State aid for businesses in difficulty

The European Commission has revised its rules as to how it assesses European Union (EU) countries’ State aid (public subsidies) to support firms in difficulty. This is to ensure that public money is targeted where it is most needed and that company owners pay their fair share of restructuring costs.

ACT

Communication from the Commission - Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty (OJ C 249 of 31.7.2014, pp. 1-28).

SUMMARY

The European Commission has revised its rules as to how it assesses European Union (EU) countries’ State aid (public subsidies) to support firms in difficulty. This is to ensure that public money is targeted where it is most needed and that company owners pay their fair share of restructuring costs.

WHAT DO THESE GUIDELINES DO?

State aid to firms in difficulty gives them an advantage over healthier, more efficient competitors not receiving aid (i.e. it can distort competition). It can also serve as a brake on economic growth by diverting taxpayers’ money away from alternative, potentially more productive uses. The guidelines lay down the rules governing the granting of State aid to businesses in difficulty requiring them to meet strict conditions.

The aim of the guidelines is to ensure that State aid granted by EU countries is genuinely in the public interest. An example of this could be the saving of a business which would prevent the social hardship arising from a closure in an area that already has a high unemployment rate. The guidelines contain examples of situations illustrating where aid can be justified.

In addition, those granting aids must demonstrate that the aid will make a difference. To do so, they have to present a comparison with a credible alternative scenario in which there is no aid.

Rescue aid allows firms facing imminent collapse to stay in business enough time to prepare a restructuring plan. This plan must be in the form of liquidity support (loans or guarantees) and last no longer than 6 months.

After this 6-month period, the aid has either to be reimbursed or a restructuring plan has to be notified to the Commission for the aid to be approved as ‘restructuring aid’.

Restructuring aid may be granted only once over a period of 10 years (the ‘one time, last time’ principle*). The restructuring plan has to show how the firm’s long-term viability will be restored without further state support.

As a precondition for granting restructuring aid and to reduce the share of taxpayers’ money involved, the guidelines require the firm’s losses to be fully allocated to existing shareholders and subordinated creditors.

The firm must also agree how it can limit the distortions of competition arising from the aid (for example, this might mean selling off profitable parts of its business).

Once it returns to profitability, a firm that received aid must agree to return a share of the profits to the state.

WHEN DO THE GUIDELINES APPLY?

The guidelines apply from 1 August 2014 until 31 December 2020. They replace similar guidelines adopted in 2004.

BACKGROUND

Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak

KEY TERMS

* ‘One time, last time’ principle: aid can only be granted once in a period of 10 years.

last update 07.04.2020