Do the EU rules on State aid continue to apply, specially the need to obtain the European Commission’s prior authorization? 

Yes, the general rule of incompatibility with the EU internal market of aid granted by Member States (MS) through State resources which distorts or threatens to distort competition by granting advantages to certain undertakings (Article 107(1) of the Treaty on the Functioning of the EU (TFEU)) continues to apply. 
The granting of benefits falling within the concept of State aid therefore requires notification to, and prior authorization from, the European Commission (EC) to assess its compatibility with the internal market.
However, certain support measures may be granted by MSs because they are not "State aid" under Article 107 of the TFEU or because they fall within the exceptions already provided for in paragraphs 2 and 3 of this Article (see questions below).

As at the time of the financial crisis, the EC has drawn up a Temporary Framework for the granting of aid under the exception of Article 107(3)(b) of the TFEU on the need to remedy serious disturbances in the EU economy, having approved four packages of national measures under this framework up to this date (see questions below).

 

What support measures to undertakings can the State adopt without requiring the prior authorization of the European Commission?

State aid presupposes granting advantages to certain undertakings or certain production units through State resources (revenue reduction or expenditure increase).

As a rule, the State can adopt measures applicable to all undertakings and all sectors, which measures do not consequently fall within the concept of "State aid”. And if they do not fit the definition of aid, such measures must not be previously notified to and approved by the EC.
Examples of such measures are, on certain conditions, the alleviation of wage costs, the suspension of payments of corporate and value added tax or social contributions, as well as financial support granted directly to consumers (e.g. to compensate for the cancellation of services or the cost of tickets not reimbursed by the operators concerned).
MSs may continue to adopt measures under the De Minimis Regulation (Reg. (EU) 1407/2013, of 18.21.2013) or the Block Exemption Regulation (Reg. (EU) 651/2014, de 16.06.2014), which do not require EC prior approval.

 

What support measures to undertakings could the European Commission deem compatible with the internal market?

The EC clarified that it finds that the current framework already allows MSs to take measures subject to the Commission’s prior approval pursuant to Article 107(2)(b) of the TFEU, according to which aid to make good the damage caused by natural disasters or exceptional occurrences are compatible with the internal market.
The EC published on its website a list of the information and data that must be contained in the aid notifications granted under Article 107(2)(b) of the TFEU to cope with the COVID-19 outbreak.
For these measures, which require prior approval, the EC indicated that it is implementing all procedural measures necessary to ensure that these measures are evaluated and the relevant aid approved rapidly, and within a few days of notification.
The notified measures are published on the Commission's website, showing the support granted by the various Member States (sectors and type of aid), which gives an idea of the sectors in crisis and the solutions found to support them.

 

Is there a special State aid scheme to address the COVID-19 outbreak?

Yes. Recognizing that the main response to the pandemic will come  from MS budgets and that the EU economy as a whole is facing a severe disturbance, the EC approved on 19 March 2020 a Temporary Framework under Article 107(3)(b) of the TFEU (further amended on 3 of April and 8 of May).

The Temporary Framework, as amended, provides for several types of aid:

  • Direct grants, repayable advances or tax advantages, zero-rate loans, guarantees on loans covering 100% of the risk, or capital injections, of up to € 800,000 per undertaking to address urgent liquidity requirements. Specific rules apply to the agriculture and fishery sectors, namely with regards to maximum amount of aid.
  • Subsidized guarantees on bank loans. MSs may grant State guarantees or set up guarantee schemes for bank loans taken out by undertakings. Some limits to the maximum amount of each loan are established based on the operational expenses of the undertakings, previous year turnover or liquidity needs. Guarantees are limited to a maximum duration of 6 years.
  •  Subsidized interest rates subordinated debt. MSs may authorize the grant to businesses of public and private loans to undertakings with subsidized interest rates as well as loans in the form of subordinated debt (in relation to ordinary senior creditors). These loans must be granted at an interest rate at least equal to the base rate in force on 1 January 2020 plus the credit risk margin corresponding to the risk profile of the beneficiary, with different rates for SMEs and non-SMEs with an added surcharge in case of subordinated debt. There are limits to the maximum amount of each loan, based on the operational needs of the undertakings.

  • Safeguard of Banking sector. The Temporary Framework clarifies that, if MSs decide to channel aid to the real economy through banks, this will be considered a direct aid to the banks' customers benefiting from such aid and not to the banks themselves. Banks and financial intermediaries shall operate mechanisms to ensure that the advantages are passed on to the largest extent possible to the final beneficiaries in the form of higher volumes of financing, lower interest rates, lower collateral requirements or lower guarantee premiums.

  • Short-term export credit insurance. The Temporary Framework introduces additional flexibility to MSs on granting export credit insurance covering marketable risks. This is subject to demonstrating unavailability to cover such risks by private players.
  • Aid for coronavirus related Research and Development (R&D). As a response to the current sanitary crisis, MSs may grant direct grants, repayable advances or tax advantages for R&D activities. A bonus may be granted for cross-borders cooperation projects between Member States.
  • Aid for construction and upscaling of testing infrastructures. MSs may grant direct grants, tax advantages, repayable advances and no-loss guarantees to support investment aids for the construction or upscaling of the necessary infrastructures to develop and test relevant products to fight the virus outbreak, up to their first industrial deployment. This measure covers medicinal products (including vaccines) and treatments; medical devices and equipment (including ventilators and protective clothing as well as diagnostic tools); disinfectants; data collection/processing tools to fight the spread of the virus.
  • Aid for the production of relevant products to face the coronavirus outbreak. To promote the cooperation and facilitate a fast response, undertakings may benefit from a bonus when their investment is supported by more than one MS or when the project in question is completed within two months after the date of the aid granting.
  • Specific aid in form of deferrals of tax and/or suspension of social security contributions. MSs may grant specific deferrals of tax and social security contributions to sectors, regions or types of undertakings that are particularly affected by the outbreak.
  • Specific aid in form of wage subsidies for employees. MSs may contribute to wage costs of undertakings of certain sectors or regions, most affected by the outbreak, which, would otherwise lay off personnel.

The second amendment to the Temporary Framework, has also allowed Member States to intervene on undertaking’s recapitalization measures, as a last resort in case of inadequacy of the above listed aid measures. Such measures may take the form of equity and/or hybrid capital instruments (convertible debt) but shall be subject to a stricter demonstration regarding the need, adequacy and proportionality of the aid.

In order to ensure the temporary nature of the State intervention and a sufficiently high remuneration for the assumed risk, incentives have been created for the buyback of the shares or the repayment by the undertakings (or their shareholders) through the specific conditions of remuneration, increased participation, conversion, and the State’s entry and exit from the equity of the undertakings. During the State’s intervention and as long as the aid measures have not been fully redeemed, beneficiaries cannot make dividend payments, nor increase remuneration or pay bonus to management officers, nor purchase more than 10% equity in competitive undertakings or other operators in the same area of business. 

The aids established under the Temporary Framework are aimed at undertakings that were not already in difficulty on 31 December 2019 but are now or will be facing difficulties as a result from the COVID-19 outbreak.
The Temporary Framework shall be in force until the end of December 2020, and any need for its extension will be reassessed.

For more information, check the consolidated version of the Temporary Framework approved by the Commission here

The  EU has announced a number of support measures under the cohesion policy financed from the Union budget. It is an instrument which, while having modest resources, can help offset the unequal ability to allocate state resources to the mitigation of the problems faced by the different economies.


Can the measures foreseen in the Temporary Framework be cumulated with other aids?

Any aid measure foreseen in the Temporary Framework may, in principle, be cumulated with others under the same Framework. There are only two exceptions to this rule: (i) aids granted in form of subsidized interest rates and guarantees may not be cumulated if the aid is granted for the same underlying loan, and (ii) aids for coronavirus R&D activities, aids for construction and upscaling of testing infrastructures, and aids for the development of relevant products to face the coronavirus outbreak may not cumulated, if the aid concerns the same eligible costs.
Furthermore, measures may be combined with De Minimis aid.


Are
there any national support measures in place under the Temporary Framework? Which undertakings may benefit from them?

The EC has already approved four packages of national support measures under the Temporary Framework. On 22 March, the EC approved the Portuguese Government’s first package of four guarantee schemes for SMEs and mid-caps affected by the COVID-19 outbreak, operating in the (i) tourism; (ii) restaurant; (iii) mining and manufacturing industry; (iv) event planning, tourist entertainment and travelling agency sectors. This package contemplated the grant of state guarantees on bank loans, with a limited maturity and size, with a  total budget of € 3 billion.

On 4 April, the EC approved a second package of national support measures comprised of two schemes in a total amount of 13 billion Euros, for SMEs and large undertakings facing difficulties due to the economic impact of the COVID-19 outbreak, aids can take the form of direct grants of up to €800.000 per undertaking or State guarantees to loans within the limits foreseen in the Temporary Framework and provided that the guarantees are limited to a maximum of six years.

The support measures foreseen in the first and second packages have been implemented through Linha de Apoio à Economia COVID-19 (COVID-19 Economy Support line) the conditions of which are available for consultation here.

The third package of national aid measures, approved by the EC on 8 April, consists of a credit facility at subsidized interest rates available for SMEs operating in the fisheries and aquaculture sectors. The credit facility is designed to cover the liquidity needs of the undertakings most affected by the crisis, in order to maintain their activity. The loans will have a maximum duration of six years and are limited to 25% of the total turnover of the beneficiaries in 2019 (with some exceptions in duly justified cases). The measure is implemented through Instituto de Financiamento da Agricultura e Pescas, IP (Institute for Agriculture and Fisheries Financing) under the conditions available here . In addition to this measure, a temporary derogatory support was also approved, in the form of salary compensation, for professionals in the fishing industry, as a result of the COVID-19 disease pandemic, pursuant to Decree-Law no. 20-B/2020.

Finally, a package of support measures to the investigation, development, testing and production of relevant products to face COVID-19 has also been approved, with a total budget of 140 million euros, of which 50 million euros have been allocated to R&D projects and testing facilities to face COVID-19 and 90 million shall finance the development of relevant products for the coronavirus outbreak. State support will take the form of direct grants and will be made available to any undertaking capable of carrying out such activities, irrespective of the sector. IAPMEI is the entity responsible for granting the support, according to the conditions available here.


Are
there measures aimed at the banking sector?

The Temporary Framework of the EC recognizes the important role of banks and other financial intermediaries in channeling aid to the final beneficiaries, in particular to SMEs.
Aid channeled to the real economy through banks will be considered a direct aid to the banks' customers and not to the banks themselves.
Banks and financial intermediaries must implement safeguards and mechanisms to ensure that the benefits are effectively passed on to their final beneficiaries, including through higher volumes of financing, lower interest rates, lower collateral requirements or lower guarantee fees.
Although not included in the scope of the Temporary Framework, the European Commission does not rule out adopting support measures targeting the banking sector, including through recapitalizations or measures related to impaired assets.

 

 

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This information is being updated on a regular basis.

All information contained herein and all opinions expressed are of a general nature and are not intended to substitute recourse to expert legal advice for the resolution of real cases.