Regulatory Outlook | State Aid | February 2020

Written on 26 Feb 2020

Current Issues

Post-Brexit State aid in the UK

The EU State aid rules place restrictions on the extent to which Member States can give support to private businesses. This includes tax reliefs, grants, below-market-rate loans and the sale of public assets at an undervalue.

Prime Minister Boris Johnson has pledged that the UK will break free of EU State aid rules after Brexit. While the focus is on supporting ailing industries, abandonment of State aid rules could open the door to increased support for wide-ranging sectors and industries, including focusing on regional development and green initiatives.

Whether this pledge can be realised is debatable and will form a key part of UK's EU (and international) trade negotiations.

2020 State aid modernisation project extended

The European Commission has extended (until 2022) the application of a raft of State aid rules which would otherwise expire in 2020. This includes key exemptions utilised by businesses that wish to take advantage of government support such as subsidies and grants, avoiding the need for upfront notification of State aid to the Commission.

The Commission's work evaluating these exemptions continues. Business can expect to know more about the Commission's reform proposals when it publishes a working paper on this work in Q3 2020.

Tax rulings on transfer pricing continue to be interrogated in Europe throughout 2020

Rulings by national tax authorities, awarding effective tax rates of less than 1% to global companies employing transfer pricing methodologies, have been scrutinised under the State aid rules in recent times. This has given rise to concerns by multi-national businesses around the lawfulness of their tax strategies.

Last year, the General Court upheld the Commission's decision requiring Luxembourg to recover €23.m from Fiat (although this is currently being appealed) but decided in favour of Netherland's tax ruling relieving Starbucks of a €27m bill. In the year ahead, a plethora of tax rulings – including rulings from Ireland to Apple, Luxembourg to Amazon, the Netherlands to Nike and Belgian to more than 39 multinational companies – will continue to be investigated.

The developing case law should provide greater clarity to multinational businesses about the State aid risk associated with its transfer pricing structure options.

In Focus: Responsible Business

Which aspects of responsible business are driving the regulatory agenda?

The State aid rules generally limit the extent to which public funds can be applied selectively to give an competitive advantage to business. However, recognising that in some circumstances targeted government support is necessary to achieve wider objectives of common interest, the Commission can approve State aid that promotes responsible business. For instance, with a view to curbing CO2 emissions, it has approved of hundreds of millions of Euros of public support for the roll-out of electric vehicle charging infrastructure.

Similarly, block exemption regulations allow governments to give aid for responsible business objectives – including local infrastructure projects, regional development and R&D – without first obtaining the Commission's approval, provided certain criteria are met (including funding caps and maximum aid intensities).

As the direction of responsible business policy in the EU changes, so do the parameters of permissible State aid. Currently high on the Commission's agenda is the "twin transition to a green and digital economy". €100 billion will be made available to support regions whose economies still largely depend on fossil fuels or on industries that produce high levels of greenhouse gases. To accommodate this, the Commission is working to have new State aid rules in place by the end of 2021.

Are responsible business considerations having an impact on the tools that regulators are using?

The State aid rules tend to be prescriptive but the Commission issues a range of supplemental guidance to help businesses to navigate the State aid rules and (where desirable) benefit from the block exemptions aimed at supporting responsible business.

For example:

Which of the recent or upcoming developments are based on international consensus or agreements?

By their nature, as EU-derived rules with the objective of creating a level-playing field for business while supporting harmonised objectives to promote responsible business within the common market, the State aid rules require adoption by EU Member States. Accordingly, any new or revised State aid rules implemented as part of the Commission ongoing fitness check modernisation work will be adopted on a pan-EU basis.

Outside the EU, WTO rules contain much more limited anti-dumping measures. These can be built on in trade agreements: the EU-Canada free trade agreement, for example, has a notification and consultation in relation to subsidies. The EU is seeking to go further in the EU-UK post-Brexit arrangements currently being negotiated, by requiring the UK to maintain EU State aid rules. With the UK government opposed to this (as discussed above), it remains to be seen what the UK State aid regime will look like after Brexit.

What are the main challenges for businesses in complying with these developments?

By seeking early and expert support, businesses have the opportunity to frame their projects and business models to in a way that enables them to benefit from and optimise government backing. Often, this means designing those projects and models to fit within block exemption criteria, or to fall outside of the remit of the State aid regime altogether. The challenge is to be aware of these opportunities and to anticipate the direction of responsible business policy: where the EU responsible business agenda goes, the EU State aid regime will follow.

Dates for the Diary

Q3 2020 Publication of Commission's Working Papers on the evaluation of the State aid block exemption regulations as part of the State aid modernisation package.
Throughout 2020 Further decisions (and guidance) expected on the application of the State aid rules to transfer pricing and national authority tax rulings.
31 December 2020 The UK may cease to apply EU State aid rules (depending what is agreed and whether there is any extension to the transition period).