EU State aid law flexibility in response to the COVID-19 pandemic

Article 107(1) TFEU contains a general prohibition of aid granted by a Member State or through State resources which distorts competition and trade within the European Union (the "EU") by favouring certain companies or the production of certain goods. However, under certain circumstances, such aid may be considered compatible with the internal market by the European Commission (the "Commission"). This might be the case when measures adopted by a Member State are necessary to remedy a serious disturbance in its economy (Article 107(3)(b) TFEU) or facilitate the development of certain economic activities or of certain economic areas (Article 107 (3)(c) TFEU). 

On 20 March 2020, the Commission published its Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, which was further expanded firstly in early April and subsequently in May and late June 2020 (the "Temporary Framework"- see consolidated version here). In the Temporary Framework, the Commission sets out which types of temporary State aid measures it considers compatible with the internal market under points (b) and (c) of Article 107, paragraph 3, TFEU. The Temporary Framework is justified by the current exceptional circumstances. It was intended to apply until 31 December 2020 (see below).

• The existing framework

The Temporary Framework complements possibilities for financial relief already available to Member States outside of state aid control. For instance, Member States can make generally applicable changes in favour of businesses, regarding wage subsidies or tax deferrals or financial support directly to consumers. Also, Member States can design support measures in line with the General State Aid Block Exemption Regulation No 651/2014 without requiring Commission involvement. In addition, Member States can notify aid within the framework of the Commission's Rescue and Restructuring State aid Guidelines. 

Furthermore, on the basis of Article 107(2)(b) TFEU, which declares aid granted to make good the damage caused by natural disasters or exceptional occurrences to be compatible with the internal market, Member States can grant damage compensation to undertakings in sectors particularly hit by the outbreak. The Commission has already approved several Member States' measures on this basis.

• Specific characteristics of the Temporary Framework

On the basis of the Temporary Framework, Member States are eligible to provide targeted support to companies that have entered into financial difficulty as a direct result of the COVID-19 crisis and therefore were not already in difficulty before 31 December 2019. By way of exception, the aid can be granted to micro or small enterprises that were already in difficulty before this date, but only if they are not subject to collective insolvency procedure under national law, and they have not received rescue aid or restructuring aid.

Several types of State aid measures can be temporarily qualified as compatible with the internal market because they are viewed as necessary to remedy a serious disturbance in the economy in accordance with Article 107(3)(b) TFEU, such as:

• direct grants, tax and payment advantages, repayable advances, guarantees, loans and equity not exceeding 800 000 euros per undertaking;
• state guarantees for loans taken by companies from banks for a limited period and loan amount; 
• subsidised interest rates for a limited period and loan amount;
• debt instruments subordinated to ordinary senior creditors in the case of insolvency proceedings up to certain ceilings;
• state guarantees and reduced interest rates provided to undertakings facing a sudden liquidity shortage directly or through credit institutions and other financial institutions as financial intermediaries;
• short-term export credit insurance provided by the State where needed;
• targeted aid in the form of deferrals of tax and/or of social security contributions for specific sectors particularly affected by the COVID-19 outbreak;
• targeted aid in the form of wage subsidies for employees to avoid layoffs during the COVID-19 outbreak.

The Commission recognises that when aid in the form of public guarantees or reduced interest rates is channelled through banks, its objective is not to preserve or restore their viability or liquidity. Nevertheless, certain safeguards will need to be applied to make sure that distortions to competition between banks are limited.

In addition, the following types of measures can be viewed as facilitating the development of certain economic activities or of certain economic areas in accordance with Article 107(3)(c) TFEU:

• aid for COVID-19 relevant research and development in the form of direct grants, repayable advances or tax advantages;
• aid for testing and upscaling infrastructures in the form of direct grants, tax advantages, repayable advances and no-loss guarantees;
• investment aid for the production of COVID-19 relevant products in the form of direct grants, tax advantages, repayable advances and no-loss guarantees.

Moreover, Member States may adopt recapitalisation measures, notably in the form of equity and/or hybrid capital instruments, to support non-financial undertakings, as part of schemes or in individual cases, if the following conditions are satisfied:

• the intervention must be necessary, appropriate, temporal and proportional, which means that (i) no other appropriate solution is available for the undertaking, (ii) without the State intervention the undertaking would face serious financial difficulties; (iii) the State intervention must be in the common interest (for example to avoid significant loss of employment); (iv) the intervention cannot go beyond what is necessary to ensure the viability of the company and to restore its capital structure in place before the outbreak, and (v) the undertaking shall be encouraged to buy out its shares acquired by the Member State according to the exit strategy developed by the undertaking and the Member State;
• dividends and share buybacks are banned and restrictions on management remuneration apply; 
• the aid is not used to pursue aggressive commercial expansion of the undertaking ;
• the Member State receives appropriate remuneration for its intervention.

Certain conditions, however, are more favourable in cases where together with the State, also a private investor contributes in a significant manner (in principle at least 30% of the new equity injected) to the capital increase of companies. In this regard:

• if the State decides to grant recapitalisation aid, the acquisition ban and the cap on the remuneration of the management are limited to three years. Furthermore, the dividend ban is lifted for the holders of the new shares as well as for existing shares, provided that the holders of those existing shares are altogether diluted to below 10% in the company;
• if the State is already an existing shareholder (i.e. was a shareholder already before the granting of recapitalisation aid) investing pro rata to its existing shareholding, the Commission does not consider it necessary to impose specific conditions as regards the State's exit.

Finally, the Commission clarified that the State aid should not be conditional upon the relocation of a production activity or of another activity of the beneficiary from another country within the European Economic Area to the territory of the Member State granting the aid, since any such condition would appear to be particularly harmful for the internal market.

Member States are obliged to notify to the Commission plans to introduce measures under the Temporary Framework. The Commission verifies whether the conditions necessary to approve the aid measure are met. Member States must also publish relevant information on each individual aid granted under the Temporary Framework and maintain detailed records. Moreover, if recapitalisation aid is granted, Member States have to publish details on the identity of the companies that have received aid and the amount of aid. Furthermore, beneficiaries, other than SMEs, have to publish information on the use of the aid received, including on how the aid supports the company's activities in line with EU and national obligations linked to the green and digital transformation.

• October 2020 prolongation and extension of the Temporary Framework

On 13 October 2020, the Commission issued a press release indicating that all sections of the Temporary Framework are prolonged for six months until 30 June 2021 and the section to enable recapitalisation support is prolonged for three months until 30 September 2021. Specific aspects of the Temporary Framework are amended (support for uncovered fixed costs, possibility for the State to exit previously State-owned companies, extension of the temporary removal of all countries from the list of “marketable risk" countries under the Short-term export-credit insurance Communication).

• Luxembourg State aid measures

In this context, the Commission has already approved several financial support measures for the Luxembourg economy. The relevant decisions can be found on the Commission's overview list of approved State aid in the COVID-19 context (see the link here).

More information on the details of the financial assistance measures adopted in support of the Luxembourg economy can be found in other sections of this COVID-19 dedicated webpage.