State aid is the name given to a subsidy provided by a government. Under European Union competition law the term has a legal meaning, being any measure that demonstrates any of the characteristics in Article 107 of Treaty on the Functioning of the European Union, in that if it distorts competition or the free market, it is classed by the European Union as being illegal state aid. Measures which fall within the definition of state aid are considered unlawful unless provided under an exemption or notified by the European Commission.
Contents
History
The concept of state aid in the European Union came from Article 87(2) of the General Agreement on Tariffs and Trade where it states that state aid was aid "granted by a Member State or through state resources in any form whatsoever". Because of the broad wording of the agreement, the European Court of Justice interpreted it as being that the state would "confer assistance or advantage to specific undertakings", which they ruled would be undue influence on intra-EU trade.
State aid was formally introduced into European Union statute law by the Treaty of Rome where it classified state aid as being any state intervention that distorted competition law. The definition was later updated by the Treaty on the Functioning of the European Union in 2007. It stated that any aid given to a company by a state within the EU would generally be incompatible with the EU's Common Market. Within the new law under the treaty, the first chapter of it defines what is not allowed to be done with state aid and the second chapter defines actions that can be done within legal limits. 1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.
The intent of this was that in order to avoid favouring a certain company or commercial group, an EU member state should not provide support by financial aid, lesser taxation rates or other ways to a party that does normal commercial business. For example, it would be considered illegal state aid by the EU if a government took over an unprofitable company with the sole intent to keep it running at a loss. However state aid can be approved by the European Commission in individual circumstances. but the aid reclaimed by the EU if it breaches the treaty.
There are specific exemptions to the treaty's provisions with regard to state aid. State aid can be given to parties involved in charity or "to promote culture and heritage conservation". The treaty also stated that aid given in response to natural disasters would be lawful. An exemption was given to allow Germany to provide aid providing the aid was used in relation to promoting development in former East German locations affected by the division of Germany after Germany's loss in the Second World War.
Examples
In 2008, the British government was granted permission from the European Commission to provide state aid to nationalise Lloyds TSB during the financial crisis of 2007–08. However, the Commission decreed that because Lloyds TSB's financial requirements had come about from their takeover of HBOS, in order for the state aid to be legal, they would have to sell part of their business. Lloyds Bank did this by splitting off TSB Bank as a separate company initially owned by them and sold it to Banco de Sabadell in order to stay within the EU's rules on state aid.
In 2016, following an investigation, the European Commission ruled that the Republic of Ireland's tax benefits system was a form of state aid as it allowed companies such as Apple Inc. to reduce tax paid on profits made within the EU. The Commission stated that as a result, Apple would have to pay €13 billion in back taxes to the Irish government. The Irish cabinet stated they would challenge the Commission's finding of state aid and would appeal against the ruling. As of December 2016, the public version of the decision text is not yet available.