applies to the same suppliers of raw materials. These considerations do not touch any operational issues specific for permanent establishments, but just affect the opposite market. side, the producers of the machines used and the suppliers and shippers. For them, however, it is irrelevant whether they drive their trucks full of raw materials ‘100 km to the right’ or ‘100 km to the left’. 363 Caution is advised in the cases of so-called common technical infrastructure. 1089 If there is an infrastructure that is part of a permanent establishment, such as wastewater treatment, the common technical infrastructure establishes a technical link pursuant to para. 360 above. If the infrastructure is made available by a third party, for example railway access or a high voltage power line with a voltage transformation station, the use of this by a third party provided infrastructure facility does not affect the question of a technical or functional link between the two establishments. Then no establishment is incomplete without the other; hence they are economically divisible investments. The same applies if the one establishment resorts to an infrastructure of the other, which is normally provided by third parties, and pays the consideration as it would have to pay to the third party, too. This is conceivable when the one establishment operates its own power plant but underutilises the capacities and the other site wants to access the electricity produced there. Also in this case, there is no functional link between the establishments. This assessment would be different if the first establishment would have the power plant designed as large in anticipation of the second establishment and were due to this reliant on the second as a customer and could not put the electricity on the market otherwise. But then, the first site would be incomplete without the second because it lacked the customer of the energy produced. Even a quote below 10% of the supply needed by the previous project from the new project or vice versadoes not constitute a functional link.1090 This applies even more if accounting regulations prohibit a preference for the new establishment offering cheap prices. 1091 364 Strategic links. Strategic links are links regarding the respective input or output product overlooking a common goal. This means that the input or the output products of a manufacturing site are processed in a different establishment. A classic example is the production of electronic components, such as memory chips. They are first produced on large thin slices called silicon wafers. There they are manufactured in a 1086

Com., Opening Decision C 46/2008, para. 46, 47 – Dell, Poland (footnote 1032). Com., Opening Decision C 46/2008, para. 47 – Dell, Poland (footnote 1032); State Aid C 34/2006 Opening Decision, para. 37 – Deutsche Solar (footnote 1032). 1088 Com., State Aid N 245/2006, para. 70 – Philips, Poland (footnote 1040). 1089 Com., State Aid N 850/2006, para. 87 – Q-Cells (footnote 1045). 1090 Com., State Aid N 203/2008, para. 53 – Papierfabrik Spremberg (footnote 502). 1091 Com., State Aid N 203/2008, para. 55 – Papierfabrik Spremberg.(footnote 502). 1087

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continuous process for several weeks. These production steps are called ‘front-end’ manufacturing.1092 In order to communicate with the environment, so to be able to be incorporated in an electronic device, it is necessary to embed them. At this stage the wafers are divided into hundreds of separate chips. These chips are installed in a housing that is provided with connections for external communication.1093 This is called ‘back-end’ processing and generally takes place in another establishment. 1094 The one establishment is not able to work properly without the other, the product would be useless. Both factories are dependent on each other. They have a common strategic objective which is the production of these useful electronic devices which are enabled to interact with their environment. Other strategic links may be patent protection or IT concepts that are not restricted to the two manufacturing sites, but are embedded in the overall concept of the company. In contrast, there is no strategic link when two plants exactly produce and sell the 365 same products.1095 Just as the common distribution channels do not constitute a functional link it is also not a strategic link that would render one project incomplete without the other. Neither the one nor the other establishment would be incomplete and a torso without the other in terms of sales of identical products. Also irrelevant is the life cycle of a product. If the same product is also produced in another production site, it is imperative that it has the same life cycle as the product of the other factory. But then, this criterion is no longer suitable as a distinguishing criterion for a strategic link. 1096 The same applies to the choice of location. If two manufacturing sites select for the same objective reasons such as the availability of labour, the same region for their investment project, it does just not constitute a strategic link that renders one project to another as an incomplete shell or torso. With that, the choice of location does not constitute a link that is able to establish economic indivisibility. The Commission also assumed a lacking strategic link in the case of a pilot project and a full-scale project meeting each other1097 or in the case of two production facilities able to also exist independently from each other.1098 Finally, an at least partially identic management between two establishments does 366 not constitute a strategic link assuming economic indivisibility of investment. 1099 Each company will ultimately run by the same management, no matter how many establishments it has. The establishment manager on site is always dependent on the decisions of the head office. Hence, considering a joint management is not a real differentiator it applies to any company with more than one establishment. Immediate geographical proximity. According to the previous considerations, it is 367 likely that a company which splits its production steps – such as electronics 1100, 1092 Com., State Aid N 810/2006, para. 16, 95 – AMD (footnote 733); State Aid N 872/2006, para. 89 – Qimonda (footnote 695). 1093 Com., State Aid N 872/2006, para. 89 – Qimonda/footnote 695). 1094 Com., State Aid N 810/2006, para. 16, 95 – AMD (footnote 733); N 872/2006, para. 89 – Qimonda (footnote 695); C 45/2003 (ex N 1/2003) of 16 March 2004, OJ 2005 L 120/5, para. 6, 30, 77 – Infineon Portugal. 1095 Com., State Aid N 850/2006, para. 141 – Q-Cells (footnote 1045). 1096 Differing Com., Opening Decision C 34/2006, para. 38 – Deutsche Solar (footnote 1033). 1097 Com., State Aid N 872/2006, para. 75–77 – Qimonda; State Aid C 21/2008 (ex N 864/2006), para. 103 – Sovello, EverQ (footnote 935). 1098 Com., State Aid N 203/2008, para. 56 – Papierfabrik Spremberg (footnote 502). 1099 Com., State Aid N 850/2006, para. 40 – Q-Cells (footnote 1045); State aid C 21/2008 (ex N 864/ 2006), para. 104 – Sovello, EverQ (footnote 935). 1100 Com., State Aid N 810/2006 – AMD; State Aid N 872/2006 – Qimonda; other relevant decisions: State Aid N 905/2006 of 18 July 2007, para. 52 – Toshiba; State Aid N 203/2008, para. 56, 58 –

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aerospace1101 or automotive industry1102 – and shifted its products to various manufacturing facilities creating strategic links between these sites, will receive only reduced subsidy rates, when it invests within a three year period. The strategic links would be always created in such a case. In this regard, the criterion of immediate geographical proximity is the necessary remedy. Both projects must lie not only in geographical proximity, but in immediate geographical proximity1103 to each other. This notion of immediacy, only missing in the French and Portuguese language version of the RAG 2007, has a crucial importance. This term clarifies that the economic indivisibility does just not relate to widely scattered production units operating on the up- and downstream market. It just involves these production facilities, which are on the same site or directly adjacent to the other one, obtaining the intermediate products from or providing the intermediate products too. The immediacy in the proximity criterion thus forms the corrective to the blurred contours of the “strategic link”, and it so puts the aspect of economic indivisibility back into the frame established by the other two elements – technical and functional link: one project is located directly next to the other one and is connected with it in at least one of the three possibilities, technical, functional or strategic. 368 A Member State which has several investment projects, may at its discretion at any time one or more projects, similar to those of an overall project, explain within a three year period combined with other previous investment projects to a single project, providing that all of these projects are located in an assisted area. Consequently, the comprised investments are subject to the rules of calculating the maximum allowable aid amount according to para. 67 RAG 2007, of the possibly associated notification obligations according to para. 64 RAG 2007 and, required by para. 68 RAG 2007, of the market-intensity-test. This assessment has also the consequence that the beginning of the single investment project is determined by the beginning of the first sub-project of this overall project.1104 369 If a Member State regards an investment project of a resident company as a single investment project and thus reduces the aid rates, the Commission has to accept this self-assessment. This even applies if the projects from the view of the Commission appear differently, possibly as separate projects. Para. 60 RAG 2007 only serves the purpose to ensure the reduction of the intervention rates pursuant to para. 67 RAG 2007. This provision does not have any other function. In consequence, if a Member State declares two investment projects 450 km apart as a single investment project due to a link of the two establishments by a floating, exclusively used, pipeline, of this own assessment nothing gets in the way.1105 It is a technical link independent of a geographic distance within the meaning of para. 60 footnote 55 RAG 2007. Therefore, the assessment made by Member States is particularly not affected by the criterion of immediate geographical proximity. Also in this respect, it does not depend on whether the Commission has carried out another assessment. This criterion is only to regard as a Papierfabrik Spremberg; State Aid N 767/2007 of 30 April 2008, para. 58 – Ford Craiova; State Aid N 907/2006 of 10 July 2007, para. 35 – Matrai Ero¨mu¨ Zrt; State Aid N 850/2006, para. 41- Q-Cells; State Aid N 299/2007 of 25 June 2008, para. 71 – Sharp. 1101 EADS – Airbus with assembly sites in Belgium, Germany, France, Great Britain, Greece and Spain. 1102 Com., State Aid N 767/2007 of 30 April 2008, para. 58 – Ford Craiova, Romania. 1103 Para. 60 footnote 55 sentence 1 RAG 2007. 1104 Com., State Aid, Final Decision, C 34/2008 para. 56, 57 – Deutsche Solar (footnote 730); see above para. 327 et seq. 1105 Com., State Aid C 34/2009, Opening Decision (ex N 588/2008), Sec 3.2., 2. Tiret – PETROGAL (footnote 158); Com., State Aid No SA. 26980 (C 34/2009 (ex N 588/2008)), Final Decision of 3 August 2011, OJ 2012 L 220/1 para. 267 – PETROGAL.

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corrective for the blurred criterion ‘strategic’ link. It is not intended to prevent undertakings from having their own strategies. It is not required that all criteria mentioned should be met cumulatively in order to 370 conclude that a single investment project exists. Just as little it is necessary that none of these criteria is given in order to assess two separate projects also as separate. Rather, the Commission considers an overall assessment of these criteria. This means that the criteria are to be ‘balanced in a global assessment on a case-by-case basis’. 1106 Intention to circumvent as a subjective element. Finally, the rule on the intent to 371 circumvent also contains a subjective criterion.1107 This element was already part of the previous rule, in para. 49 MSF-2002.1108 The Commission has not made a statement regarding the intention to circumvent in para. 60 sentence 2 RAG 2007 yet. However with regard to para. 49 MSF-2002, the Commission stated without reasoning that such an intention and fulfilling a subjective criterion is irrelevant. The only decisive factors are the objective criteria.1109 e) GBER I. Article 13(10) GBER I is a comparable rule to para. 60 RAG 2007. With Article 2(1) lit. g RRIA1110 the previous regulation to GBER I had also a corresponding provision. Article 13(10) GBER I contains the same rule with regard to the three-year period as para. 60 RAG 2007. Therefore, the remarks concerning the three-year period 1111 also apply without restrictions within the scope of the GBER I. With regard to economic indivisibility, no further criteria are provided by Article 13(10) GBER I. Only the recitals allow further interpretation of this provision. 1112 Recital 41 sentence 1 GBER I presents itself as a takeover of para. 60 RAG 2007, including the criterion ‘intention to circumvention’. Recital 41 repeats the objective criteria for the assessment of economic indivisibility in footnote 55 RAG 2007. 1113 Hence, the further discussion above to large investment projects applies without limitation also to the GBER I, however, considering the peculiarity that within the scope of an Exemption Regulation regularly rather the Member States than the Commission have to carry out the assessments. The Commission restrains itself to an ex-post control either ex officio1114 or in the context of a complaint n appeals procedure.1115 Also within the GBER I, large investment projects may not receive SME bonuses. 1116

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f) Timely applicability of the different system of rules. Individually notified invest- 376 ment projects will be assessed according to the rules applicable at the time of registration of the notification.1117 The schemes for investment aid were put out of force 1 January 2007 and needed to be notified again.1118 For single investment projects taking longer than the programming period and consisting of several subprojects, the initial aid 1106

Com., State Aid C 21/2008 (ex N 864/2006), para. 82 – Sovello, EverQ (footnote 935). ‘… in order to prevent a circumvention of the rules of the guidelines’, para. 60 S. 2 RAG 2007. 1108 ‘… to circumvent the registration requirement’, para. 49 MSF-2002 (footnote 73). 1109 Com., State Aid C 21/2008 (ex N 864/2006), para. 81, 106 – Sovello, EverQ (footnote 932). 1110 RRIA (footnote 3). 1111 See above para. 326 et seq. 1112 Recital 41 GBER I. 1113 Recital 41 sentence 2–4 GBER I. 1114 Article 10 (1), (3); Article 9 GBER I. 1115 Article 20 para. 2 Procedural Regulation (footnote 95). 1116 Article 13 (4) 2. half sentence GBER I; also see para. 67 footnote 61 sentence 2 RAG 2007 and above para. 299 and 315. 1117 Para. 63 footnote 58 RAG 2007. 1118 Para. 107 1. Tiret RAG 2007; also see at para. 45 and 497. 1107

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rate before reduction and the applying rules are determined on the basis of each subproject.1119 This means that the reduction can be carried out with different ‘initial aid rates’.1120 g) Leading undertakings. aa) Preface. The effects of granting state aid on the common market do not only depend on the aid intensity and the absolute amount of the aid, but also on the market power of respective beneficiary. Its market shares define market power of an undertaking.1121 Therefore, it appears for the compatibility of aid with the common market affected by whether the subsidy benefits a company with large market shares and whether the aid leads to a significant increase in market share of the beneficiary in a shrinking market.1122 378 These considerations have not always been valid. Abandoning sector specific individual guidelines1123 and moving towards a multi-sectoral and thus a horizontal approach.1124, the Commission generated different assessment concepts. 379 Pursuant to MSF-19981125, the assessment of the Commission in essence focused on the question whether the project took place in a growing or shrinking market and the detailed appraisal of direct or indirect jobs.1126 The MSF-20021127 shifted the focus of the assessment for very large investment projects1128 initially to the question of a single investment projects.1129 A little later, the assessment of the Commission moved to the criteria for the exclusion from state aid pursuant to para. 24 MSF-2002. 1130 Thus, a subsidy was regarded as incompatible with the common market if the subsidy amount exceeded the threshold which was allowed to be granted for an investment of 100 million EUR regarding the reducing mechanism as stated in 21 MSF-2002 without an individual notification. A justification for this rule in the MSF-2002 was not detectable. 380 The succession rules in para. 68 RAG 2007 do not exclude any more regional aid in favour of undertakings with market power for very large investment projects by.1131 Rather, it demands to pass always a formal investigation procedure pursuant to Article 108 para. 3 TFEU, Article 4 and 7 Procedural Regulation 1/2003 1132 in that case, one of the criteria stipulated in para. 68 RAG 2007 is given, such as a market share of more than 25% before or after the investment or an increase in production capacity created by the investment project to more than 5% GDP growth in the EEA.1133 An exception exists if 377

1119

Com., Final Decision C 34/2008, para. 57 footnote 13 – Deutsche Solar (footnote 730). Com., Final Decision C 34/2008, para. 57 footnote 13 – Deutsche Solar (footnote 730); see above para. 314, 332. 1121 Para. 68 RAG 2007. 1122 Para. 5 criteria (footnote 21). 1123 See above para. 15. 1124 See above para. 16. 1125 Para. 3.10. MSF-1998 (footnote 53). 1126 References see above para. 17–19. 1127 MSF-2002 (footnote 73). 1128 Projects for which an amount of aid is to be granted, which should be granted for an investment project in the respective assisted region according to the respective regional aid map with a total investment expenditure of more than EUR 100 million, see above para. 20. 1129 Para. 49 MSF-2002 (footnote 73); Com., State Aid N 810/2006, para. 46 – AMD; State Aid N 872/ 2006, para. 62 – Qimonda. 1130 Com., State Aid N 158/2005 of 8 February 2006, para. 42 et seqq. – GETRAG FORD; N 850/2006 of 10 July 2007, para. 46 et seqq. – Q-Cells; N 810/2006, para. 85 et seqq. – AMD; Opening Decision C 21/2007 (ex N 578/2006), OJ 2007 C 224/2 – IBIDEN; State Aid, Final Decision C 21/2007 (ex N 578/ 2006) of 30 April 2008, OJ 2008 L 295/34 para. 77 et seqq. – IBIDEN. 1131 In detail Hancher/Ottervanger/Slot/Junginger-Dittel/Dittel (footnote 826), Chapter 14, para. 14–015; see also at para. 386. 1132 Procedure Regulation (footnote 95). 1133 For the EEA see above para. 1 footnote 1; 90 footnote 369. 1120

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the Member State demonstrates that the beneficiary has created a new product market by true innovation. In this case, the market share thresholds are inevitably exceeded – without having to assume the market and competitive intensity usually associated with this lever of market shares. Consequently, an assessment pursuant to para. 68 RAG 2007 is omitted.1134 Therefore, the assessment of the market power criteria has almost inevitably become the central analysis for notified very large investment projects. 1135 bb) In detail. (1) Criteria for the market power assessment. The determination of 381 whether the aid beneficiary in question is a company with market power or the investment in question is a market strong investment within the meaning of para. 68 RAG 2007 requires that the undertaking concerned is to receive regional aid that exceeds the threshold of 75% of the maximum amount of the aid for an investment project with eligible expenditure of EUR 100 million could receive, applying the standard aid ceiling in force for large enterprises in the approved regional aid map on the date the aid is to be granted.1136 The project must be a project with notification requirement. If the undertaking is content with the amount of aid that can be awarded at the most in accordance with the regional aid map and applying the reduction rules of para. 67 RAG 2007 for investments up to EUR 100 million, this assessment is omitted.1137 Starting point for calculating the specific notification thresholds are the regional aid 382 ceilings11138 as stated in the national regional aid map.1139 If these are reduced by half above an investment volume of EUR 50 million pursuant to para. 67 RAG 2007,so ensues for an investment volume of EUR 100 million an aid intensity of 75% of the maximum aid rate of the individual regional aid map. If the maximum aid intensity of a stated region specified in the regional aid map is 40%, the eligible investment volume of EUR 100 million can receive under the scale and the rules laid down in para. 67 RAG 2009 the following total aid: (EUR 50 million × 40% + EUR 50 million × 20%) = EUR 20 million + EUR 10 million = EUR 30 million. The amount of EUR 30 million based on an investment of EUR 100 million means a total aid intensity of 30% or 3/4 of 40% intensity allowed by the regional aid map. Hence, the mentioned amount of 75% of the aid ceiling mentioned in para. 68 RAG 2007 is just the notification threshold pursuant to para. 64 sentence 1 RAG 2007. This amount is also stipulated in Article 6(2) GBER I1140 or previously Article 7 RRIA.1141 The notification threshold for different individual regional aid ceilings can directly be extracted from the maximum aid rate stipulated in para. 64 RAG 2007.1142 These reduction rules are inconsistent within the regional aid which is a generalised 383 compensation for the disadvantages of investments just in structurally weak regions. 1143 1134

Para. 70 sentence 1, footnote 65 RAG 2007; see below at para. 391. 1566 Com., State Aid N 635/2008 of 29 April 2009, para. 61 et seqq. – Fiat Sicily; Opening Decision C 31/2009 (ex N 113/2009) – Audi Hungaria; Opening Decision C 34/2009 (ex N 588/2008), Sec. 3.4.3 – PETROGAL (footnote 158). 1136 Para. 68, 1. half sentence RAG 2007. 1137 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.957. 1138 See above para. 109–126. 1139 Para. 102 RAG 2007. 1140 Also see Mederer/Persaresi/van Hoof/Dupont/Tumasonyte (footnote 298) Chapter 6, para. 4.957; Bacon/Wishlade (footnote 40) para. 15.73; this corresponds with para. 24 MSF-2002 (footnote 73); other opinion: 75% of 75% of the regional aid ceiling: Bartosch (footnote 75), Article 87 (3) TEU, para. 43. 1141 RRIA (footnote 3). 1142 Also see above para. 320. 1143 For generalised disadvantage compensation, see above para. 1, 3 et seq., 21, 23, 30, 47, 76, 123, 146, 178, 190, 237 and at para. 386, 447 as well as para. 2, 22 No. 2 criteria (footnote 21). 1135

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Art. 13–16 384–385

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Due to its approach as a generalised disadvantage compensation for the decision for a specific region, they should already compensate the disadvantages linked with the investment in especially the destined economically weak area. Therefore, the approach of the MSF-19981144 to examine the regional impact1145 in detail was in spite all the critique and in the administrative procedure1146 more appropriate than an assessment of market power of the beneficiary undertaking. 384 The market strength assessment implies – under consideration of the reduction rules of para. 67 RAG 2007 having to apply simultaneously – that the regional aid just does not serve as a compensation and thus as an incentive for an investment in a structurally weak region. Rather it assumes that the aid strengthens the undertaking in general, similar to an operating aid. Thus, the Commission shakes to the foundations and applies the axe to the roots of the regional aid itself and puts the objectives of Article 108(3) lit. a and c TFEU in question. The control idea to an aided investment in the assisted region is not the hypothetical non-subsidies investment at the same site but the hypothetical unsubsidised investment outside the assisted region. 1147 A comparison of these two investment scenarios only can identify the required compensation for the regionally related additional expenses of an investment in the disadvantaged region.1148 385 The criterion of market power was introduced into the rules of regional aid for the first time in para. 24 MSF-2002.1149 After that, a proposed aid must be notified if the maximum aid amount exceeded the maximum allowable aid, that an investment of EUR 100 million could be obtained under the scale laid down in para. 21.1150 This table corresponds to the table in para. 67 RAG 2007. But this provision additionally stipulates that individually notifiable aid projects will not be eligible for investment aid if the beneficiary accounted for more than 25% of the sales of the product concerned before the investment or will, after the investment, account for more than 25%. 1151 In general, the same applied if the capacity created by the project was more than 5% of the size of the market measured.1152 for these projects this meant for the first time a total exclusion from a subsidy. The exclusion could be averted by limiting the provided subsidies to an investment volume that did not require notification.1153 This was regularly the case when the provided aid was lower than the amount of the maximum allowable aid for a project eligible for an investment volume of EUR 100 million and taking into account the reduction step of EUR 50 million1154 in accordance with the approved national aid map. With that, the maximum aid intensity was defined for undertakings with strong market power, regardless whether their eligible investment costs amounted to EUR 100 million or EUR 1 billion.

1144

MSF-1998 (footnote 53). Para. 3.10 MSF-1998 (footnote 53). 1146 See para. 17–19 above. 1147 Para. 22 No. 2 criteria (footnote 21); insofar unclear Com., Opening Decision C 31/2009 (ex N 113/ 2009), p. 15, 16 – Audi Hungaria (footnote 1016); as double checking thought also admissible: the hypothetically subsidised investment in another assisted region with a lower aid ceiling pursuant to the respective regional aid map, see also at para. 427 and 450. 1148 See above para. 4; para. 24, 25 criteria (footnote 21). 1149 MSF-2002 (footnote 73). 1150 Para. 24 sentence 1 MSF-2002 (footnote 73). 1151 Para. 24 sentence 2 MSF-2002 (footnote 73). 1152 Para 24 sentence 2 lit. b MSF-2002 (footnote 73). 1153 Com., State Aid C 21/2007 (ex N 578/2006) of 30 April 2008, OJ 2008 L 295/34 para. 107 – IBIDEN. 1154 Para. 21 MSF-2002 (footnote 73). 1145

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Excluding undertakings with market power from aid runs contrary to the funda- 386 mental principles of regional aid being a generalised compensation of disadvantages for an investment in an assisted region.1155 The question of whether jobs will be created within or outside the assisted area is not linked to the question of market strength of the undertaking. The objective of regional aid is not to support weak undertakings. 1156 Rather it is aimed to support weaker regions within the intra-Member State or intra-Community cohesion.1157 In essence, Member States should be given the opportunity to compensate the disadvantages of the undertakings settling down or investing in this particular region – considered an assisted region pursuant to Article 107(3) lit. a or c TFEU – rather than an economically strong region.1158 The basic approach of regional disadvantage compensation was developed in its 387 purest form of competition rules in the motor vehicle framework 1997as an instrument of comparative cost-benefit assessment. 1159 This analysis compared with regard to the mobile elements the costs that an investor would bear in order to carry out the project in the assisted region with the hypothetical costs it would bear for an identical project in a different location. In this way it was possible to determine the specific regional handicaps of the assisted region and to limit the regional aid to the regional handicaps resulting from the comparator plant.1160 This framework enabled the Commission to determine the aid level based on the necessity1161, the proportionality1162 and the effects on the industry and competition1163 with regard to the regional challenges the aid is intended to help to resolve.1164 Furthermore, this approach – as also identified by the Commission – is widely accepted both by private companies and by government bodies in the appraisal of major investment projects.1165 This is all the more remarkable, as the Commission in implementing this framework assumed that the motor vehicle sector is a sensitive sector with structural overcapacity.1166 The approach of this framework also meets the criteria for the in-depth assessment of regional aid to large investment projects.1167 Para. 68 RAG 2007 replaced the interdiction of subsidising in para. 24 sentence 2 388 MSF- 20021168 and allowed afresh regional aid in principle even for investments with eligible costs of more than EUR 100 million. However, this provision links aid to a mandatory pass of a formal investigation procedure pursuant to Article 108(2) TFEU, Article 4(4) and (6) Procedural Regulation.1169 1155 See above para. 1, 3 et seq., 21, 23, 30, 47, 76, 123, 146, 178, 190, 237, 383, 447 and para. 2, 22 No. 2 criteria (footnote 21). 1156 Solte ´sz EWS 2004, 241, 244 et seq. 1157 1587 Para. 50 criteria (footnote 21); also see above para. 1, 33, 194, 270 and below para. 444 and 448. 1158 Also see above para. 1, 383, 384. 1159 1589 Annex I, Sec. 2.2 para. 1 motor vehicle framework 1997 (footnote 18). 1160 Sec. 3.2 lit. c para. 3 motor vehicle framework 1997 (footnote 18). 1161 Sec. 3.2 lit. a para. 1 motor vehicle framework 1997 (footnote 18). 1162 Sec. 3.2 lit. c para. 1 motor vehicle framework 1997 (footnote 18). 1163 Sec. 3.2 lit. d para. 1 motor vehicle framework 1997 (footnote 18). 1164 Sec. 3.2 lit. c para. 1 motor vehicle framework 1997 (footnote 18). 1165 Annex I, Sec. 2.1 motor vehicle framework 1997 (footnote 18). 1166 Sec. 1 lit. b para. 2; 3.2 lit. d para. 1 footnote 25; Annex I Sec. 1.1 para. 4; Annex I Sec. 2.3 para. 5 and Annex I, Sec. 3.5 para. 1 motor vehicle framework 1997 (footnote 18). 1167 Para. 24, 25 criteria (footnote 21). 1168 MSF-2002 (footnote 73). 1169 Para. 68 last half sentence RAG 2007.

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The same applies if the project created an increase of production capacity of more than 5% of the market and if the recorded average annual growth rate of apparent consumption over the last five years is above the average annual growth rate of the gross domestic product in the European Economic Area (EEA)1170.1171 The determination of the capacity created is based on the data on apparent consumption 1172, i. e. the production in the EEA plus imports minus exports.1173 If the affected annual growth rate of the apparent consumption is above the average annual growth rate of gross domestic product in the EEA, a formal investigation procedure is not necessary even if more than 5% capacity increase is created.1174 390 The sales and apparent consumption in the context of market strength analysis are defined pursuant to para. 68 lit. a and b RAG 2007 using the PRODCOM nomenclature1175 at the appropriate level – normally in the EEA. If these data are not available or are not relevant, they are defined on the basis of any other generally accepted market segmentation for which statistical data are easily available. 1176 391 The Member State has the burden of proof that the designated undertaking to be funded does not fulfil the market strength criteria. 1177 If the Member State succeeds to demonstrate that the aid beneficiary creates a new product market through true innovation – in which it of course at least initially meets the criteria of market strength described in para. 68 lit. a and b RAG 2007 – the there stipulated tests are not required. It is not a matter of wanting to produce a previously unknown product. Rather, the relevant consideration is that the product in question currently has no market. For instance, until the iPhone was introduced, there was no market for smartphones. The aid will be approved under the scale in para. 67 RAG 2007.1178 392 In order to conduct the assessment of the market power of the undertaking in question, the relevant product and geographic market must be determined first. 1179 389

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(2) Relevant product market. The relevant product market is determined by the relevant product or Service. The product concerned is normally the product covered by the investment project.1180 When the project concerns an intermediate product and a significant part of the Output is not sold on the market, the product concerned may be the downstream product. The relevant product market includes the product concerned and its Substitutes considered to be such either by the consumer (by reason of the product’s characteristics, prices and intended use) or by the producer (through flexibility of the production installations).1181 In the case of different products being 1170

Concerning EEA see para. 1 footnote 1; 90 footnote 369. Para. 68 lit. b RAG 2007. 1172 Para. 68 lit. b RAG 2007. 1173 Para. 68 lit. b footnote 62 RAG 2007. 1174 Para. 68 lit. b RAG 2007. 1175 Council Regulation (EEC) No. 3924/91 of 19 December 1991 on the establishment of a Community survey of industrial production, OJ 1991 L 374/1. 1176 Para. 70 sentence 2 RAG 2007. 1177 Para. 70 sentence 1 RAG 2007. 1178 Para. 70 footnote 65 RAG 2007; also see above para. 380. 1179 Com., State Aid N 810/2006, para. 62 et seqq., 82 et seqq. – AMD (footnote 733); N 473/2008 of 17 June 2009, para. 61 – Ford, Spain; N 671/2008 of 30 November 2009, para. 73 et seqq., 86 et seqq. – Mercedes-Benz, Hungary; N 180/2009 of 4 November 2009, para. 48 et seqq., 52 et seqq. – En Plus, Italy; Final Decision C 21/2007 (ex N 578/2006), para. 82 – IBIDEN (footnote 1016); C 46/2008 (ex N 775/ 2007), para. 128 et seqq., 144 et seq. – Dell, Poland (footnote 1032); Opening Decision C 31/2009 (ex N 113/2009), para. 69 – Audi Hungaria (footnote 1016); Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.959. 1180 Para. 69 RAG 2007. 1181 Para. 69 sentence 2 and 3 RAG 2007. 1171

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manufactured, a product-specific assessment is carried out. Thus, it is possible that one product fulfils the criterion of market strength and the other does not. Consequently, it is possible, that investments related to a market dominant product may be considered incompatible with the common market and therefore will not be approved, while other investment costs are compatible with the common market and therefore considered eligible. Difficulties arise if the manufactured or to be manufactured product is not traded on 394 the market and is merely an intermediate product. This may be the case with solar cells1182, car vehicle engines1183, microprocessor or memory chip wafers1184 and LCD panels for televisions1185. In these cases the output is not sold on the market. Thus it is necessary to switch to the downstream market.1186 These markets can be the market for finished solar modules1187 or solar-energy systems1188 in the case of solar cells, the machines or vehicles1189 driven by the engines, the memory chips1190 or finished microprocessors1191 in the case of processor and memory wafers and the assembled televisions in the case of LCD-monitors. If downstream markets are assessed as replacement markets 1192, the PRODCOM 395 nomenclature1193 does no longer seem effective. The market is not indicated sharply enough and is identified too broadly. Sometimes the industry sectors concerned also use other specifications.1194 Therefore, the Commission investigates whether the initially identified downstream market can be subdivided further making a narrower market definition possible and useful.1195 Thus, the microprocessors and memory chips could be designed around the desktop, notebook, server or workstation area. 1196 Further differentiation of the product market is useful, if the initial product – as in 396 the cases of wafers, engines, displays or solar cells – is available for a more narrow market definition or even calls for one. For wafers that would be assumed if they followed specific requirements that correspond to precisely this differentiation. 1197 The 1182 Com., State Aid N 409/2006 of 20 December 2006, para. 40 – HighSi; State aid C 21/2008 (ex N 864/2006), para. 120 – Sovello, EverQ (footnote 935). 1183 Com., State Aid C 61/2001 (ex N 226/2001), OJ 2002 L 282/23, para. 35 – Daimler Chrysler; State Aid C 63/2002 (ex N 316/2002), OJ 2003 L 229/24, para. 61 – BMW, Austria; State Aid N 767/2007 of 30 April 2008, para. 75 – Ford Craiova, Romania (footnote 1104); Opening Decision C 65/2009 (ex N 113/ 2009), para. 72 – Audi Hungaria (footnote 1016). 1184 Com., State Aid N 810/2006, para. 63 – AMD (footnote 733); State Aid N 872/2006, para. 91 – Qimonda (footnote 695). 1185 Mederer/Pesaresi/van Hoof/Dupont/Tumasonyte (footnote 298), Chapter 6, para. 4.961. 1186 Para. 69 sentence 2 RAG 2007. 1187 Com., State Aid C 21/2008 (ex N 864/2006), para. 121 – Sovello, EverQ (footnote 935). 1188 Com., State Aid N 409/2006, para. 45 – HighSi (footnote 1186). 1189 Com., State Aid C 61/2001 (ex N 226/2001), para. 35 – Daimler Chrysler (footnote 1187); State Aid C 63/2002 (ex N 316/2002), para. 61 – BMW, Austria (footnote 1187); Opening Decision C 65/2009 (ex N 113/2009), para. 73 – Audi Hungaria (footnote 1016). 1190 Com., State Aid N 872/2006, para. 92 – Qimonda (footnote 695). 1191 Com., State Aid N 810/2006, para. 81 – AMD (footnote 733). 1192 The Com. uses the term ‘proxy’ for that: Com., State Aid N 767/2007, para. 103 – Ford Craiova, Romania (footnote 1104). 1193 Para. 70 footnote 66 RAG 2007. 1194 Com., State Aid N 767/2007, para. 91 – Ford Craiova, Romania (footnote 1104); State Aid N 635/ 2008. 20 April 2009, para. 66 – Fiat, Sicily (footnote 1139); Opening Decision C 65/2009 (ex N 113/2009), para. 77 – Audi Hungaria (footnote 1016). 1195 Com., State Aid N 810/2006, para. 70 – AMD (footnote 733); State Aid N 767/2007, para. 75 – Ford Craiova, Romania (footnote 1104); Opening Decision C 65/2009 (ex N 113/2009), para. 72 – Audi Hungaria (footnote 1016). 1196 Com., State Aid N 810/2006, para. 74 – AMD (footnote 733). 1197 Com., State Aid N 810/2006, para. 76, 80 – AMD (footnote 733).

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Art. 13–16 397–398

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same applies to the automotive market. In that regard, there is a wide differentiation of up to 27 individual sectors.1198 However, a differentiation is only permissible if the engines are installed in the respective vehicle sector. So if certain engines are used only in certain segments of vehicles, only these vehicle segments may be considered. However, the replacement market (market proxy) cannot be subject to the rules that apply only to it. The investigation must remain within the limits of the market segments for which the investigation was rooted in, for the basic market for automotive engines.1199 If a motor vehicle engine is not used strictly in accordance with the individual vehicle segments but across several vehicle segments, the evaluation of the market proxy must follow this circumstance. For a proper market assessment, those vehicle segments that are attributed to an individual engine type must be examined together.1200 In the case of pure replaceable mass production such a subdivision is not advised.1201 These commodities have uniform specifications so that the products of particular specification from different manufacturers have the same characteristic and are interchangeable one-to-one for the processor. With vertically integrated manufacturers that use parts of the production of intermediate products themselves and sell parts depending on market conditions to other end product manufacturers, it may be useful to assess both markets, the overall market of the finished products, as well as the ‘open’ market on which intermediate products are offered.1202 The narrower definition of the market is, the faster the market strength criteria of 25% market share or a capacity increase of 5% as a result of the investment project to be assumed. 397 The financial market is not a downstream market. Even though the relevant items are sold and their value can always be expressed as a sum of money, it is not a sufficiently distinct market based on the individual product groups suitable for a market intensity test. 398

(3) Relevant geographic market. In principle, the relevant geographic market is the European Economic Area (EEA).1203 However, in reality, large investments are made by companies that sell their products worldwide and to other companies, which in turn offer on the world market, competing with each other. Therefore, generally the relevant geographic market should be the world market.1204 However, the Commission defines the relevant geographic market more narrowly and will mostly assume it being the EEA or even just a national or regional market1205.1206 1198

Com., State Aid N 767/2007, para. 92, 96 – Ford Craiova, Romania (footnote 1104). For the chip industry: Com., State Aid N 810/2006, para. 76 – AMD (footnote 733). 1200 Com., Opening Decision C 31/2009 (ex N 113/2009), para. 106 – Audi Hungaria (footnote 1016). 1201 Com., State Aid N 203/2008, para. 81, 87 – Papierfabrik Spremberg (footnote 502). 1202 Com., State Aid N 191/2008 of 8 November 2008, para. 68, 70, 72 (f | glass). 1203 Para. 70 sentence 2 RAG 2007; for the term: see above para. 1 footnote 1; 90 footnote 369. 1204 Com., State Aid N 810/2006, para. 82 seq. – AMD (footnote 733); State Aid N 872/2006, para. 106– 108 – Qimonda (footnote 695); N 409/2006, para. 54, 55 – HighSi (footnote 1186); C 21/2008 (ex N 864/ 2006), para. 131 – Sovello, EverQ (footnote 935); N 453/2008 of 11 February 2009, para. 82 – Sunfilm; Opening Decision C 34/2008 (ex N 180/2008), para. 63, 64 – Deutsche Solar (footnote 1033); N 199/2008 of 2 July 2008, para. 56 – Intico Solar. 1205 Com., Opening Decision C 34/2009 (ex N 588/2008), OJ 2010 C 23, p. 34, 45 r. Sp. para. 1 and 2 – PETROGAL, Portugal (footnote 158); State Aid N 907/2006, para. 58 – Ma´trai Ero¨mu¨ Zrt. (footnote 1104); N 582/2007 of 2 April 2008, para. 82 – Propapier; N 180/2009, para. 55 – En Plus, Italy (footnote 1183). 1206 Com., State Aid C 61/2001 (ex N 226/2001), para. 91 – Daimler Chrysler (footnote 1187); C 12/ 2005 (ex N 611/2003) of 20 December 2006, OJ 2007 L 276/22, para. 75, 95 et seqq. – e-glass; C 46/2008 (ex N 775/2007), para. 146–148 – Dell, Poland (footnote 1032); N 203/2008, para. 91 – Papierfabrik Spremberg (footnote 502); N 635/2008, para. 82 – Fiat Sicily (footnote 1139); N 191/2008, para. 73 – f glass (footnote 1206); C 21/2007 (ex N 578/2006), para. 98 – IBIDEN (footnote 1016). 1199

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As criteria for the determination of the relevant geographic market may serve the 399 lack of market data for a specific geographic market in independent market studies, 1207 the manufacturing facilities of the investing company,1208 the presence of the places of production of competing companies in the market1209, the sales areas and the distribution system1210 as well as the trade currents, so. import and export 1211, the selling markets of the investing company1212, the scope of trade barriers1213, e. g. in the form of significant or only minor transport costs1214 and by national (technical)1215 laws or administrative regulations,1216 the competition between the competitors1217, a uniform price level on a global scale1218, the interchangeability of products1219 and the difficult or easy, cost-significant or cheap adapting a product to their specific conditions of the markets outside the EEA.1220 Significance is to be assumed if the costs increase by more than 5% through the transportation or production change.1221 The Commission also draws on previous merger decisions.1222 Both the manufacturers and the customers’ side is considered.1223 Moreover, the Herfindahl-Hirschmann Index (HHI) may be used.1224 In that regard, 400 a reduction of competitors does not only represent a concentration process, but is also a 1207 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 773/2007, para. 57 – Wacker Schott Solar (footnote 528); Opening Decision C 34/2008 (ex N 180/2008), para. 62 – Deutsche Solar (footnote 1033); C 31/2009 (ex N 113/2009), para. 97 – Audi Hungaria (footnote 1016). 1208 Com., State Aid N 810/2006, para. 82 et seqq. – AMD (footnote 733); N 635/2008, para. 79 – Fiat Sicily (footnote 1139). 1209 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 810/2006, para. 82 et seqq. – AMD (footnote 733); Com., N 635/2008, para. 79, 80 – Fiat Sicily (footnote 1134); Opening Decision C 31/2009 (ex N 113/2009), para. 97, 100 – Audi Hungaria (footnote 1016); N 859/2006, para. 61 – Q-Cells (footnote 1045). 1210 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 635/2008, para. 79 – Fiat Sicily (footnote 1139). 1211 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 635/2008, para. 79 – Fiat Sicily (footnote 1139); Opening Decision C 34/2008 (ex N 180/2008), para. 63, 64 – Deutsche Solar (footnote 1031); C 31/2009 (ex N 113/2009), para. 97 – Audi Hungaria (footnote 1016); N 859/2006, para. 61 – QCells (footnote 1045). 1212 Com., State Aid N 810/2006 para. 82 et seqq. – AMD (footnote 733); N 773/2007, para. 57 – Wacker Schott Solar (footnote 528); Opening Decision C 31/2009 (ex N 113/2009), para. 97 – Audi Hungaria (footnote 1016). 1213 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 773/2007, para. 57 – Wacker Schott Solar (footnote 528); Opening Decision C 34/2008 (ex N 180/2008), para. 62 – Deutsche Solar (footnote 1033). 1214 Com., State Aid N 300/2002 of 30 October 2002, para. 27 – Communicant; State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 810/2006, para. 82 et seqq. – AMD (footnote 733); N 773/2007 para. 57 – Wacker Schott Solar (footnote 528); Com., N 635/2008, para. 79 et seq. – Fiat Sicily (footnote 1139); Opening Decision C 34/2008 (ex N 180/2008), para. 62 – Deutsche Solar (footnote 1033). 1215 Com., State Aid N 635/2008, para. 80 – Fiat Sicily (footnote 1139); N 859/2006, para. 61 – Q-Cells (footnote 1045). 1216 Com., State Aid N 810/2006, para. 82 et seq. – AMD (footnote 733). 1217 Com., Opening Decision C 31/2009 (ex N 113/2009), para. 98 – Audi Hungaria (footnote 1016). 1218 Com., State Aid N 773/2007, para. 57 – Wacker Schott Solar (footnote 528); N 635/2008, para. 80 – Fiat Sicily (footnote 1139); Opening Decision C 34/2008 (ex N 180/2008), para. 62 – Deutsche Solar (footnote 1033); N 17/2006 of 16 July 2006, Sec. 3.5.2 para. 6 – First Solar. 1219 Com., State Aid N 300/2002, para. 27 – Communicant (footnote 1218); N 810/2006, para. 82 et seqq. – AMD (footnote 733); N 850/2006 para. 60 – Q-Cells (footnote 1045). 1220 Com., State Aid N 810/2006, para. 82 et seqq. – AMD (footnote 733); N 203/2008 para. 77 – Papierfabrik Spremberg (footnote 502): Switch from one type of product to another within an hour. 1221 For relevance: see above: para. 176. 1222 Com., State Aid N 409/2006, para. 54 – HighSi (footnote 1186); N 859/2006, para. 65 – Q-Cells (footnote 1045). 1223 Com., State Aid N 635/2008, para. 79, 80 – Fiat Sicily (footnote 1139). 1224 Para. 43 footnote 2 criteria (footnote 21); see also below para. 439.

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sign of greater internationality. The lower number of providers now has to serve the same geographic market. 401 An increasing liberalisation and an increasing number of trade agreements tend to favour a globalized world market as a relevant geographic market instead of only the EEA or a national market. Differences in the individual tax systems1225 do not pose an obstacle as a general rule. All the more so if the manufacturer of the relevant product is present on almost all continents. Furthermore, the respective taxes, such as value added tax, occur regardless of the site of production regularly in the importing country, e. g. value added tax. (4) Defining market shares. The market share test begins with the year before the investment starts and ends in the year after full production is reached. 1226 For example, if an investment project begins in 2007 and is completed in 2010, the years frame to be considered are 2006 and 2011. If the project is completed in 2010 but the full capacity of production is only reached since 20141227, for instance because the yield curves only then reach the rated power, the market shares of 2006 and 2015 are to be examined. 1228 The relevant product and geographic market being defined, examining the existing market strengths of the product in question, i. e. achieving a market (proxy) share of more than 25% before the investment, is possible with little difficulty. Data related to the year before the investment is made1229 is usually available. If no appropriate market data should be available, existing data of a suitable replacement market may be used. 1230 403 More difficult is determining market shares after the investment at the time of the approval decision. This calculation usually projects far into the future. The projects under examination usually involve an obligation of notification representing a total investment volume of more than 100 million EUR.1231 These investment projects usually span a time period of several years.1232 This means that the respective undertaking shall predict with high certainty the developments of the global or European market and its own development on the market. However, no company can make a realistic assessment of how its market position will develop in such a time frame.1233 The Commission recognises this in principle.1234 Therefore, the Commission intends to conduct a formal investigation procedure already if only one scenario out of several, illustrated by independent market studies, seems possible that the market development will lead to the investing company getting close to the 25% market share threshold for the product for which the investment has taken place even if only for one single or two years. On the other hand, the Commission is willing to use a different (substitute) time for determining the market shares after completing the project if appropriate market data are not available.1235 402

1225

Com., Opening Decision C 31/2009 (ex N 113/2009), para. 94 – Audi Hungaria (footnote 1016). Para. 44 sentence 1 criteria (footnote 21). 1227 See Com., State Aid N 203/2008, para. 9 – Papierfabrik Spremberg (footnote 502). 1228 See Com., State Aid N 203/2008, para. 97 – Papierfabrik Spremberg (footnote 502). 1229 Para. 44 sentence 1 criteria (footnote 21). 1230 Com., State Aid N 299/2007 of 25 June 2008, para. 114 – Sharp, Poland; N 635/2008, para. 84 – Fiat Sicily (footnote 1139). 1231 Para. 64 sentence 1 RAG 2007. 1232 Com., State Aid C 46/2008 (ex N 775/2007), para. 24 – Dell, Poland (footnote 1030): 5 years. 1233 Solte ´sz EWS 2004, 241, 244. 1234 Para. 44 sentence 4 and 5 criteria (footnote 21); speculative analysis; with regard to future analysis also see below: para. 443. 1235 Com., State Aid C 46/2008 (ex N 775/2007), para. 24, footnote 18 – Dell, Poland (footnote 1030): the Commission used the data of 2012 instead of 2013. 1226

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(5) Increase in capacity. Pursuant to the test of capacity increase stipulated in 404 para. 68 lit. b RAG 2007, the data on apparent consumption for the product concerned are used and examined in a two-stage test. The apparent consumption is determined by the production in the EEA plus imports minus exports.1236 In the first step, the ratio of the annual growth rate of the apparent consumption is 405 examined in relation to GDP growth in the EEA. The assessment is based on the average annual growth rate of the apparent consumption of the product concerned in the last five years. This period is prior to the date by which the Commission conducts the market share test pursuant to para. 68 lit. a RAG 2007. To be able to compare the growth rates over a period of five years, the data of 6 single year results are required. 1237 Therefore, in the example illustrated above1238, the growth of apparent consumption of the product in question for the years 2001 to 2006 must be compared to the GDP growth in the EEA for the same period. The average growth rate of apparent consumption must be identified with regard to the quantity level in the appropriate dimension of weight, number, size or area1239 and also on the value level1240 in local currency. The quantitative growth of apparent consumption (in volume terms) has to be compared with the real GDP growth whereas the growth of apparent consumption in value terms has to be compared with the nominal GDP growth.1241 The Commission has a wide room of manoeuvre to justify the use of either volume or value data. 1242 The annual growth rate of GDP in the EEA as a benchmark is done in relation to the volume growth of the apparent consumption of the product at constant prices based on the respective base year, so in the example of 2001, and in relation to the value growth of the apparent consumption in market (current) prices. 1243 In the absence of appropriate data, it can be considered to use replacement (proxy) data to determine the apparent consumption.1244 If the outcome of the examination of the first stage shows that the growth rates of 406 GDP in the EEA remain behind the average annual growth rate of the apparent consumption in all the calculations – hence it is a relatively growing market – the test of para. 68 lit. b RAG 2007 is completed and does not require the opening of a formal investigation procedure. However, if it turns out that the GDP annual growth rate is greater than the apparent consumption of the product, the second stage examination is conducted. The second stage investigates whether the investment project leads to a significant increase in market capacity, meaning an increase in market capacity by more than 5% based on the total market capacity for the product in question. It does not matter whether the investing company significantly increased its own capacity. Necessary and sufficient condition is rather an increase in the capacity of the market concerned altogether just due to the investment project in question. 1245 It is therefore necessary to consider whether the capacity created by the project is less or more than 5% of the volume of the relevant market.1246 The apparent consumption of the year the investment began must be compared in quantity and value with the capacity to be 1236

Para. 68 lit. b footnote 62 RAG 2007; see also above para. 389. Com., State Aid N 203/2008, para. 102 – Papierfabrik Spremberg (footnote 502). 1238 See above para. 402. 1239 Com., State Aid N 191/2008, para. 83, 84 – f | glass (footnote 1206). 1240 Com., State Aid N 203/2008, para. 102 – Hamburger Papierfabrik Spremberg (footnote 502). 1241 Com., State Aid N 872/2006, para. 114 – Qimonda (footnote 695). 1242 Com., State Aid N 872/2006, para. 114 – Qimonda (footnote 695). 1243 Com., State Aid N 203/2008, para. 103 – Papierfabrik Spremberg (footnote 502). 1244 Para. 70 sentence 2 RAG 2007; Com., State Aid N 635/2008, para. 84 – Fiat Sicily (footnote 1139). 1245 Para. 68 lit. b RAG 2007. 1246 Com., State Aid N 203/2008, para. 104 – Papierfabrik Spremberg (footnote 502). 1237

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407 408

409

410

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created by the project itself.1247 The relevant factor is solely the capacity expansion as far as provided to be subsidised. It is irrelevant whether the subsidised undertaking undergoes a capacity expansion to this degree itself. An undertaking cannot compensate an increase in capacity by giving up corresponding capacities elsewhere and offset this reduction with the increase by the project in question project. 1248 This does not apply if the reduction of production capacity is a part of the notified project. 1249 This test is to be carried out separately for each relevant product market of an investment project.1250 How to assess the compatibility of aid within the scope of the formal investigation procedure according to Article 108 (2) TFEU in conjunction with Article 4 Procedural Regulation1251 in cases of market strength in detail, the Commission initially announced to specify before 1.1.2007 closer.1252 In 2009 it has released a communication of such criteria.1253 This communication was intended to ensure the transparency and predictability of the Commission decision-making process and equal treatment of Member States.1254 The key criteria for an in-depth assessment are: – Very large investment projects and – Market strength of the company with the product in question or a significant (>5%) increase1255 in capacity in the market concerned, with a lower growth in this market in relation to GDP growth. The key criteria in the scope of the in-depth assessment are – whether the aid is necessary to provide an incentive effect for the investment – whether the benefits of the aid measure outweigh the resulting distortion of competition and effect on the trade between Member States.1256 The positive effects are based on the objective, the intended effect of the aid 1257, the appropriateness of the aid instrument1258 to achieve the goal as well as the incentive effect1259 and the proportionality of the aid itself.1260 As negative effects1261, the crowding-out of private investment by pure market power1262, the creating and maintaining inefficient market structures 1263 and the 1247 Com., Opening Decision C 46/2008 (ex N 775/2007), para. 90 – Dell, Poland (footnote 1032); State Aid N 203/2008, para. 105 – Papierfabrik Spremberg (footnote 502); Final Decision C 46/2008 (ex N 775/ 2007), para. 26 – Dell, Poland (footnote 1032). 1248 Left undecided in Com., Opening Decision C 46/2008 (ex N 775/2007), para. 98 et seq., 105 – Dell, Poland (footnote 1032); rejected in Final Decision C 46/2008 (ex N 775/2007), para. 136 – Dell, Poland (footnote 1032); also see para. 54 criteria (footnote 21). 1249 Under the application of para. 24 MSF-2002 (footnote 73) assumed at shift of investment: Com., State Aid N 158/2005 v. 8 February 2006, para. 80–83 – Getrag Ford Transmissions Slovakia; C 46/2008 (ex N 775/2007) Final Decision, para. 134 – Dell, Poland (footnote 1032). 1250 Com., State Aid N 203/2008, para. 107 – Papierfabrik Spremberg (footnote 502). 1251 Procedural Regulation (footnote 95). 1252 Para. 68 footnote 63 RAG 2007. 1253 Criteria (footnote 21); previously, of 17 June 2009, published as ‘Guidance paper setting out criteria for the in-depth assessment of regional aid to large investment projects’ (Guidance). 1254 Para. 10 criteria (footnote 21). 1255 On significance: see above para. 176. 1256 Para. 68 at the end, RAG 2007. 1257 See at para. 413 et seq. 1258 See at para. 416 et seq. 1259 See at para. 146 et seq. and 419 et seq. 1260 See at para. 430 et seq. 1261 See at para. 433 et seq. 1262 See at para. 437 et seq. 1263 See at para. 444 et seq.

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413–415 Art. 13–14

IV

negative effects on trade1264 will be considered and assessed. The scope of the analysis and also the level of the evidence required will depend of the nature and the features of the individual case.1265 The detailed assessment has to be proportionate to the potential distortions which may be created by the aid.1266 So the Commission will carry out an overall evaluation of the aid based on a balance of its positive and negative effects in order to determine whether, as a whole, the aid measure can be approved. 1267 (6) Objective of the aid. First, the Commission examines the regional target and the 413 regional impact of the envisioned aid provided. They have to be in line with the requirements of para. 2 and 3 RAG 2007.1268 The Member States will be requested to demonstrate and to substantiate that the individual aid in question will address the objectives.1269 The Commission accepts the demonstration of regional contribution of aid relating 414 to additional investments and economic activity for the area in question based on the following non-exhaustive list of indicative criteria: number of direct and indirect jobs created by the investment; the commitment by the beneficiary to enter into widespread training activities which is not covered be approved training aid; clustering of firms in the same industry, which leads to increased efficiency; possibilities of a significant transfer of technology; Cooperation with local higher education institutions as well as the duration of the investment and possible future follow-on investments that indicate a durable engagement of the company in this region.1270 For this, the Member States have to rely on evaluations of past State aid schemes or measures, impact assessments made by the granting authorities, expert opinions and other studies related to the investment project under assessment or the business plan of the aid beneficiary. The latter could provide Information on the number of jobs created, the proposed salaries (as an indicator of increase in private household wealth), volume of sales from local producers, turnover generated by the investment and benefiting the region possibly through additional tax revenues.1271 If relevant the relationship between the planned investment project and the national strategy reference framework as well as the operational programmes under the structural funds have also to be considered, so that the Commission might specifically take into account of any Commission Decision within the meaning of Article 41 Structural Funds Regulation1272.1273 The Commission accepted the following impacts: lock-in periods for the investment 415 and the jobs created for at least five years, the creation of more than 2,500 direct and 1,300 indirect jobs, the clustering effect the investment project is likely to trigger, the Cooperation of the investing company with two local universities, the high likelihood of knowledge spill overs into the local economy as well as a multiplier effect, which ensures that the industrial location project will contribute to raising the living standards by increasing the local economy’s output and the monetary flows into the region.1274

1264

See at para. 447 et seq. Para. 9 sentence 2, 3 criteria (footnote 21). 1266 Para. 9 sentence 1 criteria (footnote 21). 1267 Para. 8 sentence 3 criteria (footnote 21). 1268 Para. 11 criteria (footnote 21). 1269 Para. 12 criteria (footnote 21). 1270 Para. 14 criteria (footnote 21). 1271 Para. 15 criteria (footnote 21). 1272 Structural Funds Regulation 2006 (footnote 116). 1273 Para. 16 criteria (footnote 21). 1274 See in detail: Com., State Aid C 46/2008 (ex N 775/2007), Final Decision, para. 153–156 – Dell, Poland (footnote 1032). 1265

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Art. 13–16 416–419

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(7) Appropriateness of the aid instrument. The Commission also intends to examine the appropriateness of the aid Instrument.1275 Aid measures for which the Member State considered other policy options, and for which the advantages of using a selective instrument such as State aid for a specific company are established, are considered appropriate. The Commission will in particular take account of any impact assessment of the proposed measure the Member State may have made.1276 417 The Commission has recognised that in a certain region, the granting of State aid to large investment projects with regional benefits is an appropriate means to address the economic shortcomings.1277 Here, the region relied on the fact that, despite the general measures that have already been put in place, remain significant regional disparities within the Member State regarding the GDP per capita, the unemployment rate, the long-term unemployment and the regional wage level. Furthermore, the relative underdevelopment of the region indicates a need for more targeted intervention.1278 418 The test of appropriateness is already theoretical exceeding the competences of the Commission to ensure the protection of the common market, though. The appropriateness of an aid instrument is not a criterion of protecting competition, but it is only a criterion for the Member State to reach its targets and a criterion to identify a fiscal payment possibly expended in vain. Fiscal failures, however, are neutral in terms of effect on competition. They do not have an inherent market-distorting or marketcleaning effect. Thus an inappropriate promotion – such as very high noise protection measures or other environmental standards at a very remote investment project – do not lead to a larger market-distorting effect than, in relation to the costs, a lower support, if these measures were remain undone without aid. Vice versa, a subsidy for the construction of an ultra-modem facility in a sensitive sector, such as the synthetic fibre industry, may be well appropriated to generate the expected jobs in the assisted region. Nevertheless, it is incompatible with the common market, it is a predatory subsidy promoting destructive competition only. Hence, the criteria for the appropriateness of a measure as described in para. 17 et seq. criteria 1279 say nothing about whether the measure under assessment is compatible with the common market. 416

419

(8) Incentive effect within the assessment of compatibility. of an intended aid with the common market in the case of market power of the designated subsidy recipient. The examination of this specific incentive effect1280 is concerned with the question whether the proposed aid is necessary to produce a real incentive effect to undertake investments which would not otherwise be made in the assisted areas. 1281 This assessment will take place at two levels: first, at a general, procedural level, and, second, at a more detailed, economic level.1282

1275 Para. 17 and 18 criteria (footnote 21); this assessment contains elements of the test if the granting of an aid meets the principle of proportionality in German law being appropriateness and proportionality in the closer sense; see also Com., SA 36139 of 27 March 2014, Final Decision, OJ 283/para. 45–51 – video games. 1276 Para. 18 criteria (footnote 21). 1277 Com., State Aid No C 46/2008 (ex N 775/2007), Final Decision, para. 163 – Dell, Poland (footnote 1032). 1278 Com., State Aid No C 46/2008 (ex N 775/2007), para. 164–166, 171 – Dell, Poland (footnote 1032). 1279 Para. 17 and 18 criteria (footnote 21). 1280 Para. 38 RAG 2007, Article 8 GBER I; see in particular above para. 146 et seqq. 1281 Para. 19 criteria (footnote 21). 1282 Para. 19 criteria (footnote 21).

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420–426 Art. 13–14

Procedurally, it is a question of the timely sequence of aid application, grant decision and starting the project.1283 Only with the authorisation of the so-called premature start of the measure without impairing its eligibility may the order of authorization and project start be switched under the scope of para. 38 RAG 2007 or of Article 5 RRIA. 1284 The concept of the premature start of the measure without impairing its eligibility is irrelevant in the context of Article 8 GBER I.1285 The re-examination under paragraph 68 RAG 2007 is redundant and unnecessary.1286 The assessment on the economic level asks, whether the aid is necessary to provide an incentive effect for the investment.1287 This is to determine whether the aid actually contributes to changing the behaviour of the beneficiary, so that it undertakes (additional) investment in the assisted region concerned. The criteria explicitly assume that there are many valid reasons for a company to locate in a certain region, even without any aid being granted.1288 This consideration is also expressed in Article 8(3) lit. e GBER I. Having regard to the equity objective deriving from cohesion policy and as far as the aid contributes to achieving this objective, two possible scenarios are presented, with which an incentive effect can be proven1289: – an investment, that would have normally been omitted entirely, is made on the basis of the subsidy and precisely in the assisted region in question (incentive to change a investment decision, scenario 1); – an investment, that without the aid would have occurred at another location, takes place in an assisted area, because the aid compensates for the net handicaps and costs linked to a location in the relevant assisted region. (incentive to change the location decision, scenario 2). The Member State will need to demonstrate and provide clear evidence that the aid effectively has an impact on the investment choice or the location choice. Thus applying the scenario concerned, the Member State will have to provide not only Information concerning the aided project (company documents such as risk assessments including the assessment of location-specific risks, financial reports, internal business plans, expert opinions and studies related to the investment project under assessment, demand forecasts, cost forecasts, financial forecasts, documents that are submitted to an investment committee and that elaborate on various investment scenarios, or documents provided to the financial markets, so to the banks)1290, but also a comprehensive description of the counterfactual scenario, in which no aid would be granted by the Member State to the beneficiary.1291 These criteria are essentially the criteria of Article 8 (3) lit. e) GBER I for an exempt aid for a large company.1292 It is the company’s goal, in the counterfactual situation ‘change of investment decision’ (Scenario 1) to provide proof that the investment would not be profitable without the aid and that no other location than the assisted region concerned could be envisaged.1293 This proof succeeds if the company simply would not invest simply without the aid.1294 1283

Para. 17 Guidance (footnote1257). RRIA (footnote 3). 1285 Concerning incentive effect see in detail above para. 146 et seqq., 157 et seqq. and 191 et seqq. 1286 Insofar unclear para. 20 criteria (footnote 21). 1287 Para. 68 at the end RAG 2007. 1288 Para. 21 criteria (footnote 21). 1289 Para. 22 criteria (footnote 21). 1290 Para. 24–26 criteria (footnote 21). 1291 Para. 23 criteria (footnote 21). 1292 See above para. 174. 1293 Para. 24 criteria (footnote 21). 1294 Para. 28 sentence 1 criteria (footnote 21). 1284

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Art. 13–16 427–430

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In the counterfactual situation ‘change of location decision’ (Scenario 2) the company has to prove, that a comparison has been made between the costs and benefits of locating in the assisted region concerned with an alternative region, assisted area or non-assisted region.1295 This comparison is similar to the cost-benefit analysis of the Motor Vehicle Framework 1997.1296 428 In cases where are only deadweight effects and thus there is a lack of incentive effect to achieve the regional objective and in cases where it appears that the same investment would take place in the region even without the aid, regional aid will not be approved.1297 It will therefore be important to demonstrate, as already stipulated in Article 8(3) GBER I, that the aid at least led to the investment taking place precisely in this form and that the project would not have been carried out as such in the absence of the proposed aid.1298 The level of profitability can be evaluated by reference to methodologies which are Standard practice in the particular industry concerned. 1299 429 The Commission accepted the proof, that the aid effectively had an impact on changing of the location choice of a company, also the investment would not have taken place without aid in the ultimately selected region and the proposed aid therefore provided an incentive1300: an production site analysis for the investment project retained at least two potential locations in different Member States (Roland and Slovakia), which took place before the beginning of the seven-week settlement negotiations with the Member States’ authorities1301; an analysis on the basis of this, based on a period of 12 years, by a consulting firm calculating the additional costs for the finally selected location with a capital value of more than EUR 40 million; a photocopy of an internal decision document presented to the board of directors, where the investment in the proposed location illustrates the confirmation, after the negotiations and before the signing of the declaration of intent for the aid package; confirmation of the national authorities that the decision for the location of the decision of the government of the Member State to grant aid has fallen in favour of the investing company and the declaration of the national authorities to grant the aid for the company in order to compensate for the economic disadvantages linked to this location and the related disadvantages and costs compared to the alternative location considered at that time. 1302 427

430

(9) Proportionality of regional aid. For the regional aid to be proportional, the amount and intensity of the aid must be limited to the minimum needed for the investment to take place in the assisted region.1303 Although the proportionality of aid for large investment projects is already guaranteed with the aid ceilings set out in the regional aid maps as well as the flat reductions by the adjusted regional aid ceiling of 50% and 66%1304,1305 the Commission makes additional requirements: in the scenario 1295

Para. 25 criteria (footnote 21). Annex I, See. 2.2 para. 1 motor vehicle framework 1997 (footnote 18); also see para. 356. See in particular double checking considerations at para. 384 and the explanations at para. 450. 1297 Para. 28 at the end, criteria (footnote 21). 1298 See above para. 173 et seq., 177. 1299 Para. 27 criteria (footnote 21). 1300 Com., State Aid No C 46/2008 (ex N 775/2007), Final Decision, para. 190–193 – Dell, Poland (footnote 1032). 1301 Com., State Aid No C 46/2008 (ex N 775/2007) Final Decision, para. 179 et seq., 184 – Dell, Poland (footnote 1032). 1302 Com., State Aid No C 46/2008 (ex N 775/2007) Final Decision, para. 181, 183, 185, 191, 192 – Dell, Poland (footnote 1032). 1303 Para. 29 criteria (footnote 21). 1304 Para. 67 RAG 2007. 1305 Para. 27 criteria (footnote 21); also see above para. 23. 1296

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‘change of investment decision’ (scenario 1)1306 a review of the return on investment1307 or, in the scenario ‘change of location decision’ (scenario 2)1308, a cost-benefit analysis based on the alternative location.1309 In that regard, an aid is considered to be proportional, provided that it merely compensates for the difference in net costs relative to a more developed alternative investment location.1310 The Member State needs to demonstrate the proportionality on the basis of appro- 431 priate documentation such as that mentioned in para 26 criteria. 1311 For that reason, calculations used for the analysis of the incentive effect, can also be used to evaluate whether the aid is proportionate.1312 In no case, however, can the aid intensity be higher than the regional aid ceilings approved in the national aid maps1313 and corrected by the scaling-down mechanism, as indicated in para. 67 RAG 2007.1314 Under the headline ‘proportionality’, the Commission has considered the following 432 as appropriate: NPV of an aid of EUR 39.5 million to compensate all disadvantages associated with an investment with a NPV of around EUR 40 million. This means that the aid is limited to the amount necessary to compensate for the net additional costs of the selected location compared to the alternative location. 1315 (10) Negative effects of an intended aid granting. In examining the potential negative 433 effects of the proposed aid, the assessment first applies the two indicators mentioned in para. 68 RAG 2007, being ‘high market shares’ (more than 25%)1316 and ‘potential overcapacity in a market in structural decline’1317.1318 They are based on the idea that competition is harmed by the creation of market power and by the creation or maintaining inefficient market structures.1319 Here, as a third indicator, the impact of the aid on trade and on the regions is to be examined.1320 These may be felt through lost jobs in the market concerned, disadvantages at the level of subcontractors, especially operating in the local market, and as a result of lost positive externalities such as the clustering effect, knowledge spill overs, or education and training. 1321 Moreover, it reserves the Commission, to assess additional not specified parameters. 1322 However, these indicators do not intervene if the aid merely leads to a change of 434 location decision under scenario 21323 and if the aid is proportional. In such a scenario an aid-conditioned distortion of competition does not appear even with a corresponding market power or an increase in capacity in an underperforming market. 1324 The granting of aid does not affect market power, so that even the level of any such market 1306

Para. 22 No. 1 criteria (footnote 21); see above para. 423. Para. 32 criteria (footnote 21). 1308 Para. 22 No. 2 criteria (footnote 21); see above para. 424. 1309 Para. 33 criteria (footnote 21). 1310 Para. 53, sentence 3 criteria (footnote 21). 1311 Para. 35 criteria (footnote 21). 1312 Para. 34 criteria (footnote 21). 1313 Concerning national regional aid maps: see above para. 102 et seq. 1314 Para. 36 criteria (footnote 21). 1315 Com., State Aid No, C 46/2008 (ex N 775/2007) Final Decision, para. 197, 195, 196 – Dell, Poland (footnote 1032). 1316 Para. 68 lit. a RAG 2007. 1317 Para. 68 lit b RAG 2007. 1318 Para. 37, 38 criteria (footnote 21). 1319 Para. 38 criteria (footnote 21). 1320 Para. 38, 50, 51 criteria (footnote 21). 1321 Para. 51 sentence 3 criteria (footnote 21). 1322 Para. 38 sentence 6 criteria (footnote 21). 1323 Para. 22 No. 2 criteria (footnote 21); see above para. 424. 1324 Para. 40 criteria (footnote 21). 1307

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Art. 13–16 435–437

Commission Regulation (EU) No 651/2014

power would not be affected by the granting of aid.1325 In particular, a crowding-out of private investment by a possible increase of market power of the undertaking is not considered if the investment project would have been carried out in any event, so that the appropriate aid merely leads to a change of the location decision (Scenario 2). 1326 Rather, a potential market power would exist irrespective of the location of the investment project. Therefore, in this scenario, an assessment in view of a possible increase in market power is not relevant and hence needless. 1327 435 This also applies if the competing sites belong to the same category of assisted regions, so both are a)- or c)-assisted areas 1328.1329 It is decisive that without or with a reduced aid the investment would have been located to a poorer region or to a region that is considered to have the same regional handicaps as the target region, thus to a region that, related to the approved regional aid maps, is considered to a higher or the same maximum regional aid intensity as the target region.1330 If the investment were to take place without or with merely less aid in an equally or more disadvantaged area, thus in that area with the higher approved regional aid intensity, the aid would be incompatible with the common market.1331 436 This does not apply if the aid gives an incentive to change the investment decision within the meaning of the scenario 11332.1333 in this case, the Commission will place particular emphasis on the mentioned indicators1334, especially market power and overcapacity1335.1336 437

(11) ‘Crowding-out of private investment’. (a) Market power. As part of the investigation of market power, the Commission examines the crowding-out of other private investment caused just by promoting the investment in question individually in each case.1337 The assessment shall depend on whether a competitor decides as a result of the aided investment on its own not to invest any more, thereby weakening its own position as a competitor or even has to exit from the market. In this case, aid would lead to a crowding-out of private investment. This consequence of granting aid (based on the own initiative of the competitor) would distort competition.1338 This would apply in concentrated markets, but would be especially the case if a dominant market player is subsidised. If, due to the aid, the beneficiary could maintain or increase its market power, regional aid for large investment projects might have a deterrent effect on competitors’

1325

Com., State Aid No C 46/2008 (ex N 775/2007), Final Decision, para. 202 – Dell, Poland (footnote

1032). 1326 Com., State Aid C 46/2008 (ex N 775/2007), Final Decision, para. 202 sentence 1 – Dell, Poland (footnote 1032). 1327 Para. 40 criteria (footnote 21). 1328 Definition of a)- and c)-assisted region: see above para. 51 et seq. 1329 Com., State Aid C 46/2008 (ex N 775/2007), Final Decision, para. 217, 218, 220 – Dell, Poland (footnote 1032). 1330 Para. 53 criteria, 1.c. (footnote 21); Com., Final Decision, C 46/2008 (ex N 775/2007), para. 215 – Dell, Poland (footnote 1032); see at para. 449 et seq. 1331 Para. 53 sentence 2 criteria (footnote 21). 1332 Para. 22 No. 1 criteria (footnote 21); see above para. 423. 1333 Para. 39 criteria (footnote 21). 1334 See above para. 433. 1335 Defined as the power to influence market prices, Output, the variety or quality of goods and Services, or other Parameters of competition on the market for a significant period of time, para. 42 footnote 1 criteria (footnote 21). 1336 Para. 39 criteria (footnote 21). 1337 Para. 41 criteria (footnote 21). 1338 Para. 41 criteria (footnote 21).

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438–442 Art. 13–14

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investment decisions1339 and thereby would generate distortions of competition. This would be to the detriment of consumers.1340 For all regional aid cases that trigger the notification threshold of paragraph 64 RAG 2007 the Commission assesses the share of the aid beneficiary or the group to which it belongs of the sales of the product concerned on the relevant product markets and geographic markets, para. 68 lit. a) RAG 2007. However, market shares can only give a preliminary indication of possible problems.1341 Therefore, in an in-depth assessment, the Commission will also take account of other factors including the market structure by looking at the concentration in the market, possible barriers to entry, buyer power and barriers to exit.1342 In relation to the concentration in the market, the Commission may consider the Herfindahl-Hirschman Index (HHI).1343 It represents the sum of the squares of the market shares of the various market participants and so provides a basic analysis of market structure. The values of the HHI range between 0 and 10,000 provided that the percentages of market shares are calculated as integers, or in absolute values, between 0 and 1. The 0 represents a market with infinitely many participants, all of which have an infinitely small market share. The other end of the scale, the complete monopoly with a market participant who holds 100% of the market share, is 100 x 100 = 10,000 or 1 x 1 = 1.1344 A two-party duopoly, of which one party holds 60% and the other 40% market share, has a HHI of 60 x 60 + 40 x 40 = 5200 or 0.52. A market with 10 participants, all equally hold 10% market share, is resulting in a HHI of 1,000 or 0.1. This is also the limit for a low concentration. An HHI from 1,000 to 1,800 (0.1 to 0.18) shows a moderate market concentration, an HHI higher than 1,800 (> 0.18) stands for a high degree of market concentration. At a moderate concentration, an increase of up to 100 (