What is State Aid? 

The legal definition of State aid can be found under Article 107 paragraph 1 of the Treaty on the Functioning of the European Union (TFEU). It says:

1. Save as otherwise provided in this Treaty, 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 shall, in so far as it affects trade between Member States, be incompatible with the common market.

Concretely, to define whether a State intervention constitutes State aid it is necessary to determine whether the conditions for a measure to constitute State aid are cumulatively met – whether the assistance is provided with or through State resources, whether the assistance gives one or more undertakings an advantage over others, whether it distorts or has the potential to distort competition and whether it affects trade between Member States.

Why State aid is generally banned and why is State aid control necessary?

State aid can occur whenever State resources are used to provide assistance that gives organisations an advantage over others. It can distort competition, which is harmful to consumers and companies in the EU. When giving State aid to the “national champions” the Member States give them, on the basis of an arbitrary decision, an advantage over their competitors from other Member States, they give them a selective advantage in the market, which they could not get themselves on the open market and is not the result of their work, productivity or innovation.

This is a bad message to undertakings from other EU Member States, particularly the ones whose economic incentives are limited by their budgets. In addition, it discourages the entry into the market and the interest for entrepreneurship, weakens the internal EU market, and in the long run diminishes the power of the European economy in comparison with other global players. This is why State aid control is necessary. 

Are there exemptions from the general ban on State aid? 

Where there is a genuine market failure, State aid might be necessary and justified. In general, aid that really changes the behaviour of the organisation that receives it, which is the best way to address the failure and limit distortions, and where the benefits outweigh any negative effects on competition, is approvable.

There are exemptions defined in the TFEU and in a set of rules for granting State aid with horizontal objectives and sector specific aid. These rules on allowable State aid are contained in a number of regulations, communications and other bylaws depending on the category of State aid and the sector concerned, such as aid for services of general economic interest.

All State aid rules and regulations and further guidance on these may be found on the Commission’s website.

Who is in charge of State aid control in the Republic of Croatia? 

The European Commission monitors and controls State aid in the EU by requiring Member States to notify the Commission in advance of proposed State aid in order to ensure compliance. As of the date of the accession of the Republic of Croatia to the European Union on 1 July 2013 the European Commission has the exclusive competence with respect to the legality, monitoring and recovery of State aid in Croatia.

What happens if State aid is granted without having been notified to the European Commission or without its positive decision?

The European Commission monitors and controls State aid in the EU by requiring Member States to notify the Commission in advance of proposed State aid in order to ensure compliance. State aid which falls under the notification requirement, i.e. State aid which cannot be exempted from the notification obligation, may be ordered the recovery. 

The Commission is under the obligation to order the recovery from the beneficiaries of any unlawful aid that is found to be incompatible with the EU market. This includes repayment with interest to the public authorities.

Risks are high because:

  1. The beneficiary may be requested the recovery of any unlawfully granted aid with interest from the day on which the decision on granting aid was taken.

  2. The competitors may file a complaint. If a company believes that a competitor is receiving illegal aid then it may complain directly to the Commission.

  3. The competitors may sue for damages at the competent national court based on the unlawful use of State aid, whereas the courts, based on the fact that State aid has been granted without a formal approval of the European Commission, may order the recovery of State aid, suspend the implementation of State aid and rule on the damages. No undertaking is excluded from such rulings – not even firms in difficulty or the ones that objectively cannot make the repayment of aid. In such a case they must recover aid at the cost of winding up or bankruptcy.   

Note that the limitation period for issuing of the recovery order is 10 years from the day on which illegal aid was granted. 

Who in Croatia can be aid provider and who aid beneficiary? 

Aid providers in Croatia are the Croatian State authorities, in other words, persons who manage State resources – central administration authorities, funds, agencies and others, regional and local administration units and any legal person who grants or manages public resources or resources that may be attributed to the State.

Aid beneficiaries are undertakings – natural and legal persons that are engaged in economic activity. 

What is the role of the national legislations of the EU Member States with respect to State aid?

This exclusively depends on the policy of each and particular Member State. Some of the Member States have State aid regulated by law, whereas there are also Member States who have no specific national legislation on State aid. In the latter case aid providers have services established that give advice on the compliance of State aid with the common EU rules. On the other hand, there are EU countries, for instance, Poland, Croatia, Slovenia, Hungary, Romania, that have special public authorities who are empowered to give a preliminary opinion on proposed State aid subject to notification and approval of the Commission. These authorities also notify State aid to the Commission. In a number of Member States the preliminary opinion of these authorities is also obligatory when State aid falls under the GBER or even in the case of de minimis aid. Regardless of the fact how particular Member States design their own, national State aid systems, the final assessment of the compatibility of State aid with the EU internal market and the interpretation of State aid rules is the exclusive competence of the EU institutions – the European Commission and the EU courts, not the national authorities of the Member States. 

What is notification and what is pre-notification of State aid? 

The European Commission monitors and controls State aid in the EU by requiring Member States to notify the Commission in advance of proposed State aid in order to ensure compliance. Notification is not necessarily a quick or easy process. State aid approval cannot be taken for granted and the Commission may block, delay or request modifications to proposed schemes.

It is difficult to predict exactly how long approval will take but as a guide, straightforward cases where there is a good fit with the rules can be expected to be resolved within 6 to 9 months. More complex cases will take longer.

There are a few exceptions to the notification requirement, namely:

Pre-notification is a very useful informal tool that speeds up the process of notification and is particularly recommended where there are particular issues, new elements or specific features in granting State aid or where aid is awarded within the framework of big investment projects. Pre-notification may be developed and submitted even in seemingly straightforward cases. The advantage of pre-notification is that as soon as the Commission receives the formal notification of State aid from the Member State, it will have already received additional information and refined data about the scheme. There can be several rounds of questions and answers over a period of some months until the Commission is satisfied that it can be approved. They will then invite the applicant to submit final notification.

How can State aid be awarded? 

Within various categories State aid may be granted on the basis of various aid instruments. Thus, State aid may be awarded in a form of a grant and tax advantages, equity participation, subsidized loans, debt write-offs, State guarantees etc. 

What is the difference between individual aid and aid scheme? 

Aid scheme is any legal document on the basis of which, without any additional implementing measures required, individual aid may be granted to ex ante unspecified aid beneficiaries, and any legal document on the basis of which State aid which is not linked to a particular project may be awarded to one or more aid beneficiaries for an indefinite period of time and/or in an indefinite amount.

Individual aid is any State aid which is not granted under the aid scheme but to an individual aid beneficiary. 

What is de minimis aid, who may receive it and to what purposes? 

The European Commission considers that in spite of a certain level of selectivity, public funding which complies with the de minimis regulation has a negligible impact on trade and competition, and provided that it is granted in a transparent manner, does not require notification and approval. The total de minimis aid which can be given to a single recipient is €200,000 over a 3-year fiscal period (€100,000 in the road transport sector). This can be given for most purposes, including operating aid, and is not project-related. Separate rules relating to de minimis aid have been adopted in the agricultural sector and for the provision of the services of general economic interest. 

De minimis aid cannot be given for export related activities (except attendance at trade fairs), agriculture and fisheries or aid favouring domestic over imported products.

How do you calculate the aid level?  

In order to calculate the level of State aid it is important to define the eligible costs which may be taken into account, given they constitute the basis for the calculation of the level of State aid.  This is, like aid intensity, regulated under the rules in effect for each particular aid category under the special State aid rules. 

What are the rules on State aid? 

The most important rules on State aid are contained in four major subgroups: 

Is cumulation of State aid allowed? 

Cumulation of certain types of aid is allowed provided that it relates to different eligible costs. Aid with identifiable eligible costs may be cumulated with other State aid if eligible costs are different. It may also be cumulated with other State aid for the same eligible costs, but the sum must remain below the allowed maximum rate of intensity.

State aid may not be cumulated with de minimis aid for the same eligible costs if the maximum allowed aid intensity is exceeded.

What about infrastructure investment projects – do State aid rules apply? 

In the EU Member States public support for the construction and operation of infrastructure projects, their financing and co-financing, was only until recently considered to involve no State aid. It was assumed that the financing of the construction of infrastructure falls under the measures of general interest and that it, by its nature, does not constitute a market activity.

However, there have been important market developments which led to increasingly commercial use of those infrastructures. Recent judgments of the EU Court of Justice involving aid for infrastructure investment at some airports reflect these developments in holding that public funding of infrastructure investment projects is subject to EU State aid rules when the infrastructure is intended to be commercially exploited (Joined Cases T-443/08 and T-455/08 Leipzig Halle). This judgment confirms that, for the purpose of EU State aid law, the economic character of the operation of the infrastructure necessarily determines the character of the construction of the infrastructure itself.

Therefore such projects must now be assessed under EU state aid rules.

Only the construction of infrastructure that is not commercially exploited falls outside the scope of State aid rules. Only in the case where non-commercial infrastructure is open without payment to the general public State aid rules do not apply. Primjenjuju li se propisi o potporama i na projekte koji se sufinanciraju iz sredstava iz EU strukturnih i Kohezijskog fonda?

Pravila o državnim potporama primjenjuju se i u slučaju korištenja sredstava iz strukturnih fondova EU. Naime, propisi EU koji uređuju uvjete koji moraju biti ispunjeni kako bi se „povukla“ sredstva iz fondova EU, zahtijevaju da projekti koji se financiraju iz ovih fondova ispunjavaju pravila o državnim potporama.

Do State aid rules apply to the projects that are co-financed from the EU funds? 

Yes, State aid rules apply also when the EU funds co-finance aid to businesses. The total public aid (national and EU) must remain within the ceiling laid down for the scheme in question under the State aid rules. In other words, compliance with the EU State aid rules and policies is a condition for the eligibility of expenditure for reimbursement from the funds.

 

This short guide is only for informative purposes. It cannot be used for assessment or identifying any kind of particular State aid.