Our second breakfast club of the year covered the following: • a brief refresher on the basics of state aid • practical tips for addressing or eliminating state aid in projects: o identifying aid o using De Minimis correctly o market economy operator principle o general block exemption regulation. https://www.brownejacobson.com/sectors-and-services/sectors/public-sector

1. Public sector breakfast club
April 2016, Exeter

2. State aid:
the basics

3. What Is State Aid?
Any assistance or subsidy given by a Member State which
distorts or threatens to distort competition.

4. Why does state aid compliance
matter?
• Unauthorised state aid is unlawful
– Aid payments may be suspended
– Policies may have to be altered
– Legislation may have to be amended
– Providers of aid may be sued for damages
– Member states may be fined
– Damage to the reputation of the institution
– The state aid scheme may be stopped
– Recipients of aid may be ordered to repay the aid, even if this
leads to insolvency
– Domestic court claims (J.R.) or complaints to Commission

5. Examples of potential State aid?
- Grants
- Cash injections to / investment in public enterprises
- Soft loans
- Guarantees
- Consultancy advice
- Aid to help companies invest in environmental projects
- Deferral of tax, social security or other payments to the State
- Writing off operating losses of public enterprises
- Provisions to help prepare a public enterprise for privatisation
- Sale of land/assets at discounted rate – or paying over the odds
- Legislation to protect or guarantee market share
- Tax exemptions

6. Identifying State Aid:
Key Tests

7. How to spot State Aid
The key criteria for State Aid to be present are identified as follows:
• The aid is granted by the State or through State resources;
• The aid confers an advantage on the recipient;
• The aid is selective, favouring only certain undertakings or the
production of certain goods;
• It distorts or threatens to distort competition;
• It affects, or has the potential to affect trade between Member
States.
All 5 tests have to be met for it to be considered to be State Aid.

8. Is there an advantage?
• Could either be:
– Transfer of resources i.e. grant, soft loans, provision of services,
guarantees, transfer of land at an undervalue; or
– Relief from charges which an undertaking normally has to bear
e.g. tax exemptions
• Advantage is either for free or without adequate consideration

9. Is there an undertaking?
• An undertaking is an entity which is engaged in
an economic activity, irrespective of its legal
form.
• Economic activity means an activity which
consists in offering goods or services on a given
market and which could, at least in principle,
be carried out by a private operator in order to
make profits.

10. Potential to affect trade between
member states?
• Wide interpretation
– It is usually sufficient that a product or service is subject to trade
between Member States e.g. insurance, construction
– Even if aid beneficiary does not export, or exports all of its
production outside EU
• This criterion is normally fulfilled as most activities are viewed as
tradable. Local services may be an exception BUT - the hairdresser
in Luxembourg

11. Recent case law – affecting trade
between member states
• Case law from seven decisions in the Czech Republic, Germany,
the Netherlands and the UK
• State aid granted in respect of an activity which has a purely local
impact may not affect trade between member states.
• The measure must have no, or at most marginal foreseeable
effects on cross-border investments in the sector or the
establishment of firms within the Single Market

12. Affecting trade between
member states
– A port which was used for local fishing. The aid granted would
not have opened the use of the port up to larger ships and
would not have incentivised fishermen from other Member
States to use the port
– Investment in a national ‘outdoor training centre’ providing
courses for qualifications recognised in the UK and training in
mountain skills and sports for the general public. The majority
of the activity was targeted at a regional or national customer
base, and there was no positive evidence of cross border
investments for this type of services

13. Affecting trade between
member states
– Tax exemptions for golf clubs which qualify as Community
Amateur Sports Clubs. The Commission concluded that these
clubs cater for the local community and therefore there is no
effect on trade between member states. The low level of the
tax break also meant that the clubs to which the exemption
applied were not competing with clubs outside of the UK.
– Investment in hospitals providing care to people within a local
catchment area – no evidence of cross –border investments in
hospitals from other Member States in the region

14. De Minimis

15. De minimis aid
De minimis funding is exempt from notification because the
Commission considers that such a small amount of aid will have a
negligible Impact on trade and competition.
• Exemption does not apply to all types of aid – for example:
– export related activities directed towards other member states
– aid requiring the use of domestic rather than imported goods
– acquisition of road freight transport vehicles
• Note a lower threshold (€100,000) applies to undertakings active in the
road freight transport sector

16. De minimis aid
• Came into force on 1 January 2014
• Threshold is EUR 200,000 per recipient
• Over 3 fiscal years
• Aid given under a notified scheme does not count
towards the threshold

17. De minimis aid
• The threshold is cumulative
• Only of application to ‘transparent aid’

18. Shortcut - Loans
If:
– At least 50% secured
– No more than EUR 1 Million over 5 years; or
– No more than EUR 500,000 over 10 years
Gross Grant Equivalent = not exceeding the de minimis
threshold

19. Shortcut - Guarantees
If:
• Guarantee does not exceed 80% of value of loan
• Not over 5/10 years in duration
• Not over EUR 1.5 Million / EUR 750,000
• Gross Grant Equivalent = not exceeding the de minimis
threshold

20. Process
• Ensure that the award of aid does not breach the threshold
• Grantor is required to obtain a declaration from the recipient as to
any other aid it has received under the Regulation in the last three
years
• Grantor must advise the recipient that it is receiving de minimis
state aid

21. Market Economy
Investor/Operator

22. Market Economy Operator Test
• Do the terms go beyond those that a private investor, operating
under normal market economy conditions, and having regard to
the information available and foreseeable developments at the
time, would find acceptable?
• An acceptable return on the provision of funds within a reasonable
period of time. The test does not require comparison with a
private investor placing capital with a short term view of
profitability.
• Alfa Romeo No.1 [1991]) “the conduct of a private holding
company or a private group of undertakings pursuing a structural
policy – whether general or sectoral – and guided by prospects of
profitability longer term”.

23. Market Economy Operator Test
• Investor, lender, vendor, purchaser
• How to validate :
– Private investor
– Benchmarking, business plan, experts, hypothetical private operator
– Procurement exercise
• Case law, decisions, investigations:
Coventry City Council/Ricoh Arena

24. Loans
• Where a loan is provided under ‘standard’ commercial terms the
aid element of the loan will be the difference between the actual
interest rate and the relevant reference interest rate
• 2008 Communication from the Commission sets out the reference
interest rates which are determined by the financial standing of
the borrower and collateral provided. Not a complete get out.
• Reference rates are regularly updated

25. Guarantees
• Borrower must not be in financial difficulty
• Extent of guarantee can be measured when granted
• Guarantee does not cover more than 80% of outstanding loan or
obligation (is an exception for a SGEI provider where is only
providing one SGEI entrusted by the guarantor)
• A ‘market-oriented’ price is paid for the guarantee
– If no guarantee premium benchmark can be identified, price is the
difference in the total cost of the loan with or without the guarantee
– Notice sets out safe-harbour premiums based on borrower’s status

26. Checklist for projects
• Consider State aid early as possible
• If it is aid, check for exemptions:
– GBER
– SGEI
– De minimis
• If the project is still State aid:
– Re-work the project
– Take a risk based approach
– Notify

27. The risk based approach
• Consider :
– Scale of the aid/project/investment
– Scope of the project – where it is
– Nature of the project – what’s it doing
– What sort of recipient is it?
– Who might complain?
– Where’s the funding from – funding conditions

28. Contact us…
Alex Kynoch| 0115 976 6511
alex.kynoch@brownejacobson.com
Lynne Rathbone| 01392 45 8739
Lynne.rathbone@brownejacobson.com