European Commission consults on Notice on the recovery of State aid

Background

EU State aid rules aim at preventing Member States from using direct and indirect subsidies to selectively favour certain companies or sectors. These rules have come to the forefront of EU competition law enforcement over the past decade. For example, during the financial crisis, which began in 2008, massive amounts of State aid were injected into EU financial institutions and were approved in the interests of financial stability. More recently, the State aid rules have been extensively applied to tax matters. Critics see this as the European Commission making up for the lack of an EU-wide business tax regime.

Recovery of State aid

In contrast to other areas of EU competition law, companies cannot be fined for receiving illegal State aid. Instead, the remedy is that the Member State will be ordered to recover the illegal aid, plus interest, from the beneficiary in question. Such recovery orders can have a significant impact on the financial well-being of a company and there are few possible defences. Even the risk of insolvency is not accepted. The limitation period is also unusually long: 10 years.

State aid recovery is carried out at Member State level. Whilst the recovery order is adopted by the Commission, it is the Member State that must enforce it. However, there are no procedural rules at EU level on how to achieve recovery, other than broad general principles of law. For example, the need for the national procedures to be effective to safeguard the enforcement of EU law. With this in mind and to provide guidance for Member States tasked with enforcement, the Commission adopted a Recovery Notice in 2007.

Review of the recovery rules

Both the Commission’s practice and the case law from the EU courts have evolved since 2007, in part as a result of the 2012 State Aid Modernisation reform programme. Against this background, the Commission has recently consulted stakeholders on a Draft Revised Notice. Linklaters responded to the Commission’s consultation on 29 April 2019 (our response is available here).

Advocating for procedural rights

While Linklaters welcomes the Commission’s ambition to update the Notice, we also think there is room for improvement on the Draft Revised Notice.

One persisting problem with the EU State aid regime is that it applies in the framework of bilateral contacts between the Commission and the Member States. Interested parties, including companies that face the risk of recovery, have few procedural rights other than the right to appeal the final Commission decision before the EU courts. In addition, the recovery process takes place through dealings between the Commission and the Member State concerned and is not transparent.

In Linklaters’ submission to the Commission, we suggest that these shortcomings are addressed in the revised Notice in order to ensure that interested parties are involved at an early stage and are also kept informed about the recovery process. We believe that increased transparency and stakeholder involvement would lead to better decisions, increase legal certainty and avoid unnecessary litigation.

We also propose rules ensuring that recovery is limited to the amount required to remedy the illegal granting of aid. This is so that Member States cannot take advantage of recovery, going beyond this objective in order to serve internal purposes.

An aspect of this is where the beneficiary has paid taxes on the State aid it has received. It is accepted, in principle, that any such tax effect shall be taken into account when determining the amount to be recovered. Only the “net” amount must be reimbursed. But unless the aid beneficiary participates in the process, how can this result be guaranteed? The Member State may have few incentives for putting forward arguments that will reduce the amount it recoups. Such “design flaws” risk leading to excessive recovery and unjust enrichment for the Member State in question.

Next steps

The Commission is expected to adopt the new Notice later in 2019. All responses received by the Commission during the consultation period will be published here.