EU facilitates state support for businesses affected by COVID-19 crisis

20 March 2020 Reed Smith Client Alerts

Home Perspectives EU facilitates state support for businesses affected by COVID-19 crisis

EU member states are planning support measures to help businesses affected by the spread of the novel coronavirus (COVID-19) to continue operating. Most of these measures, including direct grants/subsidies, tax advantages, capital injections, loans and guarantees, are likely to involve ‘state aid’ and will require prior approval from the European Commission (EC) under the EU State aid rules.

Authors: Christian Filippitsch Isabelle Rahman Max Seuster

On 13 March 2020, EC President Ursula von der Leyen and EC Executive Vice President and Competition Commissioner Margrethe Vestager announced that the EC stands ready to “use the full flexibility of the State aid rules” to help member states mitigate the consequences of the COVID-19 outbreak. The EC has already approved the first COVID-19 state aid, by the Danish state, in record time (within 24 hours) and has dedicated significant resources to deal with the expected load of state aid notifications in the weeks to come. On 19 March 2020, the EC adopted a state aid ‘Temporary Framework’ to support the economy in the context of the COVID-19 outbreak. It complements the many other possibilities already available to member states to mitigate the impact of the COVID-19 outbreak in line with state aid rules.

At the same time the EC emphasises that, despite the COVID-19 crisis, support for businesses must not undermine competition law, including the state aid rules. For any public advantage received, full compliance with the state aid rules is therefore of outmost importance.

This alert provides an overview of the EC’s response to the urgent need for member states’ support for businesses during the COVID-19 crisis. It outlines possibilities for state aid already available under the EU rules and for state aid under the new Temporary Framework and highlights the impact on businesses.

Next steps and where we can help:

As the EC and member state governments are assembling extensive schemes to compensate businesses for the damages caused by the COVID-19 pandemic, we can assist companies with evaluating their eligibility for financial and other forms of support.
We can guide you through the process, on how to obtain public support in order to ensure full compliance with the state aid rules and subsequently on how to ensure legal certainty with respect to the receipt of such funds.
Where required, state aid provided to companies will need to be notified to the EC, which will assess whether the support was lawfully granted (for example, the EC will ensure that the current situation is not used to ‘overcompensate’ companies for damages not caused by the pandemic). Governments will need to recover from the beneficiary any (part of) aid unlawfully provided. We can help companies satisfy themselves that any aid is appropriately structured and lawfully granted.

First COVID-19 state aid approval in record time

On 12 March 2020, the EC approved a €12 million Danish scheme under EU state aid rules to compensate organisers for the damage suffered due to the cancellation or postponement of large events with more than 1,000 participants due to the COVID-19 outbreak.

This is the first state aid measure notified by a member state to the EC in relation to the COVID-19 outbreak so far.

The EC assessed the measure under Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU), which allows state aid measures to compensate for damages directly caused by exceptional occurrences, and approved it in record time – within 24 hours of receiving the notification from Denmark.

The EC based its approval on the following grounds:

the COVID-19 outbreak qualifies as an exceptional occurrence as it is an extraordinary, unforeseeable event having a significant economic impact;
the Danish aid scheme will compensate damages that are directly linked to the COVID-19 outbreak; and
the measure is also proportionate as the foreseen compensation does not exceed what is necessary to make good the damage.

The EC is expecting that member states will continue seeking to grant aid to tackle the outbreak of the COVID-19 virus under Article 107(2)(b) TFEU. To facilitate this process, the EC has published a template for member state notifications for COVID-19 state aid under Article 107(2)(b) TFEU on its website.¹

Existing possibilities for COVID-19 support

The main fiscal response to the COVID-19 outbreak will come from member states’ national budgets and governments are currently putting in place wide-ranging COVID-19 state aid plans for businesses. These plans may include support schemes for specific industry sectors or types of companies (e.g., small and medium-sized enterprises (SMEs)) and packages to support individual companies (e.g., airlines).

On 13 March 2020, the EC adopted a communication setting out the possibilities for state aid support to businesses to tackle the COVID-19 crisis and its commitment to assist member states to ensure that possible national support measures can be put in place in a timely manner. The EC also highlighted support measures that do not require notification.

Possible state aid to tackle COVID-19 crisis

COVID-19 is recognised as an exceptional occurrence justifying state aid under Article 107(2)(b) TFEU: Article 107(2)(b) TFEU allows state aid measures to compensate certain sectors (such as transport², tourism, hospitality and retail) or individual companies for “damage caused by natural disasters or exceptional circumstances”. As demonstrated in its first approval of COVID-19 state aid, granted by Denmark (see above), the EC is prepared to support schemes or individual aid packages at record speed provided that they compensate for damages that are directly linked to the COVID-19 outbreak and are proportionate (i.e., limited to what is necessary to make good the damage).
Emergency rescue aid may be granted in accordance with the EC’s 2014 Rescue and Restructuring State Aid Guidelines: The guidelines allow member states to help companies cope with liquidity shortages and needing urgent rescue aid. In this context, member states can, for example, put in place dedicated support schemes for SMEs including to cover their liquidity needs for a period of up to 18 months. There is a clear template for such schemes, and some member states already have this type of scheme in place. In February 2019, for instance, the EC approved a €400 million support scheme in Ireland to cover the acute liquidity and rescue and restructuring needs of SMEs as a Brexit preparedness measure.
Aid to remedy serious disturbance to economy under Article 107(3)(b) TFEU: In case of particularly severe economic situations, EU state aid rules allow member states to grant support to remedy a serious disturbance to their economy. In its announcement of 13 March 2020, the EC confirmed that the current impact of the COVID-19 outbreak in Italy is of a nature and scale that allows the use of Article 107(3)(b) TFEU. In light of the rapid spread of COVID-19 and the drastic measures member states are required to take to slow down the virus, the EC has now adopted a Temporary Framework for COVID-19 state aid (see below in more detail).

Other support measures

Most of the member states’ COVID-19 support measures are likely to involve state aid and require prior EC approval. In its recent announcements on 12 and 13 March 2020, however, the EC also highlighted the flexibility for member states to design support measures not requiring notification, including the following:

Financial support granted to health services or other public services or given directly to consumers (e.g., for cancelled services or tickets that are not reimbursed by the operators concerned).
Public support measures that are available to all companies, such as wage subsidies or the suspension or extension of payment deadlines for corporate and value added tax or social contributions, as long as they do not give a selective advantage to specific companies vis-à-vis others in comparable situations.
No notification is also required for government loans or guarantees where they are based at market rates or other measures that benefit from an EC block exemption, including so-called de minimis aid allowing member states to grant up to €200,000 to corporate groups over a three-year period.

The new Temporary Framework

On 19 March 2020, the EC adopted a state aid Temporary Framework to specifically support the economy in the context of the COVID-19 outbreak to remedy any serious disturbance across the EU economy. The Temporary Framework will initially be in place until the end of December 2020.

The new Temporary Framework will enable member states to (i) set up schemes providing direct grants (selective tax advantages and advance payments) of up to €800,000 to individual companies; (ii) give subsidised state guarantees on bank loans; (iii) enable public and private loans with subsidised interest rates; (iv) safeguard banks that channel support to end customers, in particular SMEs; and (v) grant short-term export credit insurance more flexibly. The new rules are applicable as of 19 March 2020 (even if the measures were notified prior to that date).

The new framework complements (and does not replace) other existing possibilities available to member states in line with state aid rules (see above). For instance, compensation can be granted to airlines under Article 107(2)(b) TFEU for damages suffered due to the COVID-19 outbreak, even if they have received rescue aid in the last 10 years.

Eligible for aid are:

“Companies that were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019; or
companies that are not in difficulty and/or companies that were not in difficulty on 31 December 2019, but that faced difficulties or entered in difficulty thereafter as a result of the COVID-19 outbreak.” The new framework will also foresee general transparency obligations.

The specific measures available to member states under the draft Temporary Framework are described in more detail below:

Direct grants, selective tax advantage and advance payments: Member states would be able to set up schemes to grant up to €800,000 (gross) to a company to address its urgent liquidity needs. This can be done through direct grants, repayable advances, tax or payments advantages. Companies active in the processing and marketing of agricultural products are only eligible if the aid is not (partly or fully) passed on to primary producers and is not fixed on the basis of the price or quantity of products purchased from primary producers or put on the market by the undertakings concerned. Aid is more limited for companies active in the fishery and aquaculture sectors (up to € 120,000 gross) as well as for primary producers of agricultural products (up to € 100,000 gross) and is subject to special conditions.
Subsidised guarantees on bank loans: Member states can grant state guarantees or set up guarantee schemes supporting bank loans taken out by companies. These would have subsidised premiums, with reductions on the estimated market rate for annual premiums for new guarantees for SMEs and non-SMEs, and must be limited in duration (max. six years). The Temporary Framework foresees limits on the maximum loan amount, which are based on the scale of the companies' economic activity (established on the basis of the wage bills, turnover or liquidity needs). The guarantees may relate to both investment and working capital loans.
Subsidised interest rates: Member states can enable public and private loans to companies with subsidised interest rates. These loans must be granted at an interest rate that is at least equal to the base rate applicable on 1 January 2020 plus the credit risk premium corresponding to the risk profile of the recipient, with different rates for SMEs and non-SMEs, and must be limited in duration (max. six years). The base rate is fixed in order to provide more certainty on the financing conditions in this volatile context. As with the possibility to provide subsidised guarantees, the new framework will provide some limits regarding the maximum loan amount, which will be based on the scale of the companies' economic activity (established on the basis of the wage bills, turnover or liquidity needs). The loans may relate to both investment and working capital needs.
Safeguards to banks that channel support to the real economy: To recognise the important role of the banking sector and other financial intermediaries in dealing with the economic effects of the COVID-19 outbreak, the Temporary Framework makes clear that, if member states decide to channel aid to the real economy via banks, this is direct aid to the banks’ customers, not to the banks themselves. It also gives guidance on how to minimise any undue residual aid to banks and how to make sure that the aid is passed on, to the largest extent possible, to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates. In addition, when there is a legal obligation to extend the maturity of existing loans for SMEs, the Temporary Framework provides that no guarantee fee may be charged. Should direct aid to banks become necessary under Article 107(2)(b) TFEU to compensate for damages resulting directly from the COVID-19 outbreak, such aid would not be considered as extraordinary public support under state aid rules. Similarly, this would also apply to any residual indirect aid granted to banks under the Temporary Framework.
Short-term export credit insurance: As a consequence of the COVID-19 outbreak, it cannot be excluded that insurance cover for marketable risks could be temporarily unavailable in certain countries. The Temporary Framework provides additional flexibility on how to demonstrate that certain countries are not-marketable risks to enable states to provide short-term export credit insurance, where needed.

Impact on businesses

The disruptive impact of the COVID-19 outbreak requires urgent member state support for businesses. As mentioned above, companies should closely monitor whether they, including subsidiaries and affiliates across the EU, could benefit from and are eligible for any aid scheme implemented by member states. In addition, businesses seeking public support in EU member states should ensure that any state aid support is given in compliance with EU state aid rules to avoid the risk of recovery at a later stage.

COVID-19 state aid can include direct grants/subsidies, tax advantages, capital injections, loans or guarantees, etc. and take the form of support schemes (e.g., sectoral support for the tourist or events industries), cross-sectoral support for SMEs or state aid packages for individual companies (e.g., airlines).

The EC has already anticipated upcoming COVID-19 state aid-related challenges for member states and is prepared to deal with new state aid quickly through dedicated resources (including a hotline and notification template), to provide immediate help to member states.

The new Temporary Framework is specifically designed to enable COVID-19 state aid and provides member states (including the UK, which remains bound by the EU state aid rules until the end of 2020) and businesses with significant additional flexibility in dealing with the massive economic impact resulting from the COVID-19 crisis. It complements many other possibilities for member state support already available.

State aid rules and COVID-19 - European Commission (17 March 2020)
In recognition of the unprecedented impact of the COVID-19 pandemic on the aviation industry, the EC announced on 10 March that it would propose measures to suspend the “use-it-or-lose-it” rule whereby carriers that do not use a given slot for at least 80% of the time during the relevant scheduling season lose their right to maintain the same slot in the next corresponding season.

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