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What is State Aid?

State Aid is a term that refers to forms of public assistance, using taxpayer-funded resources, given to undertakings on a discretionary basis, with the potential to distort competition and affect trade between member states of the European Union.

In general, State aid is banned because of its anti-competitive effects. For example, without State aid rules Member States might engage in wasteful subsidy races, which are non-sustainable, or perfectly healthy companies might be put out of business because their competitors received unfair state subsidies.

However, various categories of schemes are approved because their positive effects are considered to outweigh their negative impact, for example, schemes to promote Regional Development (IDA grants, tax-break schemes), or to promote Training or Research and Development and Innovation (RDI) in Industry.

Five key questions

Article 107(1) of the Treaty establishing the European Community sets out criteria, all of which must be met for a State aid to be present.

  1. granted by the state or through state resources? As well as government departments, this includes bodies that use resources that belong to the state, or are controlled by the state. State resources can include grants, interest and tax relief, guarantees, government holdings of all or part of a company, or the provision of goods and services on preferential terms. The advantage granted must have a budgetary consequence for the government, that is, the State must give something from its own resources, or fail to receive something from what is owed.
  1. confer an advantage to an undertaking? A benefit, whether direct or indirect, to an undertaking, granted for free or on favourable (non-commercial) terms, could be State aid. An undertaking is an entity that is involved in economic activity, irrespective of its legal form or how it is financed or whether it has a for profit orientation or not.
  1. selective, favoring certain undertakings? Aid that targets particular businesses, locations, types of firm, for example, SMEs or sectors is considered selective. A general measure affecting the whole of the state's economy. for example, nation-wide fiscal measures is not considered a State aid.
  1. if it strengthens the position of the beneficiary relative to other competitors or potential 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 firms with little market share. Most interventions have the potential to distort competition.
  1. activity tradeable between member states? The Commission's interpretation of this is broad - it is sufficient that a product or service is subject to trade between member states, even if the aid beneficiary itself does not export to the EU. Consequently most activities are viewed as tradeable.

 If one or more than one of these conditions is not met, then the matter is not a State aid.

Early consideration of State Aid is essential

It is crucial that public bodies fully consider the State Aid implications of a proposal at the earliest stage possible. This allows the measure to be designed or tweaked to fit within the State Aid Rules, and thus avoid potential serious problems later.

The European Commission can, and has, forced Member States to recoup any State Aid that has been given illegally. If the Commission takes a negative decision in the context of aid that has already been paid out, the Commission requires the Member State to recover the aid from the recipient, with interest.

The short video, presented by Phedon Nicolaides, Professor at the College of Europe in Bruges and Maastricht University, explains why public authorities should be concerned about State Aid.

What are the options if your proposal might involve State Aid?

Services of General Economic

In general, Services of General Economic Interest (SGEI) are services that the market does not provide or does not provide to the extent or at the quality that the State desires and are in the general (that is, of all citizens) interest and not the interest of a particular sector. For certain SGEI’s to operate, financial support from the public authorities may prove necessary. If so, State Aid issues may arise. 

SGEI's tend to include such areas such as healthcare provision, social housing, provision of gas, electricity and telecoms, public service broadcasting and public transport, but this is not an exhaustive list.

There are specific State Aid provisions for SGEI’s.