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4.8 State Aid

4.8.1

It is the responsibility of aid providers and implementing bodies to ensure that aid schemes comply with the State Aid rules. The Treaty of Rome sets out the criteria as to what constitutes State Aid:

“State Aid is any aid granted by a Member State, or through State resources in any form whatsoever which distorts, or threatens to distort competition by favouring certain undertakings or production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the Common Market.” (Article 87(1))

State Aid can include the following:

  • Grants to Firms for Investment, Training or Research and Development;
  • Cash injections to public enterprises;
  • Loans and Guarantees;
  • Consultancy advice;
  • Infrastructure projects benefiting identifiable end users;
  • Provision of goods or services on preferential terms;
  • Contracts not open to competitive tendering.
4.8.2State Aid can be described as any form of assistance provided to an undertaking by a public body, publicly-funded body or body under public sector control, which provides the undertaking with an advantage and has the potential to distort competition between Member States of the EU.
4.8.3The first step in the State Aids assessment is to establish whether the beneficiary is, or is likely to become, an undertaking. An undertaking is an organisation which is involved in economic activity, i.e. it is involved in activities that result in the production of certain goods or the supply of certain services for which there are actual or potential commercial competitors. If none of the activities or potential activities are economic, the beneficiary organisation is not an undertaking and the aid cannot be State Aid.
4.8.4

Once it has been established that the beneficiary is an undertaking, there are 5 questions that must be considered in order to establish whether aid constitutes State Aid. (See checklist below). Only if the answer is ‘Yes’ to all 5questions is State Aid involved.  If ‘No’ is the answer to any one of the questions, the funding is not State Aid and therefore the State Aid rules do not apply.

State Aid Identification Checklist

(i)  Is the aid granted by the State or through State resources?

This test is usually straightforward and the answer is usually ‘yes’. As well as Central Government Departments, ‘by’ or ‘through’ means aid from regional or local authorities, as well as other public or private sector bodies designated or controlled by the State.  State resources include grants, tax exemptions, loans, guarantees, services, loans of staff, etc. Other funds not permanently belonging to the State but under State control, e.g. Lottery funding, are also regarded as being analogous to State resources. This includes European Structural Funds as the State has direct control over these.

(ii)  Does it confer an advantage?

State Aid rules are concerned primarily with the effect on competition and trade, not the form of a measure, nor the intention behind it. Therefore, it is important to establish the effect of the aid on the beneficiary (i.e. does it provide an advantage). If the aid reduces a beneficiary’s costs or provides the beneficiary with facilities, staff, equipment or infrastructure, which have been partly funded by the State, it will usually be concluded the aid has provided an advantage. It is also important to establish, when aid is provided through intermediary bodies, that they are not also getting an advantage as the aid flows through them.

(iii)  Is it selective, favouring certain undertakings?

Measures are either ‘selective’ or ‘general’. Therefore, when a measure applies only to a specific group of companies or sector or geographic region, e.g. Northern Ireland, it will usually be considered as being selective. General measures are those that affect all undertakings in the whole of the State’s economy (e.g. nationwide tax and fiscal measures). State Aid rules do not apply to such general measures. Since aid schemes in Northern Ireland tend to target aid to undertakings located in Northern Ireland, they are almost always selective and the answer to this question is almost always ‘yes’.

(iv)  Is the activity tradable between Member States?

The Commission’s interpretation of this is very 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 tradable and the answer to this question is almost always ‘yes’.

(v)  Does the Activity distort or have the potential to distort competition?  

If the aid has the potential to strengthen the position of the beneficiary relative to other competitors, then it has the potential to distort trade and competition. Significantly, the distortion of competition does not have to be substantial or significant, and includes small amounts of aid and firms with little market share. Therefore most interventions have the potential to distort competition.

There is some limited scope to conclude that a measure does not distort trade between Member States (and is therefore not State Aid) if it can be demonstrated that aid is limited to financing ‘local activities’. However, the Commission does not clearly define what is meant by ‘local activities’ and each case needs to be considered in isolation. It is strongly advised that funders wishing to demonstrate an activity is local take specialist State Aids advice, including advice from economists and the Departmental Solicitor’s Office or legal council with proven expertise in State Aids law.

If a measure is judged to be State Aid, it will either be notified to the European Commission (i.e. a full notification) or be registered and comply with the requirements of a block exemption regulation e.g. the General Block Exemption Regulation (GBER) or it must comply with the de minimis regulation.

Further information on the frameworks and regulations that apply to State Aid can be obtained at the following links:

Guidance Note 7: Northern Ireland EU Structural Funds – State Aid

BIS: State Aid Regulations and Frameworks

European Commission’s State Aid pages

The Office of Fair Trading: Public subsidies page

Read on to General Checklist

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