State Aid
Objectives of this information sheet
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Raise awareness of State Aid as an issue;
Help organisations determine whether State Aid rules may apply to them;
Provide information as to possible solutions to State Aid queries; and
Clarify the possible consequences of ignoring the State Aid rules.
What does the term ‘State Aid’ mean?
The Government of each European Member State must comply with European Community
(EC) rules when giving subsidies/grants for commercial activities operating in the
European Union (EU). If these subsidies have the potential to distort competition and affect
trade between Member States they are known as ‘State Aid’. The overall aim of the State
Aid rules is therefore to maintain a level playing field for free and fair competition in the
European single market..
Why can it cause a problem if an organisation receives
support from the government?
By giving certain organisations favoured treatment to the detriment of others, in the form of
grants, subsidies or preferential treatment, State Aid can seriously disrupt normal
competitive market forces. Unsubsidised enterprises will be at a disadvantage in
comparison to those organisations receiving public support, and they will not be competing
on an equal basis. Ultimately then, the entire European common market could suffer the
distorting effects of State Aid.
State Aid rules only apply to organisations involved in economic activity ('undertakings').
The organisation does not have to be profit-making if the activity carried out is one that has
commercial competitors. In some instances it can also apply to the voluntary sector.
Examples of groups that may be classed as an undertaking could include credit unions,
community transport schemes and social enterprises, or charities/groups that sell an
element of their services or products. All of these examples may be classed as an
undertaking because they are economic activities.
5 key questions
There are five criteria or questions that need to be considered in order to find out whether a
subsidy constitutes State Aid. If all five criteria are met, State Aid is involved and the rules
apply. Where one or more of the criteria appears not to be met, then funding is unlikely to
be State Aid. If you are at all unsure, we recommend that you seek further assistance from
the organisation to which you are applying for funding, or professional legal advice.
1. Is the measure granted by the State or through State resources?
As well as central government departments, this includes regional or local authorities and
other public or private sector bodies established by the State to distribute public support.
The Aid can take a variety of forms, for instance:
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State grants or subsidies
tax breaks and rate rebates
low interest loans
State guarantee or holding
provision by the State of goods and services below market value rates
State resources include tax exemptions and also funds not permanently belonging to the
State but under State control, e.g. lottery funding.
Sometimes it can be quite hard to tell whether money or assistance has come from State
control/resources. In this case, it is advisable to seek further clarification from the funder.
2. Does it give advantage to an undertaking?
A benefit to an undertaking, granted for free or on favourable (non-commercial) terms,
could be State Aid. This includes the direct transfer of resources, such as grants and soft
loans, and also indirect assistance - for example, relief from charges that an undertaking
normally has to bear, such as a tax exemption or the provision of services or loans, at a
favourable rate.
3. Is it selective, favouring certain undertakings?
Aid that targets particular businesses, locations, types of enterprise e.g. small and medium
enterprises (SMEs), or sectors is considered selective. A general measure affecting the
whole of the State's economy e.g. nation-wide fiscal measures, is not considered a State
Aid.
4. Does the measure distort or have the potential to distort competition?
If it strengthens the position of the beneficiary relative to other competitors then this criteria
is likely to be met. The potential to distort competition does not have to be substantial or
significant, and this criterion may apply to small amounts of Aid and groups with little
market share.
Most interventions have the potential to distort competition.
5. Is the activity tradable between member States?
States?
The Commission's interpretation of this is broad - if the product or service is tradable, even
if the organisation itself does not work outside the UK then the answer to the question is
yes.
Consequently most activities are viewed as tradable.
Some examples of State Aid
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Grants to enterprises for investment, research and development, employee training,
etc.
Loans and guarantees below market rates
Free or subsidised consultancy advice
Cash injections to and writing off losses of public enterprises
Sale or lease of public land or property at discounted rates
Contracts not open to competitive tendering
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Discretionary deferral of or exemption from tax, social security and other payments to
the State
Legislation to protect or guarantee market share
Funding/cash injections to non-profit social enterprises, community companies and
some charities
Public funding of privately owned infrastructure
Support that is not State Aid • Aid to individuals, charities, organisations and public bodies not involved in an
economic activity
• Commercial payments for services rendered, where a company is contracted by a
public body in accordance with competitive tendering requirements
• General measures, which can apply to all firms throughout the UK, with no
discretionary power
Granting State Aid legally
In some circumstances the granting of State Aid is legal because the EC recognises that
there will be times where the advantages of providing Aid outweigh the disadvantages. The
EC Treaty on State Aid therefore contains a number of exemptions which enable State Aid
to be granted legally.
It is these Treaty exemptions, on which the EC’s Frameworks, Guidelines and Block
Exemptions are based, which enable certain kinds of Aid to be granted legally that will help
achieve Community market or equity objectives, in circumstances where the market fails to
properly provide.
These Community objectives include the promotion of Research, Development &
Innovation, Environmental Protection, access to venture capital, access to broadband,
investment in SMEs and support for public services – such as rural transport and social
housing.
General Block Exemption Regulation
The EC also allows a simple method of providing financial support to undertakings. This is
via the General Block Exemption Regulation (GBER). This is for a whole range of Aid
measures that are considered less problematic in competition terms, i.e. less distortive.
This enables notified Aid to be granted without the need for approval from the EC in cases
where a measure meets the terms of the Regulation. Twenty six areas are covered by the
GBER; these include:
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Regional Aid
SME Aid
Aid to Disadvantaged and Disabled Workers
Aid for Environmental Protection
Training and Employment Aid
Each of the twenty six listed areas has specific Aid ceilings that must not be breached; the
EC has produced a Vademecum to explain Community law on State Aid and this is
available at:
http://ec.europa.eu/competition/State_Aid/studies_reports/studies_reports.html .
de Minimis Aid
De minimis Aid is a generic term for small amounts of public funding to a single recipient.
The current de minimis threshold is set at €200,000 (approx £178,000) over a rolling three
year period, The EC considers that this level of funding has little impact on trade and
competition, and does not require notification. The threshold applies cumulatively to all
public assistance received from all sources and not to individual schemes or projects. This
Aid can be given for most purposes, including operating Aid.
This does not mean that all funding under €200,000 should be counted as de minimis. It is
strongly recommended to account for even small amounts as Aid under a specific
approved scheme, or a block exemption, if possible. Try to keep the de minimis cover as a
‘back-up’ for when there are no other options.
This ceiling takes into account all public assistance given as de minimis funding over the
previous 3 years and which can take various forms (grants, loans, subsidised contracts,
etc). Aid given under an approved scheme does not have to be accumulated with de
minimis Aid.
It is important to remember that de minimis Aid can’t be given for export related activities
(except attendance at trade fairs), transport, agriculture and fisheries or Aid favouring
domestic goods over imports.
It must be remembered that the provider of the Aid is responsible for abiding by the de
minimis threshold. If you are an organisation providing de minimis Aid you must first
ensure that the amount will not exceed the €200,000 limit over the 3-year rolling period,
when added to all other de minimis Aid the intended recipient has already received.
Organisations that are being provided with Aid using de minimis must be notified by the
provider of the Aid that this is the case.
Notification
If your project proposal involves State Aid that can’t be awarded under existing approved
schemes or block exemptions, there is still scope to potentially get the EC’s approval. This
is done by submitting a ‘notification’ of your scheme to the Commission. This is a formal
process and you are advised to seek legal assistance.
Structural Funds and State Aid
Projects receiving grants through the Structural Funds programmes must comply fully with
State Aid rules.
When dealing with a Structural Funds project you must find out if the match funding is
State Aid by asking the five key questions above. If the match funding is State Aid both the
European Structural Funds money and the match funding must comply with the State Aid
rules. In most cases, Structural Funds projects will have a general benefit e.g. to support a
road building project that has been competitively tendered, and does not fall within the
scope of the State Aid rules.
If the match-funding element constitutes State Aid it must be provided under an approved
scheme, block exemption, be given as de minimis funding, or be notified to the
Commission for approval. Structural Funds maximum intervention limits only apply to
projects where the match funding is not State Aid.
The Convergence programme in Wales has seen a marked increase in the amount of
procured activity, especially under ESF, in part this has occurred to reduce the burden of
State Aid. By procuring activities an undertaking is not preferred as they were selected to
undertake the service or work through an open and competitive process.
Services of general economic interest (SGEIs)
SGEIs are different from ordinary services in that public authorities consider that they need
to be provided even where the market is not sufficiently profitable for the supply of such
services. The concept of services of general interest is to ensure that a quality service is
provided at an affordable price everywhere for everyone, this can be especially relevant in
a rural country such as Wales.
A good example of an SGEI is the obligation of a Government of Local Authority to provide
a given service throughout the territory of a country at affordable tariffs and on similar
quality conditions, irrespective of the profitability of individual operations.
Article 86(2) of the EC Treaty provides that SGEIs are subject "to the rules on competition,
in so far as the application of such rules does not obstruct the performance, in law or in
fact, of the particular tasks assigned to them".
These principles allow for some flexibility that takes account of the Member States'
different circumstances and objectives, in some circumstances this means that support
granted to an undertaking might be regarded as State Aid but because the service being
provided is an SGEI then it is difficult to argue that it involves an economic activity and
affects trade between Member States.
Getting it wrong
The EC considers State Aid to be incompatible with the common market and to damage
competition and trade across the Community area. Consequently, the Commission takes a
serious view of Aid provided without its approval and a particularly serious view of Aid that
breaks State Aid rules.
In these circumstances, there can be serious repercussions:
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the Aid payment could be halted;
the recipient could be required to repay the Aid, plus interest;
interest
aggrieved competitors may seek legal action for damages; and
the Commission could commence infringement procedures against the UK, possibly
resulting in a fine.
In recent years the Commission has given increasing importance to State Aid rules. So it
is extremely important to establish whether your project constitutes State Aid and, if so,
how it could go ahead within the rules.
Don’t panic!
If you have applied the five questions and think that State Aid may apply to your project(s),
don’t panic! It is important to seek expert advice from someone who can consider your
individual case and perhaps make recommendations as to how potential problems could
be overcome. This information sheet is intended as a resource to get you thinking about
State Aid and the implications, it is not meant to be a definitive guide. No two examples
are the same and each case will require a different approach.
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