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Commission publishes State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak
Practical Law UK Legal Update w-024-5658 (Approx. 11 pages)
Commission publishes State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak
| Published on 20 Mar 2020 • European Union |
On 19 March 2020, the Commission adopted 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.
Speedread
On 19 March 2020, the Commission adopted 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 Temporary Framework provides for five types of aid:
- Direct grants, selective tax advantages and advance payments: member states will be able to set up schemes to grant up to EUR800,000 to a company to address its urgent liquidity needs.
- State guarantees for loans taken by companies from banks: member states will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them.
- Subsidised public loans to companies: member states will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.
- Safeguards for banks that channel state aid to the real economy. Where member states plan to build on banks' existing lending capacities, and use them as a channel for support to businesses, such aid is considered as direct aid to the banks' customers, not to the banks themselves. The Temporary Framework provides guidance on how to ensure minimal distortion of competition between banks.
- Short-term export credit insurance. The Temporary Framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.
The Temporary Framework includes a number of safeguards, for example, linking the subsidised loans or guarantees to businesses to the scale of their economic activity, by reference to their wage bill, turnover, or liquidity needs, and to the use of the public support for working or investment capital. It will be in place until 31 December 2020, but can be extended.
The Commission has also published a template document setting out the information that member states should provide when notifying under Article 107(2)(b) of the TFEU aid for damage caused as a result of an exceptional occurrence.
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. Such disturbance must affect the whole or an important part of the economy of the member state concerned, and not merely that of one of its regions or parts of its territory.
Considering that the COVID-19 outbreak affects all member states and that the containment measures taken by member states impact undertakings, the Commission considers that state aid is justified and can be declared compatible with the internal market on the basis of Article 107(3)(b) of the TFEU, for a limited period, to remedy the liquidity shortage faced by undertakings and ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability, especially of SMEs.
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, and which will complement the normal EU state aid rules (see Legal update, Draft Commission proposal for a State aid Temporary Framework to support the economy in the context of the COVID-19 outbreak).
On 19 March 2020, the Commission announced that the Temporary Framework had been adopted and published the text of the Framework on its website.
Temporary Framework
The Temporary Framework recognises that in the exceptional circumstances created by the COVID-19 outbreak, undertakings of all kinds may face a severe lack of liquidity, with SMEs being at particular risk. This can seriously affect the economic situation of many healthy undertakings and their employees in the short and medium term, while having also longer-lasting effects by endangering their survival.
The Framework also recognises the role banks and other financial intermediaries will have in dealing with the effects of the COVID-19 outbreak, by maintaining the flow of credit to the economy. It is, therefore, appropriate that member states can take measures to incentivise credit institutions and other financial intermediaries to continue to support economic activity in the EU.
It is expressly stated that aid granted by member states under Article 107(3)(b) TFEU under the Temporary Framework that is channelled through banks as financial intermediaries, benefits those undertakings directly and that such aid does not have the objective to preserve or restore the viability, liquidity or solvency of banks. Similarly, aid granted by member states to banks under Article 107(2)(b) TFEU to compensate for direct damage suffered as a result of the COVID-19 outbreak does not have the objective to preserve or restore the viability, liquidity or solvency of an institution or entity. As a result, such aid would not be qualified as extraordinary public financial support under the Bank Recovery and Resolution Directive (BRRD) 2014/59 nor under the Single Resolution Mechanism (SRM) Regulation 806/2014, and would also not be assessed under the state aid rules applicable to the banking sector. The aid would still have to be notified to the Commission for assessment under Article 107(2)(b) of the TFEU.
If due to the COVID-19 outbreak, banks need direct support in the form of liquidity recapitalisation or impaired asset measure, it will have to be assessed whether the measure meets the conditions of Article 32(4)(d) (i), (ii) or (iii) of the BRRD. Where the latter conditions were to be fulfilled, the bank receiving such direct support would not be deemed to be failing-or-likely-to-fail. To the extent such measures address problems linked to the COVID-19 outbreak, they would be deemed to fall under point 45 of the 2013 Banking Communication, which sets out an exception to the requirement of burden-sharing by shareholders and subordinated creditors.
Any measures to support credit institutions or other financial institutions that constitute state aid in the meaning of Article 107(1) of the TFEU, which fall outside the Temporary Framework or are not covered by Article 107(2)(b) of the TFEU must be notified to the Commission and shall be assessed under the state aid rules applicable to the banking sector (see Communication from the Commission on the application, from 1 August 2013, of state aid rules to support measures in favour of banks in the context of the financial crisis, OJ 2013 C216/1).
Given that (well-targeted) public support is needed to ensure that sufficient liquidity remains available in the markets, to counter the damage inflicted on healthy undertakings and to preserve the continuity of economic activity during and after the COVID-19 outbreak, and that the main response will come from member states' national budgets, the EU state aid rules enable member states to take swift and effective action to support citizens and undertakings, in particular SMEs, facing economic difficulties due to the COVID-19 outbreak. The Temporary Framework recognises the need for appropriate state aid measures and close European co-ordination of national aid measures.
State aid that can be granted outside the Temporary Communication
Member states can design support measures in line with the General Block Exemption Regulation 651/2014 without the involvement of the Commission.
In addition, on the basis of Article 107(3)(c) of the TFEU and as further specified in the Rescue and Restructuring State aid Guidelines, member States can notify to the Commission aid schemes to meet acute liquidity needs and support undertakings facing financial difficulties, also due to or aggravated by the COVID-19 outbreak. The Commission states that it has already authorised various schemes in nine different member states.
On the basis of Article 107(2)(b) of the TFEU, member states can also compensate undertakings in sectors that have been particularly hit by the outbreak (for example, transport, tourism, culture, hospitality and retail) and/or organisers of cancelled events for damages suffered due to and directly caused by the outbreak. Member states can notify such damage compensation measures and the Commission will assess them directly under Article 107(2)(b) (see, Legal update, Commission approves Danish aid scheme to compensate damages caused by cancellations of large public events due to COVID-19 outbreak).
The principle of "one time last time" of the Rescue and Restructuring Guidelines does not cover aid that the Commission declares compatible under Article 107(2)(b), since the latter type of aid is not "rescue aid, restructuring aid or temporary restructuring support" within the meaning of point 71 of the Rescue and Restructuring Guidelines. Therefore, member States may compensate under Article 107(2)(b) of the TFEU the damages directly caused by the COVID-19 outbreak to undertakings that have received aid under the Rescue and Restructuring Guidelines.
To complement these possibilities, the Temporary Framework sets additional temporary state aid measures that it considers compatible under Article 107(3)(b) of the TFEU, which can be approved very rapidly upon notification by a member state. Moreover, notification of alternative approaches, both aid schemes and individual measures, remains possible.
State aid measures under the Temporary Framework
The Temporary Framework sets out the compatibility conditions it will apply in principle to the aid granted by member states under Article 107(3)(b) of the TFEU. Member states must show that the state aid measures notified to the Commission under the Framework are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of the member state concerned and that all the conditions of the Framework are fully respected.
Aid in form of direct grants, repayable advances or tax advantages
Beyond existing possibilities based on Article 107(3)(c) of the TFEU, temporary limited amounts of aid to undertakings that find themselves facing a sudden shortage or unavailability of liquidity can be an appropriate, necessary and targeted solution during the current circumstances.
The Commission will consider such state aid compatible with the internal market on the basis of Article 107(3)(b), provided that:
- The aid does not exceed EUR800,000 per undertaking in the form of direct grants, repayable advances, tax or payments advantages; all figures used must be gross, that is, before any deduction of tax or other charge.
- The aid is granted on the basis of a scheme with an estimated budget.
- The aid may be granted to undertakings that were not in difficulty (within the meaning of the Article 2(18) of the General Block Exemption Regulation) on 31 December 2019; it may be granted to undertakings that are not in difficulty and/or to undertakings 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 aid is granted no later than 31 December 2020. (If the aid is granted in form of tax advantages, this deadline is not applicable and the aid is considered granted when the 2020 tax declaration is due.)
- The aid granted to undertakings active in the processing and marketing of agricultural products (as defined in Articles 2(6) and 2(7) of the Agricultural Block Exemption Regulation 702/2014 is conditional on not being partly or entirely 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.
Additional conditions apply for the primary agricultural and the fishery and aquaculture sectors:
- The aid does not exceed EUR120,000 per undertaking active in the fishery and aquaculture sector or EUR100,000 per undertaking active in the primary production of agricultural products (all figures used must be gross, that is, before any deduction of tax or other charge).
- Aid to undertakings active in the primary production of agricultural products must not be fixed on the basis of the price or quantity of products put on the market.
- Aid to undertakings active in the fishery and aquaculture does not concern any of the categories of aid referred to in Article 1, paragraph (1)(a) to (k), of the Fisheries De Minimis Regulation 717/2014.
- Where an undertaking is active in several sectors to which different maximum amounts apply, the member state ensures, by appropriate means such as separation of accounts, that for each of these activities the relevant ceiling is respected and that the highest possible amount is not exceeded in total.
Aid in the form of guarantees on loans
To ensure access to liquidity to undertakings facing a sudden shortage, public guarantees on loans for a limited period and loan amount can be an appropriate, necessary and targeted solution during the current circumstances.
The Commission will consider such state aid in the form of new public guarantees on loans compatible with the internal market on the basis of Article 107(3)(b) of the TFEU provided:
- Guarantee premiums are set at a specified minimum level. These differ according to whether the recipient is a large enterprise or SME (see paragraph 25(a), Temporary Framework).
- As an alternative, member states may notify schemes, considering these levels as basis, but whereby maturity, pricing and guarantee coverage can be modulated (for example, a lower guarantee coverage offsetting a longer maturity).
- The guarantee is granted by 31 December 2020 at the latest.
- For loans with a maturity beyond 31 December 2020, the amount of the loan principal does not exceed:
- the double of the annual wage bill of the beneficiary (including social charges as well as the cost of personnel working on the undertakings site but formally in the payroll of subcontractors) for 2019, or for the last year available. In the case of undertakings created on or after 1 January 2019, the maximum loan must not exceed the estimated annual wage bill for the first two years in operation;
- 25% of total turnover of the beneficiary in 2019; or
- with appropriate justification and based on a self-certification by the beneficiary of its liquidity needs, the amount of the loan may be increased to cover the liquidity needs from the moment of granting for the coming 18 months for SMEs and for the coming 12 months for large enterprises.
- For loans with a maturity until 31 December 2020, the amount of the loan principal may be higher than under noted above with appropriate justification and provided that proportionality of the aid remains assured.
- The duration of the guarantee is limited to maximum six years and the public guarantee does not exceed:
- 90% of the loan principal where losses are sustained proportionally and under same conditions, by the credit institution and the State; or
- 35% of the loan principal, where losses are first attributed to the State and only then to the credit institutions (i.e. a first-loss guarantee); and
- in both of the above cases, when the size of the loan decreases over time, for instance because the loan starts to be reimbursed, the guaranteed amount has to decrease proportionally.
- The guarantee may relate to both investment and working capital loans.
- The guarantee may be granted to undertakings that were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019; it may be granted to undertakings that are not in difficulty and/or to undertakings 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.
Aid in the form of subsidised interest rates for loans
To ensure access to liquidity to undertakings facing a sudden shortage, subsidised interest rates for a limited period and loan amount can also be an appropriate, necessary and targeted solution.
The Commission will consider state aid in the form of subsidies to public loans compatible with the internal market on the basis of Article 107(3)(b) of the TFEU provided the following conditions are met:
- The loans may be granted at reduced interest rates which are at least equal to the base rate (one year IBOR or equivalent as published by the Commission) applicable on 1 January 2020 plus specified credit risk margins set out in paragraph 27(a) of the Temporary Framework.
- As an alternative, member states may notify schemes, considering these credit margin risks as basis, but whereby maturity, pricing and guarantee coverage can be modulated.
- The loan contracts are signed by 31 December 2020 at the latest and are limited to maximum six years.
- For loans with a maturity beyond 31 December 2020, the amount of the loan does not exceed:
- the double of the annual wage bill of the beneficiary (including social charges as well as the cost of personnel working on the company site but formally in the payroll of subcontractors) for 2019 or for the last year available. In the case of undertakings created on or after 1 January 2019, the maximum loan must not exceed the estimated annual wage bill for the first two years in operation;
- 25% of the total turnover of the beneficiary in 2019;
- with appropriate justification and based on self-certification by the beneficiary of its liquidity needs, the amount of the loan may be increased to cover the liquidity needs from the moment of granting for the coming 18 months for SMEs and for the coming 12 months for large enterprises.
- For loans with a maturity until 31 December 2020, the amount of the loan principal may be higher than noted above with appropriate justification and provided that proportionality of the aid remains assured.
- The loan may relate to both investment and working capital needs.
- The loan may be granted to undertakings that were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019; it may be granted to undertakings that are not in difficulty and/or to undertakings 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.
Aid in the form of guarantees and loans channelled through credit institutions or other financial institutions
Aid in the form of public guarantees and reduced interest rates (see above can be provided to the undertakings facing a sudden liquidity shortage directly or through credit institutions and other financial institutions as financial intermediaries. In the latter case, the following conditions must be complied with.
While such aid is directly targeting undertakings facing a sudden liquidity shortage and not credit institutions or other financial institutions, it may also constitute an indirect advantage to the latter. Nevertheless, such indirect aid does not have the objective to preserve or restore the viability, liquidity or solvency of the credit institutions. As a result, the Commission considers that such aid should not be qualified as extraordinary public financial support according to Article 2(1) No 28 BRRD and Article 3(1) No 29 SRM, and should not be assessed under the state aid rules applicable to the banking sector.
In any event, it is appropriate to introduce certain safeguards in relation to the possible indirect aid in favour of the credit institutions or other financial institutions to limit undue distortions to competition.
The credit institutions or other financial institutions should, to the largest extent possible, pass on the advantages of the public guarantee or subsidised interest rates on loans to the final beneficiaries. The financial intermediary shall be able to demonstrate that it operates a mechanism that ensures that the advantages are 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. When there is a legal obligation to extend the maturity of existing loans for SMEs no guarantee fee may be charged.
Short-term export credit insurance
The Commission Communication on short-term export-credit insurance (OJ 2012 C392/1) stipulates that marketable risks cannot be covered by export-credit insurance with the support of member states. As a consequence of the current outbreak, the Commission considers that it cannot be excluded that, in certain countries cover for marketable risks could be temporarily unavailable.
Therefore, member states may demonstrate the lack of market by providing sufficient evidence of the unavailability of cover for the risk in the private insurance market. Use of the exemption concerning non-marketable risks envisaged in paragraph 18(d) of the Commission Communication on short-term export-credit insurance will in any case be considered justified, if either a large well-known international private export credits insurer and a national credit insurer produce evidence of the unavailability of such cover or at least four well-established exporters in the member state produce evidence of refusal of cover from insurers for specific operations.
Cumulation
All temporary aid measures provided for by the Framework can be cumulated with aid falling within the scope of the de minimis Regulation 1407/2013.
Aid granted in the form of direct grants, repayable advances or tax advantages may be cumulated either with aid in the form of guarantees on loans or aid in the form of subsidised interest rates for loans, and with aid granted under section 3.5 of this Communication.
For the same underlying loan principal, aid granted in the form of guarantees on loans and aid granted in the form of subsidised interest for loans cannot be cumulated.
Monitoring and reporting
Member states must publish information on each individual aid granted under the Temporary Framework within 12 months from the moment of granting. They must also submit annual reports to the Commission. By 31 December 2020, they must provide the Commission with a list of measures put in place on the basis of schemes approved based on this Communication.
Member states must ensure that detailed records regarding the granting of aid are maintained. These records must contain all information necessary to establish that the relevant conditions have been observed and must be maintained for ten years upon granting of the aid and be provided to the Commission upon request. The Commission may request additional information regarding the aid granted, to verify whether the conditions laid down in the Commission decision approving the aid measure have been met.
Template for notification under Article 107(2)(b)
The Commission has also published:
- A document setting out the information that member states should provide when notifying under Article 107(2)(b) of the TFEU aid for damage caused as a result of an exceptional occurrence.
- A notification template.