knowledge 12 September 2016 |

Commission Publishes Explanatory Notice on the Notion of “State Aid”

A State aid cannot be paid by a Member State unless it is approved by the European Commission (the “Commission”) as compatible with the internal market. Such approval can be further to a direct notification to the Commission or to a Commission regulation block exempting certain State aids. As such, the Commission acts as a gatekeeper to the payment of State aid.

A notification to the Commission for approval of a State aid can result in considerable delay in its payment, with the possibility of the Commission declining to approve the payment. Thus, the issue of whether a State aid arises or not can be critical to timing and progress of State funded activities and projects. Unfortunately, this critical issue is not always a straightforward one.

Helpfully, the Commission has recently published a communication outlining its understanding of the constitutive elements of a State aid, those being the concepts of: an undertaking and non-economic activities; the exercise of public power by the State; the imputability of the measure to the State; State resources; selective advantage; distortion of competition; effect on trade between Member States.

The communication- titled the Commission Notice on the Notion of State Aid as Referred to in Article 107(1) TFEU (the “Notice”)- summarises the case law of the Union courts and, in areas where the Union Courts have yet to consider an issue (there are quite a few), the Commission’s decision making practice on these constitutive elements of a State aid. The Commission’s decision making practice is expressly stated to be subject to any interpretation of Article 107(1) that may be made by the Union courts (a statement of the obvious, but of particular relevance in respect of the Commission’s summary of its approach to tax rulings- that decision making practice is under appeal to the Union courts at present).

The Notice deals only with whether a State measure is an aid for the purposes of Article 107(1). It does not address the issue of whether, if a measure constitutes an aid, that aid is compatible with the internal market further to Articles 107(2) and (3) and Article 106(2) of the TFEU.

The Commission issued a draft version of the Notice for consultation in 2014. The final version of the Notice contains a number of differences, including the following substantive amendments:

 

• The Commission includes specific clarifications regarding when public funding of infrastructure will constitute a State aid.
  • For example, the Commission clarifies that there will normally be no effect on trade between Member States or no distortion of competition as regards the construction of infrastructure where (i) the infrastructure typically faces no direct competition (comprehensive network infrastructures that are natural monopolies is the example provided); (ii) private financing is insignificant in the sector and Member State concerned (to be assessed at the Member State rather than regional level); and (iii) the infrastructure itself is not designed to selectively favour a specific undertaking or sector, but rather provides benefits for society at large.
  • This section summarises case law and Commission practice as regards when there will be aid to the developer/ owner of the infrastructure (helpfully, this is discussed by sector, in addition to a discussion of the general principles), aid to the operator of the infrastructure, aid to end-users and the circumstances in which no aid will arise due to a lack of a distortive effect on competition or lack of effect on trade between Member State.

• The Commission confirms that in assessing whether the sale and purchase of assets, goods and services by the State is on market terms, compliance with the procedures provided for in the Public Procurement Directives will be considered a sufficient method of meeting the requirements of the Market Economy Investor Principle (there are other methods).
  • However, the Commission clarifies that this does not apply where the specific circumstances make it impossible to determine if a market price was achieved, such as where the negotiated procedure is used without the publication of a contract notice.
  • The Commission further states that if only one bid is received in response to a tender, the procedure would not normally be sufficient to have established a market price, unless either (i) the tender process included particularly strong safeguards to ensure genuine and effective competition and the process was not designed in a way that only one operator was realistically able to submit a credible bid or (ii) additional steps are taken to verify that the price is market (such as benchmarking).

 

• The Commission outlines its approach regarding when tax rulings confer a selective advantage- essentially summarising its decision making practice in the Fiat and Starbucks cases, both of which are under appeal
  • The Commission notes that tax rulings can provide legal certainty and predictability in the application of general tax rules. However, it states that tax rulings can confer a “selective advantage” upon the addresses where the ruling does not reflect in a reliable manner a result that would arise from the normal application of the ordinary tax system in so far as the ruling results in the lowering of the addressee’s tax liability as compared to companies in a similar factual and legal situation.
  • The Commission sets out its view that this will be the case where a ruling endorses a method of transfer pricing for determining a corporate group entity’s taxable profit that does not result in a reliable approximation of market based prices in line with the arm’s length principle. The taxable profit of the group entity is reduced as compared to standalone companies that are taxed on their accounting profit (which reflects prices negotiated on the market at arm’s length). 
  • The Commission states that the arm’s length principle forms part of its assessment of tax measures granted to group companies “independently of whether a Member State has incorporated this principle into its national legal system and in what form”. The Commission regards the arm’s length principle as an application of Article 107(1).
  • The Commission states that a more favourable tax treatment could also apply if the ruling allows the addressee to use alternative, more indirect methods of for calculating taxable profits, such as the use of fixed margins for a cost-plus or resale-minus method for determining an appropriate transfer price, when more direct ones are available.

 

• The Commission provides additional clarification regarding the circumstances in which it considers that measures have purely local impact with no effect on trade between Member States
  • In addition to the new clarifications regarding funding of physical infrastructure, the Commission outlines when funding of cultural events in a Member State has the potential to affect trade between Member States.

 

• The Commission clarifies when culture and heritage conservation will be considered non-economic in nature
  • The Commission states that a cultural activity will be considered to be non-economic in nature (and so, outside of the State aid rules) if it is accessible to the public free of charge or for a monetary contribution which only covers a fraction of the costs of providing the service.

Finally, it is worth noting that the Notice has replaced three Commission Communications concerning

• sales of land and public buildings by public authorities;
• public undertakings in the manufacturing sector; and
• measures relating to direct business taxation.

It also replaces any opposing statements relating to the notion of State aid in any existing Commission Communications (except where sector specific).