08 Apr 2020
Article 107 of the Treaty on Functioning of the European Union provides that save exceptions, Member States are prohibited from providing state aid ‘in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods’. Naturally, the situation caused by COVID-19 warrants exception to this rule and the Treaty does provide for it in sub-article (3)(b) which states that aid “to remedy a serious disturbance in the economy of a Member State” may be considered compatible with EU state aid rules. The Commission had used this same legal basis to allow exceptional aid measures to the real economy following the 2008 financial crisis.
Furthermore, the Treaty establishes that the state aid measures must be notified to the Commission for its approval. To gain this approval, economic disturbances must be of a significant character and affect the entirety of a Member State's economy or an important part of it.
In a communication published on March 19, the European Commission adopted a temporary framework for the implementation of less stringent State aid rules in order to support the economy in the COVID-19 outbreak circumstances (“Temporary Framework”). Acknowledging the limitations of the EU budget, it is expected that most assistance available to both SMEs and large undertakings will likely be primarily funded by national budgets, and might therefore be subject to strict State aid rules.
With measures such as social distancing, mandatory closures and quarantines, many undertakings are experiencing lower demands for their goods and services. The Temporary Framework identifies financial intermediaries providing access to liquidity as key players in ensuring that the economy has a healthy access to credit. The Temporary Framework acknowledges that such intermediaries may support and incentivisation by the Member States.
The Temporary Framework allows for five types of State aid, provided certain conditions are met:
1. Direct grants, selective tax advantages and advance payments
The aid cannot exceed €800,000 per undertaking and must be based on a scheme with an estimated budget. Furthermore, the aid can be granted both to those undertakings that did not experienced any difficulties prior to 31st December 2019 and those that started experiencing difficulties after that date.
For undertakings that primarily market and process agricultural products, the aid cannot be conditioned by how much the undertaking is buying the products for, how much of it is placed on the market or being passed on to the primary producers.
There are separate conditions applicable to undertakings working in agriculture, fisheries and aquaculture. The direct aid is reduced to €120,000 per undertaking in fishery and aquaculture and €100,000 for agricultural sectors. There is also a prohibition on conditioning the aid on the production quantities.
2. Loan guarantees
The Temporary Framework acknowledges that one of the viable ways to help undertakings access liquid assets is by governments guaranteeing parts of the loans taken out by such undertakings. Both working capital loans and loans for investment purpose are covered. The Temporary Framework provides the minimum allowed guarantee premiums that the Member State can provide.
Member States may also notify the Commission of alternative schemes.
For long-term loans that become due after 2020 they must not exceed 25% of the turnover of the beneficiary or double of the annual wage bill of the beneficiary in 2019 or previous year of assessment (if a 2019 bill is not available).
In exceptional circumstances, for liquidity needs and provided that a valid justification is given, a larger loan may be allowed for SMEs for 18 months and for large enterprises for 12 months.
For short-term loans which are due before 2020, a larger amount is allowed provided there are justifications and the guarantee is proportionate.
The guarantee is limited to maximum of 6 years and cannot exceed 90% of the loan in cases where the losses are shared between the State guarantor and the credit institution and cannot exceed 35% of the loan in cases where the State bears the risk first. The guaranteed amount of the loan must decrease in proportion to the loan decrease in case if repayments.
3. Loans under reduced interest rate
As an alternative, the State may subsidize the loan’s interest taken up by the undertakings. It is important to note that Member States cannot offer both loan guarantees and loan interest subsidies to the same beneficiary.
The loans may be granted at a reduced interest rate which must be at least equal to the Euro Interbank Offered Rate which on January 1st, 2020 stood on average of -0.438%. In addition, the credit risk margin must be added.
The Member States may also notify the Commission of alternative schemes.
The loans eligible are the same as those eligible under loan guarantees conditions.
4. Supporting banks that channel state aid to the real economy
The Temporary Framework acknowledges that since banks are the key intermediaries in the provision of State aid to undertakings, Member States that either give compensation to banks for the damages suffered due to the outbreak or which channel State aid through them to be given to the final recipient will not be considered as a direct State aid to the bank as per Directive 2014/59/EU and Regulation 806/2014. The Temporary Framework acknowledges that this might benefit indirectly the credit institutions through which the aid is channeled, but that this should not be qualified as extraordinary public financial support. The Temporary Framework also notes that there is a need to establish safeguards to prevent any distortions to competition.
Nevertheless, more direct support to banks in a form of liquidity recapitalization or impaired asset measure will still have to be assessed as per the abovementioned Directive and Regulation.
5. Short-term export credit insurance
The final aid option under the Temporary Framework is State-Sponsored insurance on export. Due to the COVID-19 outbreak, certain countries may not have private insurance companies willing to cover marketable risks. If sufficient evidence is shown that there are no private insurers willing to cover marketable risks, then Member States can provide for it themselves.
The Temporary Framework is in force until the end of 2020 with the possibility of the EU Commission of extending it, if the need arises.
How the State Aid is handled
Within 12 months of implementing the State aid measures, Member States must report them to the Commission. There must be annual reports submitted as well as comprehensive records be kept for the period of 10 years regarding the aid measures and the Commission has the right to request further documentation.
Calls for extension
On March 27th a press statement and an official communication was issued by the European Commission calling for the extension of the Temporary Framework and adding new support measures to combat COVID-19 effects on EU.
Additionally, the EU is considering Union-wide measures to support the Member States. The five new measures proposed are:
Amendments to rules on short-term export-credit insurance
Additionally, in the new communication, the EU Commission has decided to remove all Member States from the list of ‘marketable risk’ countries within the context of short-term export-credit insurance communication of 2012 until the end of the Temporary Framework. Marketable risks are commercial and political risks that exporters may suffer. The 2012 Communication prohibits Member States from providing export aid in a form of export insurance, which is considered to grossly distort the single market. As Recital 6 of the 2012 Communication provides: ‘Risks that are in principle non-marketable are outside the scope of this Communication.’ Hence, the EU Commission has temporarily removed the rules usually applicable to State-provided insurance for marketable risks allowing Member States to provide for short-term export-credit insurance.
The Commission notes that after public information request process was over, it observed that the current ability of the market to cover the export insurance demand is dwindling, and is expected to become extremely scarce considering current market volatility.
The Temporary Framework will probably be followed very quickly by notifications (and likely, clearances) of aid schemes by Member States. In parallel, more targeted measures for certain sectors such as aviation could also give rise to clearances to State aid programmes under separate legal bases, such as Article 107(2)(b) which provides that “aid to make good the damage caused by natural disasters or exceptional occurrences” is compatible with the internal market.
A key difference in the two legal bases is that Article 107(3)(b) uses the word “may”, meaning that state aid measures must still be vetted for under this sub-article, while measures under Article 107(2)(b) are considered a priori compatible with the Treaty.
If you have any questions concerning this briefing, please reach out to your usual WH Partners contact, the authors, or our COVID-19 team by writing directly to email@example.com.