Just Because State Aid Is The Best Hammer Does Not Mean That All Issues Are Nails (Part I)

by Emanuela Matei, Associate Researcher – CELS*

This article represents Part 1/2 of a larger material regarding the interaction of EU state aid rules and international investment law in the context of recent EC Decisions. Part 2/2 will be published later this week.

 I.          Introduction

In May 2014, Obama defended a more relaxed foreign policy that entailed less military interventions, by stating, I cite: ‘Just because we have the best hammer does not mean that every problem is a nail’[i]. The same observation can be made in relation to the Commission’s all-encompassing use of the versatile tool of State aid control. It would most probably not nail all forms of state liability. In particular with regard to regulatory measures adopted by a Member State before its accession to the EU, the application of State aid rules must be more precisely calibrated.

The Micula arbitral award established in December 2013 that by annulling an investment incentive scheme four years prior to its scheduled expiry in 2009, Romania failed to comply with its obligations assumed via the Romania-Sweden BIT, which had come into force in 2003.

In its decision of 30 March 2015, the Commission found that the compensation paid by Romania according of the named arbitral award breached the State aid prohibition. State aid is forbidden unless notified and approved by the European Commission. An extra intricacy of the present case relates to the fact that at the moment, when the notification had to be made, Romania was not yet a Member State of the Union. The standstill obligation existed according to the acquis, though the prerogatives of control were attributed to the Romanian Council of Competition.

II.      State aid Definition

According to the Commission, the revoked investment incentive scheme selectively favoured certain investors and was therefore deemed to be incompatible with the state aid rules. In order to classify a national measure as State aid, the following criteria must be examined and cumulatively fulfilled:

  • The measure must confer a selective economic advantage upon an undertaking;
  • The measure must be imputable to the state and financed through state resources;
  • The measure must distort or threaten to distort competition;
  • The measure must have the potential to affect trade between Member States.

Four conditions will be analysed in this post: the presence of an advantage, its selectivity, its imputability and the definition of an undertaking which may benefit from the aid.

A.  An economic advantage

A.1. A derogation from ‘normal taxation’ is an advantage

The concept of State aid is broader than that of a subsidy, since it comprises not merely positive benefits, such as subsidies themselves, but also interferences which, in diverse forms, mitigate the charges that are regularly included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are comparable in character and have the same effect[ii].

The concept of aid has constantly been interpreted by the CJEU as not covering measures that distinguish between undertakings in relation to charges, where that differentiation is the result of the nature and general scheme of the fiscal system. The very existence of an advantage may be established only when compared with ‘normal’ taxation’[iii].

The line of argumentation followed by the Commission asserts that ‘by repealing the EGO 24 scheme, Romania re-established normal conditions of competition on the market on which the claimants operate, and any attempt to compensate the claimants for the consequences of the revocation of the EGO 24 incentives grants an advantage not available under those normal market conditions’[iv]. I see no valid explanation for choosing the test of ‘normal market conditions’ instead of the benchmarking of ‘normal taxation’ in the present case.

In its recent negative decision in case SA.38375[v], the Commission repeats this choice while applying the ‘normal market conditions’ test (one form of it, the Market Economy Investor Principle) to a case concerning tax rulings, despite the fact that the measures concerned were administrative i.e. non-economic in nature[vi].

The Romanian legislation in Micula granted a derogation from the general regime of taxes and customs duties and the award re-established the initial economic advantage by ordering the compensation of those previously abolished fiscal facilities.

The AG Colomer[vii] has noticed in his Opinion in the Atzeni case that even if the entitlement to compensation is recognised, the amount prescribed cannot be equal to the sum that must be recovered according to the standstill prohibition enshrined in Article 108(3) TFEU and the article 14 of the Regulation No 659/1999[viii]. The Commission affirms that the Award was based on an amount corresponding to the fiscal facilities provided by EGO24 including lost profits plus interest.

The compensation provided for by the Award is based on an amount corresponding to the customs duties charged on raw materials, lost profits and interest on the total sum of damages awarded[ix].

However, the calculation of State aid cannot be based on the Award, but it must be assessed independently taking into consideration the difference between the ordinary expenses and the subsidised expenses under EGO24 with reference to the situation prior to payment of the aid[x]. In Dunamenti it has been established that even if the Article 107 TFEU became applicable on the accession date, the analysis of the measure must be done in the context of the period in which it had been granted.

The relevant factual circumstances of the grant cannot be disregarded solely because they have preceded the accession[xi]. In case, the Award exceeded the amount of aid granted under EGO24, which is the regulatory measure examined by the Romanian Council of Competition in its decision of May 2000, this excess cannot be deemed to constitute indirect State aid as established by the Atzeni Opinion.

A.2.   Compensation for damages is not an advantage

The principle of State responsibility for loss and damage caused to individuals because of breaches of European Union law for which the State can be held liable is enshrined by the system of the treaties on which the European Union is based[xii]. In Asteris, the CJEU established that State aid is fundamentally different in its legal nature from the amounts paid to individuals as compensation for the damage caused by public authorities and that, in consequence, such damages do not constitute aid for the purposes of Articles 107 and 108 TFEU[xiii].

Acknowledging the fact that EU law does not allow an unconditional permeation of obligations derived from international law, the main difference between a Micula entitlement and the Asteris right to bring an action for payment is the source of the obligations on which the claim for payment is based.[xiv] Greece was expected to implement EU law obligations, while Romania is responsible for implementing an obligation arisen from a BIT and affirmed by an ICSID-award.

The CJEU recognised a distinction between an action for damages under Article 340 TFEU and an action for payment concerning the liability of the national authorities responsible for implementing Union law, which individuals are seeking to establish before national courts[xv]. Hence, it can concluded that the Asteris liability is a distinct case, since it does not entail a sufficiently serious breach of an EU law obligation borne by the State.

On the other hand, the entitlement to payment in Micula ought to be interpreted in the light of the relevant rules of customary international law, which is part of the Union legal order and is compulsory for its institutions[xvi]. The BITs obligations go beyond the field of customary international law, ensuring a higher level of protection for the investor that can be recognised under EU law, only if it concurs with the specific characteristics and the autonomy of the Union legal order[xvii]. The Commission considered that the BIT obligations were not conform to EU law and subsequently, the action for payment could not be supported by an Asteris claim.

[i] Read more at: http://www.nationalreview.com/corner/378955/obama-west-point-because-we-have-best-hammer-does-not-mean-every-problem-nail-andrew.

[ii] Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority [1961] ECR 1.

[iii] Case 173/73 Italy/Commission [1974] ECR I- 00709 [15].

[iv] Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania, OJ L 232, 4.9.2015, p. 43–70 [92].

[v] Commission Decision, State aid SA. 38375 (2014/NN) (ex 2014/CP) Brussels, 11.06.2014. The final decision of 21 October 2015 not yet published. Read also my commentary (click here).

[vi] Read more at: http://www.kluwertaxlawblog.com/blog/2015/10/28/the-interplay-between-the-state-aid-rules-and-other-beps-preventing-tools-sa-38375/.

[vii] AG Opinion, AG Colomer, Joined Cases C-346/03 and C-529/03 Atzeni [2006] ECR I-01875 [198].

[viii] ‘It should be noted that, if an entitlement to compensation is recognised, the damage cannot be regarded as being equal to the sum of the amounts to be repaid, since this would constitute an indirect grant of the aid found to be illegal and incompatible with the common market’.

[ix] Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania, OJ L 232, 4.9.2015, p. 43–70 [123].

[x] Case T‑473/12 Aer Lingus, not yet reported [83]. See, to that effect, C‑277/00 Germany /Commission [2004] ECR I-03925 [74-5].

[xi] Opinion AG Wathelet, Case C‑357/14 P Dunamenti Erőmű, not yet reported [121].

[xii] Joined Cases C-6/90 and C-9/90 Francovich and Others [1991] ECR I-5357 [35]; Joined Cases C-46/93 and C-48/93 Brasserie du Pêcheur and Factortame [1996] ECR I-1029 [31]; and Case C‑445/06 Danske Slagterier [2009] ECR I‑0000 [19].

[xiii] Joined cases 106 to 120/87 Asteris/Greece (Asteris III), [1988] ECR I-05515.

[xiv] Opinion 2/13 of 18 December 2014, not yet reported [201].

[xv] Asteris III [25-6].

[xvi] Case C‑179/13, Evans, not yet reported [35]

[xvii] Opinion 2/13 of 18 December 2014, not yet reported [174].

Emanuela Matei,  Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).