The state aid regime in the EU-UK Trade and Co-operation Agreement: a level playing field for EU-undertakings? (Part 1)

One of the key elements in the EU-UK Trade and Co-operation Agreement (TCA) – the Brexit-deal – is the assurance that entrance to the internal market is linked to a level playing field for open and fair competition, given the parties’ geographic proximity and economic interdependence. Part of that level playing field is a regime on ‘state aid’ or, as it is called in the TCA, subsidies. I will discuss the provisions concerning this part of the level playing field in a series of blogs, from the perspective of EU companies: are they protected against unfair competition stemming from distorting subsidies and what can they do about it? The comments are based on a first impression of the draft EU-UK Trade and Co-operation Agreement, published in the European Commission’s DG Comp website.

In this first blog I will discuss the concept of subsidy. Next blogs I will discuss, inter alia, the types of subsidies that are allowed under the TCA, the role of the ‘independent authority’ and the role of national courts and tribunals.

The concept of ‘subsidy’

The EU-UK Trade and Co-operation Agreement (TCA) provides for a subsidy control regime in Chapter 3. The TCA avoids the term ‘state aid’. We recognize, however, several elements of the concept of state aid of Article 107(1) as interpreted by the EU Courts. The question is whether this concept of ‘subsidy’ in the TCA differs from the concept of state aid as meant in Article 107(1) TFEU.

According to Article 3.1(1)(b) TCA a subsidy is a financial assistance which:

(i) arises from the resources of the Parties, that
(ii) confers an economic advantage on one or more economic actors,
(iii) is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services
(iv) has, or could have, an effect on trade or investment between the Parties

 

In these elements we recognize the ‘state resources’, the advantage criterion (see ii) the concept of ‘undertaking’ (‘economic actors’ as beneficiary), the selectivity criterion (iii) and ‘the effect on trade’ we know from Article 107(3) TFEU.
As for the element of ‘resources’ of the Parties, Article 3.1(1)(b) TCA specifies that the concept encompasses:
(A) a direct or contingent transfer of funds such as direct grants, loans or loan guarantees;
(B) the forgoing of revenue that is otherwise due; or
(C) the provision of goods or services, or the purchase of goods or services.

 

This concept of ‘subsidy’ raises several questions. The first one is whether ‘resources of the Parties’ also covers resources of regional and local bodies like city councils, counties etc. At first sight, regional and local bodies are not a Party to the TCA. On the other hand, it would be a very unreasonable interpretation of the concept of a level playing field if the concept of subsidy did not cover the conduct of local and regional bodies. Indeed, not covering that conduct would make the provisions on subsidies devoid of substance, offering an easy way to avoid the restrictions on subsidies laid down in the TCA. It would, for instance make, possible the aid that was given by the Shetland Islands Council through Shetland Leasing and Property Ltd, which under the EU regime was declared unlawful and incompatible by the European Commission in 2005. That example also raises the question whether indirect subsidies, granted through private companies, however controlled by public bodies, will qualify as ‘subsidies’ within the meaning of the TCA. It may be argued that it will, since financial assistance also arises from resources of the Parties if revenues that are otherwise ‘due’ are forgone. The question of course is whether the forgoing from, for instance, dividends, is the forgoing from a revenue ‘otherwise due’. From an EU point of view, it would be if certain criteria, set by the EU Courts, are met. The UK Courts are, however, not bound by that case law. See Article COMPROV.13(3) TCA: “For greater certainty, an interpretation of this Agreement or any supplementing agreement given by the courts of either Party shall not be binding on the courts of the other Party.” I will discuss that in a future blog.

 

This rule on the interpretation of the TCA must be kept in mind as well when assessing the other elements of the concept of subsidy in the TCA.
The second point concerns what categories of possible beneficiaries are covered by the concept of subsidy. As far as this element is concerned, the term ‘economic actor’ is defined as an entity or a group of entities constituting a single economic entity, regardless of its legal status, that is engaged in an economic activity by offering goods or services on a market. It seems that this concept encompasses the same as the concept of undertaking in Article 107(1) TFEU, although it remains to be seen how ‘on a market’ will be interpreted by the UK courts.
The next element that attracts attention is ‘advantage’. The ‘advantage’ criterion does not say that the advantage should be an advantage that an undertaking would not have obtained under normal market conditions. Nevertheless, Article 107(1) TFEU is not so specific either. Against the background of the ‘level playing field’ character of this part of the TCA, it may be assumed that ‘advantage’ as meant here must be interpreted as an advantage that an undertaking would not have obtained under normal market conditions in the same way as the concept of advantage in Article 107(1) TFEU.

 

As for the ‘selectivity’ criterion (the financial assistance’ is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services): this seems to correspond with the selectivity criterion of Article 107(1) TFEU. Again, however, it remains to be seen again, whether this criterion will be interpreted as broad as the European Commission’s interpretation, like in several COVID-aid decisions in which aid was regarded as selective only because the financial sector was excluded from the aid measure, while all other sectors could benefit from the measure.
As far as the selectivity criterion in the area of tax measures is concerned, the TCA contains more specific rules that resemble the case law of the EU Courts on that point. I leave it there for now.

 

The question how the elements of the concept of ‘subsidy’ will be interpreted is extremely important, as far as the ‘effect on trade’ element of the ‘subsidy’ concept is concerned. After all, the concept of subsidy only applies if the financial assistance has or could have, an effect on trade or investment between the Parties. Therefore, the main question here is whether the low barriers the Court of Justice applies will be applied, or that the barrier that must be crossed before an effect on trade may be assumed, will be higher. Think of the Court’s judgment in Eventech, concerning the practice of permitting London black cabs to use bus lanes, while prohibiting minicabs from using those lanes, in which case the Court held: “In the main proceedings, the view must be taken, in particular, that it is conceivable that the effect of the bus lanes policy is to render less attractive the provision of minicab services in London, with the result that the opportunities for undertakings established in other Member States to penetrate that market are thereby reduced, which it is for the referring court to determine.”

Conclusions

The first impression of the provisions regarding subsidies – as part of the provisions that maintain a level playing field between the UK and the EU – is that the concept of ‘subsidy’ resembles the concept of state aid of Article 107(1) TFEU very much. Since it is not the EU Court of Justice that has jurisdiction regarding the interpretation of the TCA as far as it is applied in the UK, it remains to be seen, however, how the concept will be interpreted within the UK’s jurisdiction.

In the next blog I will discuss which types of subsidies will be allowed under the TCA.