The outbreak of COVID-19 has caused an economic crisis necessitating support measures from EU Member States to citizens and companies.
Such support measures may be subject to EU state aid law. State aid law offers three key flexibilities to Member States in awarding aid to counteract market failures such as that caused by COVID-19, namely:
(i) to compensate firms in hard-hit sectors for damages suffered as a result of COVID-19;
(ii) for a limited period, to remedy liquidity shortages faced by firms caused by COVID-19, by providing them with direct grants, repayable advances, loans or equity, and
(iii) to grant urgent and temporary assistance in the form of loan guarantees or loans to firms facing acute liquidity needs and/or facing bankruptcy due to COVID-19.
Flexibilities (ii) and (iii) above have been used by Ireland in its state aid response to COVID-19 to date. Questions are now arising as to whether Ireland should follow the example set by certain other EU Member States such as Denmark, Sweden, France and Germany, and rely on the third key flexibility open to it: to provide targeted compensation to companies in sectors badly affected by COVID-19 such as transport, tourism and hospitality. If Ireland does ultimately rely on this third flexibility, a key issue will be what companies or types of companies in those sectors may avail of state aid under such a scheme.
The Three Key Flexibilities under State Aid Law Applicable to COVID-19
Support measures by EU Member States may amount to state aid within the meaning of Article 107(1) of the Treaty on the Functioning of the EU (“TFEU”) if they involve a transfer of state resources which confers a selective economic advantage to certain enterprises and which has the potential to distort competition within the EU and to affect trade between member states.
State aid may nevertheless be lawful if it falls under one of the following three flexibilities which allow EU Member States to grant aid to support the economy in the context of the COVID-19 outbreak, subject to notification to and approval by the European Commission (the “Commission”), namely:
1. Article 107(2)(b): Compensation for damages suffered due and directly caused by exceptional occurrences, such as those caused by COVID-19:
A Commission Communication on a coordinated economic response to COVID-19 dated 13 March 2020 (the “Communication”) confirms that Article 107(2)(b) can be used by Member States to compensate companies for the damage suffered in exceptional circumstances, such as those caused by the COVID-19 outbreak. This includes measures to compensate companies in sectors that have been particularly hard hit (e.g. transport, tourism and hospitality) and organisers of cancelled events (e.g. concerts, festivals, sport tournaments, cultural or commercial fairs).
2. Article 107(3)(b): Aid to remedy a serious disturbance to the economy, such as COVID-19:
The Commission recently adopted a temporary framework based on Article 107(3)(b) for state aid measures to support the economy in the current COVID-19 outbreak (the “Temporary Framework”). Notified schemes meeting the conditions of the Temporary Framework will be approved rapidly by the Commission.
The Temporary Framework applies to companies that entered into difficulty after 31 December 2019 and sets out ten categories of aid which may be granted by Member States before 31 December 2020: (i) Direct grants, selective tax advantages and advance payments up to a gross amount of €800,000 (with separate rules applicable to the primary agricultural, fishery and aquaculture sectors); (ii) State guarantees for loans taken by companies from banks; (iii) Subsidised public loans to companies; (iv) Safeguards for banks that channel State aid to the real economy; (v) Short-term export credit insurance; (vi) Aid for R&D related to COVID-19; (vii) Aid for the construction/upgrade of testing and upscaling infrastructures that contribute to develop COVID-19 relevant products; (viii) Investment aid for the production of COVID-19 relevant products; (ix) tax deferrals/suspension of social security contributions; and (x) wage subsidies for employees to avoid lay-offs during the COVID-19 outbreak.
3. Article 107(3)(c): Aid for rescuing and restructuring of non-financial companies in difficulty:
The Communication notes that the Commission’s Rescue and Restructuring Guidelines, which are based on Article 107(3)(c), allow Member States to grant urgent and temporary assistance in the form of loan guarantees or loans to all types of companies in difficulty, or companies that are not yet in difficulty if they face acute liquidity needs due to COVID-19. The Guidelines also enable Member States to put in place dedicated support schemes for SMEs and smaller state-owned companies, including to cover their acute liquidity needs for a period of up to 18 months.
In addition to the above three flexibilities, aid to a company which is ‘de minimis’ (i.e. direct aid not exceeding €200,000 over a 3-year period and subsidised loans of up to €1m) and aid under an EU regulation known as the ‘General Block Exemption Regulation’ (“GBER”) which exempts certain categories of aid below certain financial thresholds, is also lawful. ‘De minimis’ aid and aid under the GBER is not subject to notification to and approval by the Commission.
Lastly, certain supports will not be subject to state aid law, namely:
- Financial support from EU or national funds granted to health services or other public services to tackle COVID-19;
- Any public financial support given directly to citizens; and
- Public support measures that are available to all companies such as for example wage subsidies and suspension of payments of corporate and VAT or social contributions.
Ireland’s COVID-19 State Aid Response
Aside from ‘de minimis’ aid and aid under the GBER, Ireland has, to date, relied on two of the above three key flexibilities open to it in responding to COVID-19, namely, the Temporary Framework and Article 107(3)(c):
- On 21 April 2020, the Commission approved Ireland’s ‘Sustaining Enterprise Scheme’ (the “Sustaining Enterprise Scheme”) which has an estimated budget of €200m. The Sustaining Enterprise Scheme was approved by the Commission because it was in line with the Temporary Framework, as the maximum aid amount per company is €800,000.
The support under the Sustaining Enterprise Scheme will take the form of direct grants, repayable advances, equity injections, and subsidised loans, and will be open to firms of all sizes operating in the manufacturing and/or internationally traded services sectors of Ireland which are affected by the economic repercussions of COVID-19.
The scheme is not open to firms: (a) that are operating in the coal or steel sector; (b) that are active in the primary agricultural, fishery or aquaculture sectors; and (c) that are covered by specific rules for financial services. The Sustaining Enterprise Scheme replaces a scheme that was previously approved by the Commission on 30 March 2020 and that provided for support in the form of repayable advances to firms active in Ireland employing 10 or more full time employees (the “Repayable Advance Scheme”).
- As noted in the Communication, in February 2019 the Commission found that a €400m support scheme in Ireland to cover acute liquidity and rescue and restructuring needs of SMEs as a Brexit preparedness measure, was compatible with Article 107(3)(c). The Irish authorities have now repurposed this measure to help companies cope with COVID-19.
Other Member States’ State Aid Measures under Article 107(2)(b)
To date, there have been over 60 national support measures across the EU approved under the Temporary Framework which is underpinned by Article 107(3)(b.
By contrast however, there have been relatively few support measures adopted under Article 107(2)(b):
- Denmark has been the main Member State to rely on Article 107(2)(b) in responding to COVID-19 to date, with measures taken to compensate organisers of events, self-employed persons, companies particularly affected by COVID-19, and the airline SAS for damage caused by COVID-19.
- Sweden has also taken measures to compensate organisers of events and the airline SAS for damage caused by COVID-19.
- France and Germany each have taken measures to compensate airlines for damage caused by COVID-19.
The Sustaining Enterprise Scheme focuses on remedying liquidity shortages across the Irish economy to address the serious disturbance caused by COVID-19, in line with the Temporary Framework. It is open to all companies operating in the manufacturing and/or internationally traded services sectors that are facing liquidity shortages due to COVID-19. Most EU Member States have received approval for similar state aid schemes in response to COVID-19.
By contrast, a small number of Member States have received approval for more targeted state aid schemes that provide for compensation aimed at specific sectors and businesses that have been particularly hard hit by COVID-19, on the basis of Article 107(2)(b), for example in the transport and tourism sectors.
This may be ‘food for thought’ for organisers of concerts, festivals, sports tournaments and cultural or commercial fairs in Ireland who have suffered damage and/or will suffer future damage as a result of cancellations or postponements of those events due to COVID-19. They will naturally be scrutinising the extent to which their rivals have been compensated in other EU Member States such as Denmark and Sweden.
Given that damage caused to specific sectors and businesses by COVID-19 may only become apparent with the passage of time, Ireland may conceivably notify an additional scheme based on Article 107(2)(b) to gain approval for compensation to those sectors and businesses, in due course. A key issue will be what companies or types of companies in those sectors might avail of the state aid under such a scheme.