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[Footnote 1]

EU law on state aid derives from the Treaty of Rome and aims to prevent member states from unfairly distorting competition within the EU, except in certain permitted circumstances. Where a state intervention distorts competition, this will usually constitute state aid. The Treaty expressly prohibits the granting of state aid except in certain circumstances where the European Commission has discretion to approve state aid that does not unacceptably distort the internal market.

State aid exists if all of the following four criteria apply to the proposed funding:

  • It is granted by the state or through state resources
  • It favours certain undertakings or the production of certain goods
  • It distorts or threatens to distort competition
  • It has the potential to affect trade within the EU.

These are discussed below.

State resources

The subject of this DST is spending by government. This criterion applies, therefore, to all the funding covered by the DST. However, the use of government spending which constitutes state aid is allowed in certain circumstances. There are a range of instruments through which approval of a state aid may be achieved. These include existing approved schemes, the ‘block exemption regulations’, the ‘de minimis regulation’ and seeking approval for a particular aid or aid scheme directly from the European Commission (see below).

State aid policy evolves over time. So, for each public programme involving the use of government spending, there is a need to test compatibility with current state aid policy.

Favouring an undertaking

An ‘undertaking’ is an entity that undertakes ‘economic activity’. An economic activity is an activity that could be carried out for profit. As such, many TSOs carry out activities that qualify them as ‘undertakings’. Whether or not a TSO will be an ‘undertaking’ will be related solely to the nature of the activities it carries out. Legal form or constitution (such as charitable or not-for-profit status) does not have a bearing on whether or not an entity is an ‘undertaking’.

Economic activity is activity for which there is a market in comparable goods or services. It can include voluntary and non-profit-making public or private bodies, such as charities or universities, when they engage in activities that have commercial competitors. It can include activity by the self-employed/sole traders, but generally not employees as long as the aid does not benefit the employers, private individuals or households.

So you need to determine whether or not your proposed programme is an economic activity. There is case law to help interpretation here: for example, air traffic control is not determined as an economic activity.

To count as favouring an undertaking, the aid must:

  • Be available to certain undertakings but not others in the member state. It must select individual businesses, sectors, areas, sizes of business, or production of certain goods. A benefit available to all businesses is not state aid but a general measure
  • favour undertakings by conferring an advantage on them. An advantage may be direct (eg grants) or indirect (eg favourable loan terms or services provided at less than market cost, or relief from charges a business would normally bear).

Distortion of competition

This test will be met, if state resources potentially or actually strengthen the position of the recipient in relation to competitors.

Almost all selective aid will have potential to distort competition – regardless of the scale of potential distortion or market share of the aid recipient.

If a policy objective is to make a market, funding plans will have to be assessed on a case-by-case basis. In some cases, moving from a monopoly to a market would suggest a non-economic activity that is intended to become an economic activity. However, market making in itself is likely to represent state aid.

Intra-EU trade

Any programme proposed by a funder should not inhibit trade between members of the EU. This includes potential effects. Most products and services are traded between member states. Aid for almost any selected business or economic activity is capable, therefore, of affecting trade between states, even if the aid recipient itself does not directly trade with member states. The only likely exceptions are single businesses, such as hairdressers or dry cleaners, with a purely local market not close to a member state border. The case law also shows that even very small amounts of aid can affect trade.

Options where a state aid is present

If your programme may constitute state aid, to deal with the problem you can:

  • Consider developing or adapting proposals to omit or minimise the element of state aid
  • Design or adapt the proposed aid to fit within the terms of one of the state aid schemes which the European Commission has approved for the UK
  • Design or adapt the proposed aid to fit one of the existing‘block exemption’ regulations
  • Seek formal approval for the aid from the Commission. (This may be on the basis of the Commission’s various state aid frameworks or guidelines or on the basis of the relevant articles of the Treaty of Rome.)

Block exemption regulations

There are three ‘block exemption regulations’ that allow certain, limited types of aid to be granted without prior Commission approval provided they comply with the criteria set out in the regulations. The three regulations relate to aid for:

  • Investment in Small and medium-sized enterprises (SMEs) and research and development aid to SMEs
  • Training
  • Employment.

For state aid measures that satisfy all the conditions of the SME, training or employment regulation, the member state is required to send to the Commission standard summary information about the aid measure within 20 working days of the implementation of the measure. This should be sent to the Department of Trade and Industry’s (DTI) state aid branch for onward transmission to the Commission.

De minimis

The ‘de minimis’ regulation in state aid rules allows undertakings in all sectors (other than agriculture) to receive up to a maximum of 100,000 Euros ‘de minimis’ aid from all public sources over a rolling three-year period. Again, this is subject to compliance with the terms set out in the regulation; these include a requirement for the keeping of records of all‘de minimis’ aid granted for ten years.

Separate rules exist regarding ‘de minimis’ aid in the agriculture sector.

Seeking approval for state aid from the Commission

Where it is not possible to redesign a measure to avoid state aid or to fit it under an existing scheme or the block exemptions, it may be possible to seek approval from the Commission. Where this is necessary, aid cannot be granted to potential recipients until Commission approval has been received.

Seeking approval can be a complicated and lengthy process. A straightforward notification to the Commission can take on average five to six months to achieve approval. Where a case is more complex or does not fit easily within the Commission’s state aid guidelines, the approval process can take considerably longer. You will need to ensure that you allow sufficient time to obtain Commission approval within your policy timetable.

If you think your programme may require state aid approval from the Commission, you should consult the EU or state aid advisers in your organisation. All notifications for Commission approval must be prepared on the correct forms and submitted to the relevant state aid branches in DTI, the Department for Transport (DfT) or the Department for Environment, Food and Rural Affairs (DEFRA) for transmission to the European Commission via the UK Permanent Representation in Brussels.

  1. Taking account of state aid issues in policy making: A risk based approach (pdf – 87KB) (DTI, 2004).

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