The state aid regime in the EU-UK Trade and Co-operation Agreement: a level playing field for EU-undertakings? (Part 2)

In my first blog on this topic, I discussed the concept of subsidy in the EU-UK Trade and Co-operation Agreement (TCA). In this second blog I will discuss which types of subsidies are allowed under the TCA.

 

The TCA does not follow exactly the same pattern as the EU State aid regime (state aid is incompatible with the internal market unless it fulfils the criteria of Article 107(2) or (3) TFEU and the European Commission establishes that these criteria are fulfilled, or the measure involved falls within the ambit of the GBER or another block exemption). Instead, the TCA explicitly mentions which criteria subsidies must fulfil (to be allowed under the TCA, one may add). These criteria, called ‘principles’ in the TCA, are laid down in Article 3.4(1) TCA. Apart from these criteria, the TCA provides that it does not apply to subsidies where the total amount granted to a single economic actor is below 325,000 Special Drawing Rights (On January 10th, 2021 this was appr. € 384.000 ) over any period of three fiscal years. This may be considered a de minimis threshold fixed in the TCA itself. Unlike the de minimis regulation this de minimis clause in the TCA does not require any formal references to this clause or otherwise to the concept of de minimis aid. The Partnership Council may amend the threshold. I note that the threshold in the TCA leaves room for increasing the de minimis threshold in EU State aid law.

 

The principles are, according to Article 3.4(1) TCA:

a) subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”);
b) subsidies are proportionate and limited to what is necessary to achieve the objective;
c) subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
d) subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
e) subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means;
f) subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.

 

The TCA does not directly allow subsidies that comply with these principles. It requires the parties to have in place and maintain an effective system of subsidy control that ensures that the granting of a subsidy respects the principles as set out above. It seems, therefore, that Article 3.4(1) TCA cannot be relied on directly before a national court in order to establish the (in)compatibility of a certain subsidy with the TCA’s principles. So, it remains to be seen how the UK exactly implements these principles in national law.

 

Regardless of this, it can be noted that the principles of Article 3.4(1) TCA mirror the criteria the European Commission applies in its decisional practice when applying Article 107(3) TFEU. If the UK implements these principles in national law and if UK Courts interpret these principles in a way the Commission does, we can say that the UK will have a state aid regime similar to that of the EU indeed.

Let us take a closer look to the principles mentioned in Article 3.4(1) TCA

Principle a provides that subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns. That state aid, or, for that matter, a subsidy, must remedy a market failure, is part of the Commission’s assessment as already laid down in the State Aid Action Plan (see COM(2005) 107 final, e.g. page 7, see also point 12 of the State Aid Modernisation Plan, COM(2012) 209 final). The same goes for the alternative objective for state aid measures (social difficulties or distributional concerns irrespective of market failures – see point 10 of the State Aid Action Plan).

 

Principle b reflects the proportionality requirement the Commission applies when assessing the compatibility of aid measures (see also recital 5 of the GBER). The same goes for the incentive effect that is required in principle c (subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided), and the principle that subsidies must be appropriate (principle e) that are laid down in recital 5 of the GBER as well.

 

Principle d (subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy) is, in my view, a reiteration, albeit in other words, of the principle that aid must be necessary, laid down in Article 3:4(1)(b) TCA. After all, it can be argued that aid is not necessary if it compensates costs the beneficiary would otherwise have funded.
As for principle f it must be noted that this principle mirrors the balancing test of Article 107(3) (c) and (d) TFEU (‘where such aid does not adversely affect trading conditions to an extent contrary to the common interest’).

 

Apart from these principles, that must be applied to subsidies in general, the TCA leaves room for specific subsidies, in the sense that the principles are not applicable to subsidies granted to compensate the damage caused by natural disasters or other exceptional non-economic occurrences (Article 3.2(1) TCA). This resembles Article 107(2) TFEU. The same goes for subsidies of a social character that are targeted at final consumers to which the Chapter on subsidies is not applicable at all (Article 3.2(2) TCA).

 

A distinct category seems to be formed by subsidies that are granted on a temporary basis to respond to a national or global economic emergency. According to Article 3.2(3) TCA these subsidies shall be targeted, proportionate and effective in order to remedy that emergency. Unfortunately, the TCA does not define what an economic emergency is. Since Article 3.2(3) TCA only excludes the application of Article 3.5 and 3.12 to this kind of subsidies, the general principles of Article 3.4 do apply.

 

The general principles do not apply to subsidies that are subject to the provisions of Part IV or Annex 2 of the Agreement on Agriculture, to subsidies related to trade in fish and fish products and to subsidies related to the audio-visual sector.

Conclusions

The principles that the UK must implement in its national laws, mirror the principles, or if you wish, the criteria, the Commission applies when assessing the compatibility of state aid measures in the sense of Article 107 TFEU. In the GBER (as well as, for instance, the Environmental and Energy Aid Guidelines, par. 27, or the Risk Capital Guidelines, par. 54) these principles are applied as well. If the similarity between the principles and the criteria the Commission applies should lead to a level playing field, it is, of course, necessary that the principles and criteria will be interpreted in the same way. I will discuss in a next blog whether this is assured and if so, how.