Not all public assistance is state aid | In Principle

Granting of state support in the EU, which businesses are increasingly taking advantage of, is based on a set of common principles. Mainly these include compatibility with the internal market, achievement of an objective of common interest, a clear incentive effect, proportionality, and full transparency. Violation of these rules when granting public support may mean a grant of unlawful state aid, incompatible with the common market and subject to recovery.

The level of interest in support from state funds and the scale of use of state assistance by businesses have increased significantly in the past few years. This was particularly evident in the emergency assistance programmes notified in 2020–2022 in connection with the worldwide situation caused by the Covid-19 pandemic.

And in 2022, wartime emergency assistance was launched in connection with Russia’s full-scale invasion of Ukraine. As found by Poland’s Office of Competition and Consumer Protection (UOKiK) in its annual report on state aid to undertakings in 2022, “The value of emergency assistance amounted to PLN 2,540.8 million, of which nearly 80% (PLN 2,013.9 million) was provided under 23 Covid crisis assistance programmes and more than 20% (PLN 526.9 million) under five wartime emergency assistance programmes.”

UOKiK’s analysis also shows that in 2022, similar to previous years, the largest part of the assistance was granted in the form of subsidies and other non-repayable benefits, refunds and setoffs. The value of this assistance was PLN 24,618.2 million, 3.5% higher than in 2021 (an increase of PLN 828.2 million). There was also a significant increase in tax exemptions. This form of assistance amounted to PLN 4,241.4 million, 19% higher than in 2021 (+PLN 676.8 million).

In this article and those to follow, we will address the nature of state aid, what it can be used for, what forms of aid are most frequently claimed by businesses in Poland, and limitations and risks arising from state aid.

In general state aid is prohibited

Regardless of any benefits that may arise from state support for businesses, in practice such assistance may adversely affect the conditions of trade to a degree that violates the common interest and, as a result, distorts competition. Therefore, Art. 107(1) of the Treaty on the Functioning of the European Union prohibits granting state aid that could distort competition between EU member states (and not between companies).

This rule was introduced to protect the internal market. In practice, this means that member states must refrain from artificially attracting business to their territory through various types of incentives, in the form of repayable or non-repayable instruments facilitating business operations.

What is state aid?

The European Union defines state aid in Art. 107(1) TFEU as “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 the production of certain goods … in so far as it affects trade between Member States.” How the treaty definition of state aid is to be understood and what it implies has been clarified in the case law of the Court of Justice of the European Union (i.e. the Court of Justice and the General Court).

In practice, the treaty concept of state aid establishes a mechanism whereby member states cannot introduce new state aid measures or amend existing state aid measures unless they notify the European Commission of their plans and wait (under the standstill clause) until the Commission takes a decision finding that the aid is compatible with the internal market (pursuant to Art. 107(2)–(3) and 108(2) TFEU). Aid granted without prior approval of the Commission, i.e. made in violation of Art. 108(3) TFEU, is unlawful aid. If granted, such aid is repayable with interest.

What circumstances determine that public assistance will be subject to state aid rules?

Whether a support measure constitutes state aid is vital from a practical standpoint for both public authorities and beneficiaries.

State aid exists when support from the state meets certain criteria. According to the legal literature, there are four, five, or sometimes seven elements that must occur for a support measure to be considered state aid.

For a proper assessment, a checklist of sorts should be created in each case, to help determine whether all the fundamental elements of state aid are present.

A meticulous examination of the support measure should cover the following items:

1. Existence of state resources, i.e. resources that belong to the state or are subject to state control (even temporarily). State resources can be engaged in many different ways, such as:
   • Granting a subsidy
   • Making an investment
   • Providing a guarantee or a loan, i.e. situations where there is a risk of a future transfer of state resources to the beneficiary, as long as the risk is real and sufficiently concrete
   • Tax exemptions or relief, i.e. situations where the state gives up resources that a business should pay to the state (the state is entitled to obtain a tax from a business, and therefore a tax break or tax exemption covers state resources).

On the other hand, state control of resources refers to a situation when a system exists in which a buyer makes payments that are handled by a state body or a body designated by the state, and subsequently this body hands them over to businesses (even if the state is not the owner of the resources).

2. Existence of a state measure or a measure imputable to the state. For a state measure to exist, the activity must be undertaken by an entity that is a state body, e.g. parliament passing tax exemptions, the local commune government, a ministry, a court, but also state-owned entities (e.g. a bank owned by the state). In assessing this element, it is necessary to take into account the principle of neutrality of property rights in Art. 345 TFEU, under which public companies should not be treated worse than private companies (for example, the mere fact that a state-owned bank takes a certain action does not mean that state aid will be present, even if the action provides an advantage to the beneficiary, affects trade or is likely to distort competition). As the Court of Justice held in Stardust Marine (C-482/99), when analysing whether a measure taken by a state-owned undertaking (there, a state-owned bank) constitutes state aid, it is not enough to find that the state is the owner of the undertaking. “It is also necessary to examine whether the public authorities must be regarded as having been involved, in one way or another, in the adoption of those measures,” or (tougher for member states) it is unlikely that state authorities were not involved in adoption of the measure.
3. Selectivity of the aid measure. A measure that is general, i.e. does not favour specific undertakings, does not constitute state aid. But, as the Court of Justice has held, that a large number of undertakings may qualify for an aid measure (even if it covers all undertakings in a sector), nor the diversity and size of the sectors to which such undertakings belong, does not provide a basis for concluding that it is a measure of general economic policy, if not all sectors of the economy can benefit from it (Belgium v. Commission, C-75/97; Adria-Wien Pipeline, C-143/99). Each time, it should be verified whether there is a difference in the treatment of entities in the same factual and legal situation with regard to the purpose of the measure, without an objective justification arising from the nature and logic of the measure itself. (Traditionally, the selectivity test was applied to tax provisions, but in Eventech, C-518/13, the Court of Justice held that it applies to any general measures and is not limited to taxation.)
4. Benefit. A benefit always occurs when the financial situation of an undertaking improves as a result of state intervention under conditions other than normal market conditions (this includes not only granting benefits, but also relief from burdens). The form of the benefit is also irrelevant.

In Altmark, C-280/00, the Court of Justice developed a test for determining when compensation for providing services of general economic interest does not constitute an advantage: (1) the state must actively entrust the undertaking with an obligation to provide a public service, (2) the parameters of compensation must be defined in advance, (3) the public service provider must not be overcompensated, and (4) compensation is provided at the least possible cost to the community, e.g. the provider was selected via public procurement with price as the deciding factor, or comparing the provider’s costs with the costs of a hypothetical well-managed provider. In practice, the undertaking’s financial situation after application of the measure should be compared with its financial situation in the absence of the measure, under the test established by the Court of Justice in Italian Textiles, C-173/73. Under Art. 345 TFEU (the treaty’s neutrality on property rights), it is necessary to apply the market economy operator test, i.e. to determine whether an investment by a public entity is state aid, it should be considered whether in similar circumstances, a market economy operator of comparable size, operating under normal market economy conditions, would be willing to make the same investment.

5. Undertaking. State aid rules apply exclusively if the beneficiary of the measure is an “undertaking,” i.e. any entity, regardless of its legal form and method of financing, which offers goods or services on the market. There may be situations where:
   • An entity provides services, but is not considered an undertaking, as it provides the services to fulfil the prerogatives of the state (public obligations), which renders market principles inapplicable—then the support provided by the state does not constitute state aid.
   • An entity provides services on a solidary basis. An example could be a state-owned health insurance provider, where:
     • The insurance is mandatory
     • A social objective is realised
     • Insured persons pay premiums not tied to their level of risk
     • The entity is not profit-oriented, and
     • The state strictly controls the activity.

In such circumstances, the service is not provided on a market basis, and thus the state aid rules will not apply (Slovak health insurance, Joined Cases C-262/18 P and C-271/18 P).

6. Impact on competition. The aid measure may result in improvement in the beneficiary’s competitive position compared to other, competing, undertakings. In general, distortion of competition is considered to exist if the state grants a financial advantage to an undertaking in a liberalised sector where competition exists or could exist.

The possibility of distorting competition is excluded if the following four conditions are all present: (1) the service is covered by a legal monopoly (complying with EU law), (2) the legal monopoly not only precludes competition in the market, but also competition for the market, ruling out any possible competition to become the exclusive provider of a given service, (3) the service does not compete with other services, and (4) if the service provider conducts its activity in another market (geographic or product) open to competition, cross-subsidisation must be ruled out (this implies an obligation to keep separate accounting and properly allocate costs and revenues, and the public funds transferred for a service covered by a legal monopoly must not feed other activities).

7. Impact on trade. The support that a state provides to an undertaking operating exclusively in one location is considered not to have an impact on trade if it is highly unlikely that:

• Users of the service will come to that location, or
• Businesses from other member states will try to start activity in the same sector.

If these rather restrictive conditions are met, the aid is deemed not to affect the trade between member states.

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When evaluating a support measure, it is important to remember the following principles:

• State aid is an objective concept. The member state’s intent and the beneficiary’s intent are irrelevant. State aid can exist even if the member state does not intend to grant an advantage or distort competition.
• State aid can also occur when the beneficiary is completely unaware that it is benefiting from state aid. The evaluation should analyse the effects of the support.
• The elements indicated in the checklist above must all exist simultaneously. The absence of even one of them means that the support measure is not state aid.

Dr Anna Kulińska, Tax practice, Wardyński & Partners