There have been a number of significant State aid decisions and initiatives by the European Commission (Commission) and EU Courts concerning Ireland in the last 12 months. These have covered a diverse range of sectors such as transport, financial services, energy and manufacturing. A number of the State aid decisions have involved repayment by recipients of State aid. Such an outcome is an obvious business risk and therefore dealings with the State in relation to aid measures can have serious implications for businesses unless such aid is in line with the State aid rules. The next few months in particular will likely bring further State aid developments, for example in relation to taxation matters.
What is State aid?
Under the EU rules, State aid is provided where a company receives government support and obtains an advantage over its competitors. The Treaty on the Functioning of the European Union (Treaty) prohibits State aid unless it is justified (e.g. for overriding economic development reasons). The Commission ensures that State aid complies with EU rules (subject to decisions of the EU Courts) and the Irish Courts also have a role in supervising aspects of State aid.
What are the elements of State aid?
State aid is an advantage in any form conferred on a selective basis to undertakings by public authorities of the Member States. Subsidies granted to individuals or general measures open to all companies are not covered by this prohibition and do not constitute State aid (e.g. general taxation measures (and there will be a decision on taxation measures and Ireland which will shortly be provided by the Commission) or employment legislation). To be State aid, a measure needs to have the following features:
- a measure taken by the State or the provision of State resources which can take a variety of forms (e.g. grants, guarantees, interest and tax reliefs or providing goods and services on preferential terms);
- the intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions;
- competition has been or may be distorted; and
- the measure is likely to affect trade between Member States.
In some circumstances, State measures can be regarded as necessary for a well-functioning economy. Therefore, the Treaty allows for a number of policy objectives for which State aid can be considered compatible with the Treaty rules. However, illegal State aid can result in all such aid being repaid by the recipient to the State (plus interest).
Ireland, State aid and the last 12 months
The following examples demonstrate the range of sectors that have been affected by the application of the Treaty rules on State aid in Ireland over the last 12 months.
Energy in Ireland - The energy capacity mechanisms sector enquiry
In April 2015, the Commission launched a State aid sector enquiry to gather information on existing or planned capacity mechanisms, i.e. measures taken by Member States to ensure that electricity supply can match demand in the medium and long term. The sector enquiry aims at examining, in particular, whether such measures ensure security of electricity supply without distorting competition between electricity suppliers or hindering cross-border trade. This sector enquiry is the first under EU State aid rules and covers a representative sample of Member States that have capacity mechanisms in place or are considering them, namely: Ireland, Belgium, Croatia, Denmark, France, Germany, Italy, Poland, Portugal, Spain and Sweden. In regard to the enquiry, the Commission stated that: "While governments have a legitimate interest in ensuring that there is sufficient electricity supply to avoid blackouts, competition policy should make sure that public measures underpin investments in electricity supplies, are consistent with policy instruments aimed at fostering decarbonisation, and do not unduly favour particular producers or technologies."
The Commission issued an interim report in April 2016 which pointed to a lack of proper and consistent analysis by many Member States of the actual need for capacity mechanisms. It also appeared to the Commission that some capacity mechanisms in place could be better targeted and be more cost-effective.
Air Transport in Ireland – Regional Airports Programme 2015 – 2019
On 15 April 2015, the Irish authorities notified two aid schemes to the Commission which aim to provide support for regional airports in Ireland. The two notified schemes form part of Ireland's "Regional Airports Programme 2015 - 2019". One of the two notified schemes is the Core Airport Management Operational Expenditure Subvention Scheme (OPEX Scheme), the other is the Regional Airports Capital Expenditure Grant (CAPEX Scheme). A third scheme that also forms part of the Regional Airports Programme, for the support of airlines operating Public Service Obligation routes, did not form part of the notification to the Commission.
Four Irish airports are eligible for the CAPEX scheme, (i.e. Donegal, Waterford, Kerry & Ireland West Airport Knock). Only Waterford and Kerry airports are eligible for the OPEX scheme. Ireland's largest airports, (i.e. Dublin, Cork and Shannon) are not be eligible for either scheme. The aid schemes aim to create net economic benefits for the Irish regions concerned. The schemes will cover the period from 30 July 2015 to 31 December 2019. The OPEX Scheme will have a maximum total budget of €10 million over the duration of the scheme. The CAPEX Scheme will have a maximum total budget of €32.5 million over the same period.
On 31 July 2015, the Commission approved the schemes because the compatibility criteria laid down by the Commission's guidelines for investment and operating aid were met and therefore the schemes were compatible with the State aid rules.
The Air Travel Tax cases
In March 2009, Ireland introduced an excise duty referred (the Air Travel Tax (ATT)) which airline operators had to pay in relation to every departure of a passenger on an aircraft from an airport located in Ireland (other than those with fewer than 10,000 passengers a year). Ireland then modified the tax so that, as of March 2011, a single rate of EUR3 applied to all destinations.
The Commission's ATT decisions
On 13 July 2011, the Commission found that four of the measures (including the non-application of the ATT to transfer and transit passengers) did not constitute State aid.
However, the Commission investigated the difference in rates for flights to destinations located no more than 300 kilometres from Dublin Airport and, on 25 July 2012, the Commission found that Ireland had granted unlawful State aid in the form of a lower ATT applicable to such flights. The Commission ordered Ireland to recover the incompatible State aid from the beneficiary airlines and indicated that the amount of the State aid was the difference (i.e. €8) between the lower rate of the air travel tax (i.e. €2) and the standard rate (i.e. €10) levied on each passenger. These decisions were appealed to the EU General Court (General Court).
ATT – Appeal against the Commission finding of no State aid case (transit and transfer passengers)
The Commission opened an in-depth State aid investigation into Ireland's exemption for airlines from paying air travel tax for transfer and transit passengers. Following an appeal, on 25 November 2014, the General Court annulled the Commission's 2011 findings that the exclusion of transfer and transit passengers did not result in State aid. The General Court found that the Commission should have initiated the formal State aid investigation procedure to gather any relevant information to verify whether the disputed measure was "selective" and allow interested third parties to present their observations. On 28 September 2015, the Commission opened an in-depth State aid investigation into the whether the tax exemption provides certain companies with a selective advantage in breach of State aid rules. The Commission investigation is examining in particular whether the exemption serves to avoid levying the tax twice on the same journey, and whether exempting transfer flights only when they were booked in a single-booking discriminates against airlines not applying a single-booking policy.
ATT - Appeal against the Commission finding of State aid case regarding ATT
Following an appeal, on 5 February 2015, the General Court annulled the Commission decision of 25 July 2012 in so far as it ordered the recovery of aid from the beneficiaries for an amount which is set at EUR 8 per passenger. The Commission and Ireland appealed that judgment to the EU Court of Justice (Court of Justice). The Advocate General agreed considered that the General Court had erred in its annulment of the Commission recovery order. The Advocate General considered that the role of recovery was to reassert the status quo prior to the State aid, and that a form of passing on defence (i.e. the extent to which the beneficiary airlines passed on any advantage to passengers) was not necessarily applicable. In any event, the Advocate General considered that passing on was a matter for private actions in the Courts and not for public enforcement designed to protect market competition. There were also cross-appeals by airlines which the Advocate General dismissed. The Advocate General recommended that the case be referred back to the Court, or in the alternative, that the airline appeals should be dismissed. The decision of the Court of Justice is awaited.
Healthcare in Ireland - Risk Equalisation Scheme
On 27 April 2015, contacts were made between the Commission and the Irish authorities regarding the prolongation of a risk equalisation scheme (RES) on the private medical insurance market in Ireland. The scheme consists of a compensation mechanism allowing for risk sharing between insurers relating to health insurance and intergenerational solidarity in Ireland. The previous RES scheme was introduced in 2013 following a decision by the Commission that the compensation granted through the scheme was compatible with the State aid rules and the RES scheme was approved by the Commission for the period between 1 January 2013 and 31 December 2015. On 2 December 2015, Ireland notified the new RES for the period 1 January 2016 until 31 December 2020 to the Commission for approval under the Treaty. The Irish authorities informed the Commission that the levels of credits and stamp duties applicable under the scheme are revised on a yearly basis and the new rates for the 2016 RES were applicable as of 1 March 2016. These rates will be revised and new rates will eventually apply as of 1 March 2017. Four submissions were made to the Commission on the notification. The Commission approved the new RES under the State aid rules on 29 January 2016.
Ireland – Production of Alumina
On 22 April 2016, the General Court confirmed the decision of the Commission ordering the repayment of tax exemptions granted by France, Ireland and Italy for alumina production. Ruling for the third time in these cases, the Court considered, and contrary to its first two judgments of 2007 and 2012, that the Commission’s decision was valid and that the State aid must therefore be recovered for the period between 3 February 2002 and 31 December 2003. The Commission had found that Ireland (as well as France and Italy) exempted undertakings from excise duty on mineral oils used for the production of alumina. The Commission later held that those measures, financed by State resources, conferred an advantage on the recipient companies, were selective, distorted competition and affected the EU's Single Market. Therefore, in 2005 it adopted a decision according to which the exemptions granted by France, Ireland and Italy in respect of heavy fuel oils used in the production of alumina constituted unlawful State aid. The Commission ordered the recovery of the aid granted between 3 February 2002 and 31 December 2003. An appeal on points of law may be brought before the Court of Justice against the decision of the General Court.
Credit unions in Ireland - Third prolongation of the Credit Union restructuring and stabilisation Scheme
On 16 October 2014, the Commission approved the restructuring and stabilisation scheme for the Credit Union Sector in Ireland (Scheme). The Scheme was approved until 1 April 2015. On 5 May 2015, the Commission approved a first prolongation of the scheme until 31 October 20152 and on 16 November 2015 a second prolongation until 30 April 2016. The scheme is based on the Credit Union and Co-operation with Overseas Regulators Act 2012 (2012 Act). The 2012 Act was prepared under the Programme of Financial Support for Ireland from the European Union and the International Monetary Fund. The 2012 Act provides for the establishment of a Credit Union Fund of €250 million to support the restructuring of credit unions and a further €30 million to support their stabilisation. It also provided for the establishment of the Credit Union Restructuring Board with the mandate of approving stabilisation plans as well as restructuring plans and recommended the provision of repayable financial support for restructuring proposals. On 4 May 2016, the Commission agreed to the third prolongation of the Scheme until 31 October 2016 under the State aid rules subject to certain commitments agreed to by Ireland (i.e. regarding viability, burden-sharing and avoiding distortions of competition). Any further prolongation will require the Commission's approval.
Credit Unions in Ireland - Ninth prolongation of the Credit Union Resolution Scheme H2 2016
On 20 December 2011, the Commission approved the Credit Union Resolution Scheme1 (CUR scheme). On the basis of subsequent notifications, the Commission approved eight prolongations of the CUR scheme by its decisions of 3 September 2012, 14 December 2012, 18 July 2013, 16 January 2014, 17 July 2014, 9 January 2015, 2 July 2015 and 17 December 2015 (until 30 June 2016). The CUR scheme is based on the provisions of the Central Bank and Credit Institutions (Resolution) Act 2011 which sets out the basis for and the nature of State financial support for credit unions in a resolution context. On 1 June 2016, the Irish authorities notified an additional prolongation of the CUR scheme until 31 December 2016. The prolongation did not introduce any new elements compared to the eighth prolongation decision. On 20 June 2016, The Commission approved the additional prolongation of the CUR scheme until 31 December 2016.
Ireland, State aid and future pointers
Ireland - Transfer pricing
An assessment by the Commission of Ireland's transfer pricing arrangements is expected soon. Transfer pricing refers to the prices charged for commercial transactions between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries. Recent State aid decisions of the Commission regarding local tax rulings on the application of transfer pricing rules in the Netherlands and Luxembourg highlight the Commission's focus on this area.
Ireland – the Energy Capacity Mechanisms Sector Enquiry
The energy capacity enquiry is ongoing and the Commission may soon make an assessment of the compatibility with EU state aid rules of Ireland's capacity mechanism.
Ireland – Financial services
In addition, financial institutions in Ireland continue to adapt to the State aid decisions of the Commission following the global financial crisis including the credit unions and these will likely continue to be a feature of the next 12 months as well.