State aid and Covid-19

Governments across Europe are being called on to provide unprecedented levels of financial support to businesses to help combat the economic effects of Covid 19.  The State aid rules,[1] which were widely considered in the press during Brexit, are particularly important in this context because they prohibit financial support except in certain circumstances.  This article is intended to be a reminder of the rules and provide an update about how to comply with them in the current crisis.

In summary, the State, which includes central and local government, may not provide selective financial support to any entity offering goods and services on a market if doing so will or may distort competition and affect trade within the EU.  The consequences of breaching the rules are serious, and can result in an order to repay the aid plus interest and / or damages.  The European Commission is responsible for monitoring and enforcement, and as part of that role must be notified of, and approve, proposed aid before it can be given.  However, there are a number of “pre-approved” exemptions that can be relied on if the specific conditions can be met.  For example, the General Block Exemption Regulation (651 / 2014) and the De Minimis Regulation (1407 / 2013).  These will enable the UK government and local authorities to provide aid quickly and compliantly, but are likely to be insufficient to permit the scale of aid required.

The Commission has acknowledged the seriousness of the Covid 19 crisis by issuing a formal response and adopting a temporary framework to support the EU economy (both are available on a new dedicated page of its website – see here). 

The formal response explains how in the Commission’s view Member States can provide financial support within the existing aid rules, for example, by:

• offering support that is general rather than selective and so does not constitute aid. This could take the form of wage subsidies or tax holidays;
• providing support direct to consumers as they will not be caught by the aid rules. For example, for cancelled services or tickets that are not refunded;
• seeking Commission approval for schemes to compensate companies for damage directly caused by exceptional circumstances, such as those in Italy. In this respect, on 13 March 2020 the Commission approved a €12 million Danish scheme to compensate organisers for the cancellation of large events (more than 1,000 people) and events targeted at those particularly at risk from Covid-19, for example, the elderly or vulnerable.[2]

The framework, which will be in force until the end of the year, provides more detail about the type of aid the Commission expects to approve and on what terms.  For example: 1) direct grants and selective tax advantages of up to €800,000, 2) State guarantees for loans taken by companies from banks, 3) subsidised public loans to companies, and 4) safeguards for banks that channel support to the economy.  The Commission also explains that in its view the Covid 19 outbreak justifies reliance on its power to approve aid to remedy a serious disturbance in the economy of a Member State.[3] 

The key point to take away from this article is that the State aid rules still apply in the current crisis, but that the Commission has already adopted a practical and responsive approach.  Although all proposed aid must still be notified to the Commission, it is likely to be approved if it broadly fits within the terms outlined in the framework.  We have also seen in the Danish scheme that the Commission can provide approval very quickly – 24 hours in that case – recognising the importance of enabling the State to provide urgent financial support.

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For further support and advice relating to the impact of COVID-19, please view our COVID-19 Advisory Service page.

[1]             Please note that this article is based on State aid law as at the date of writing.  The law may change after 31 December 2020, depending on whether a trade agreement is reached with the EU, or whether the UK adopts a different regime.

[2]             State aid SA.56685 (2020/N) – DK – Compensation scheme for cancellation of events related to Covid-19.

[3]             Article 107(3)(b), Treaty on the Functioning of the EU.