The Coronavirus crisis has created exceptional circumstances and its related economic challenges have triggered the need foremergency actions to be taken by EU member states to deal with them. Competition law has a vital role to play in assessing the legitimacy of such actions and their effects.
Member states have expressly communicated their strong commitment to supporting companies in need. This can be done by giving guarantees to companies, allowing them to get bank loans more easily, and by delaying payment obligations on taxes and social security contributions.
Many of these measures will fall under the definition of state aid, which is essentially any aid granted selectively by a Member State through state resources in any form whatsoever that distorts competition and affects trade between Member States (Article 107 of the Treaty on the Functioning of the European Union (TFEU)). If these conditions are met, the measure has to be notified to the European Commission (the Commission) and approved before it is granted. Measures that constitute state aid are illegal if they are not approved by the Commission, unless an exemption applies.
Companies will have to become familiar with state aid rules, because if an aid has not been notified or it has not been granted in accordance with the rules, the Commission can recover the aid (with interest) from the company which received it.
Article 107(3)(b) TFEU, states that aid may be declared compatible if it is given to "remedy a serious disturbance in the economy of a Member State. The Commission deemed the coronavirus crisis a serious disturbance, so article 107(3)(b) TFEU mentioned above will be used to assess support measures in those Member States where the situation has deteriorated.
On19 March 2020, the Commission adopted a Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support their economy in the context of the Coronavirus outbreak. More details on the terms of the Temporary Framework are further below.
The Commission approved a €33 million Cypriot aid scheme deferring VAT payments
Cyprus notified to the Commission, under the Temporary Framework, a scheme allowing companies facing difficulties due to the coronavirus outbreak to delay the payment of VAT due by 10 April, 10 May and 10 June 2020. Under the scheme, no interests or penalties are imposed on those companies that will pay the due VAT by 10 November 2020 instead. The total estimated budget of the measure is €33 million. The scheme will be accessible to companies of all sizes and all sectors, except the sectors which continued to operate during the lockdown in Cyprus. The aim of the scheme is to ease the liquidity constraints faced by those companies that are most severely affected by the economic impact of the coronavirus outbreak, thus helping them continue their activities.
The Commission found that the scheme notified by Cyprus is in line with the conditions set out in the Temporary Framework. In particular, the support is granted before 31 December 2020, and the end date of the deferral is 10 November 2020, thus before the end date of 31 December 2022 as defined in the Temporary Framework. The Commission concluded that the Cypriot scheme is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework.
Executive Vice President Margrethe Vestager, in charge of competition policy, said: “The €33 million Cypriot scheme will allow the delayed payment of VAT by companies affected by the coronavirus outbreak. This will help businesses to address their immediate liquidity constraints and continue their activities in these difficult times. The Commission works in close cooperation with Member States to swiftly approve measures during these difficult times, in line with EU rules.”
Background: The EU Temporary Framework
The Commission has adopted a Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the Coronavirus outbreak. The Temporary Framework, as amended on 3 April, 8 May and 29 June 2020, provides, amongst others, for the following types of aid which can be granted by Member States:
- direct grants, equity injections, selective tax advantages and advance payments of up to €100,000 to a company active in the primary agricultural sector, €120,000 to a company active in the fishery and aquaculture sector and €800,000 to a company active in all other sectors to address its urgent liquidity needs;
- state guarantees for loans taken by companies to ensure banks keep providing loans to the customers who need them. These state guarantees can cover up to 90% of risk on loans to help businesses cover immediate working capital and investment needs;
- subsidised public loans to companies (senior and subordinated debt) with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs;
- targeted support in the form of deferral of tax payments and/or suspensions of social security contributions for those sectors, regions or for types of companies that are hit the hardest by the outbreak; and
- targeted support in the form of wage subsidies for employees for those companies in sectors or regions that have suffered most from the coronavirus outbreak, and would otherwise have had to lay off personnel.
The Temporary Framework enables Member States to combine all support measures with each other, on the conditions that (a) cumulated loans and guarantees for any one borrower cannot exceed the limits set in the Temporary Framework and (b) no beneficiary of the scheme can exceed the maximum thresholds set in the Temporary Framework.
Furthermore, the Temporary Framework complements the many other possibilities already available to Member States to mitigate the socio-economic impact of the coronavirus outbreak, in line with EU State aid rules. On 13 March 2020, the Commission adopted a Communication on a Coordinated economic response to the COVID-19 outbreak setting out these possibilities. For example, Member States can make generally applicable changes in favour of businesses (e.g. deferring taxes, or subsidising short-time work across all sectors), which fall outside State Aid rules. They can also grant compensation to companies for damage suffered due to and directly caused by the coronavirus outbreak.
Temporary State aid to micro and small companies is unlikely to distort competition in the Internal Market, given their limited size and involvement in cross-border transactions. In addition, by keeping them alive and giving them time to recapitalise, this step can even enable competition in the medium-term while wider negative economic effects are prevented. Nevertheless, public interventions such as the recapitalisation of some larger companies can be highly distortive for competition in the EU single market in the longer term and should remain measures of last-resort.
In any case, the Temporary Framework sets out a number of safeguarding conditions intended to limit the negative consequences of the allowed aid measures to the level playing field within the EU internal market. Some examples are:
- the granting of aid shall not be a pretext for requiring the relocation of an activity of the beneficiary from another country within the EEA to the territory of the Member State granting the aid, as such a condition would be harmful to the internal market;
- it links 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;
- only companies which were not in difficulty on 31 December 2019 are eligible, except for micro and small companies, which escape this condition provided that they are not in insolvency proceedings, have not received rescue aid that has not been repaid, nor are subject to a restructuring plan under State aid rules.
The Temporary Framework will be in place until the end of December 2020. As solvency issues may materialise only at a later stage as this crisis evolves, the Commission has extended this period until the end of June 2021 for recapitalisation measures. With a view to ensuring legal certainty, the Commission will assess before those dates if any of these periods need to be extended.
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