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Draft Commission proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak
Practical Law UK Legal Update w-024-5073 (Approx. 4 pages)
Draft Commission proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak
| Published on 17 Mar 2020 • European Union |
On 17 March 2020, the European Commission published a statement by Executive Vice-President Margrethe Vestager on a draft proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak.
Speedread
On 17 March 2020, the Commission published a statement by Margrethe Vestager, Executive Vice President and Commissioner in charge of competition policy, announcing that it has sent to member states for consultation a draft proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak, based on Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU). Article 107(3)(b) enables the Commission to approve national support measures to remedy a serious disturbance to the economy of a member state.
The proposed new Temporary Framework will enable member states to grant direct grants and selective tax advantages, up to EUR500,000, to address companies' urgent liquidity needs. Member states will also be able to issue State guarantees to support 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. The guarantees may relate to both investment and working capital loans.
Further, the Temporary Framework will allow subsidised interest rates on public and private loans to companies. Such 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. Again, the loans may relate to both investment and working capital needs.
Recognising the role of the banking sector and other financial intermediaries to deal with the economic effects of the COVID-19 outbreak, the Temporary Framework will provide safeguards making it 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. The Framework will give guidance on how to minimise any undue residual aid to banks and 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. Should direct aid to banks become necessary 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.
The Commission aims to have the new Temporary Framework in place "in the next few days".
Background
Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU) enables the European Commission to approve additional national support measures to remedy a serious disturbance to the economy of a member state.
On 13 March 2020, the Commission published a Communication outlining its immediate response to mitigate the economic impact of the COVID-19 outbreak, which included an explanation of how state aid could be used to provide financial support to citizens and companies (see Legal update, Commission Communication on co-ordinated economic response to the COVID-19 outbreak: state aid aspects). The Communication stated that the Commission was preparing a special legal framework under Article 107(3)(b) of the TFEU to adopt in case of need.
On 17 March 2020, the Commission published a statement by Margrethe Vestager, Executive Vice President and Commissioner in charge of competition policy, announcing that, on 16 March, the Commission sent to member states for consultation a draft proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak, based on Article 107(3)(b) of the TFEU, which will complement the normal EU state aid rules.
Draft Temporary Framework
The proposed new Temporary Framework will enable four types of state aid:
- Direct grants and selective tax advantages. Member states will be able to set up schemes to grant up to EUR500,000 to a company to address its urgent liquidity needs.
- State guarantees for loans taken by companies from banks. Member states will be able to 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. There are some limits foreseen on the maximum loan amount, which are based on the operating needs of the companies (established on the basis of the wage bills or liquidity needs). The guarantees may relate to both investment and working capital loans.
- Subsidised public loans to companies. Member states will be able to provide for 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. 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, there are some limits regarding the maximum loan amount, which are based on the operating needs of the companies (established on the basis of the wage bills or liquidity needs). The loans may relate to both investment and working capital needs.
- Safeguards for banks that channel support to the real economy. Recognising the role of the banking sector and other financial intermediaries to deal with the economic effects of the COVID-19 outbreak, the Temporary Framework will make it 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. The Framework also gives guidance on how to minimise any undue residual aid to banks and 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.
The Commission states that should direct aid to banks become necessary under Article 107(2)(b) of the 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.
General features for all the above measures include that companies that entered into difficulty after 31 December 2019 are eligible for aid under this Temporary Framework. This is to ensure that the Temporary Framework is not used for taxpayer support unrelated to the COVID-19 outbreak. The Temporary Framework also imposes general transparency obligations.
The Commission is working on templates to facilitate the work to design measures to tackle the impact of the COVID-19 outbreak, including one on how to compensate companies for damage.
It has set up a dedicated mailbox and telephone number to assist member states, which is open seven days a week:
- Telephone number: (+32) 2 296 52 00
- e-mail address: [email protected]
The Commission also assures that it can decisions very quickly.
Comment
The Commission aims to have the new Temporary Framework in place "in the next few days".
Executive Vice-President Vestager commented "the Commission will enable member states to use the full flexibility foreseen under state aid rules to tackle this unprecedented situation".
By way of example, to help minimise permanent layoffs and damage to the European aviation sector, the Commission states that it is ready to work urgently with member states to find workable solutions, using the full flexibility under State aid rules. Compensation will be able to be granted to airlines under Article 107(2)(b) of the TFEU for damages suffered due to the COVID-19 outbreak, even if they have received rescue aid in the last ten years. The normal "one time last time" principle set out in the Guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulty (which aims to prevent companies that are not viable being kept artificially alive through public support) will not apply.