The European Commission last week launched a detailed investigation into tax benefits allegedly received by Starbucks in the Netherlands. The purpose of the investigation is to establish whether Starbucks, by profiting from a “favourable tax regime”, is receiving state aid from the Dutch State. If the investigation shows that Starbucks is indeed receiving state aid that is not exempted from notification, the Dutch State is obliged to reclaim the benefit wrongly received by Starbucks. This case illustrates the potentially serious consequences of granting state aid to private companies. Another potentially serious consequence of granting state aid is that the juridical act underlying the granting of illegal state aid can be declared void.

The rules on state aid are based on the notion that companies must compete with each other by their own efforts in a free-market economy. It is not consistent with a free-market economy system that governments grant benefits to certain companies that give them an edge over others. The European prohibition on state aid (recorded in Section 107 of the TFEU) applies to aid that may affect trade within the European Union. The Wet markt en overheid(Public Enterprises Market Activities Act) applies to competition by Dutch public enterprises. The transitional regime in question also ends on 1 July, incidentally.

State aid is involved if the following conditions are met:

  • The aid is granted by the state or is publicly funded.
  • The aid gives the company in question an economic benefit that it would not have obtained in a normal commercial setting.
  • The benefit is selective, meaning that it benefits a specific company or specific companies.
  • The benefit distorts or threatens to distort competition and affects (or potentially affects) trade between EU Member States.

The Market Economy Investor Test (“MEIT”) is relevant in assessing whether aid gives rise to an economic benefit. That test means that state aid is involved if a State grants benefits that are not in line with market practices (e.g. a loan at an interest rate far below the rate that a bank would charge). No state aid is involved if the conditions of the aid are in line with market practices.

Procedure

In principle, Section 108 of the TFEU obligates Member States to notify state aid to the European Commission. The Commission then investigates whether the state aid is consistent with “the internal market”. The state aid measure may be implemented only after it has been approved by the Commission (known as the “standstill obligation”).

The investigation whether notified state aid is consistent with the internal market usually involves a great deal of time and effort. To prevent the European Commission from having to consider all forms of aid, exemptions from the notification requirement apply. The Commission recently adopted a new General Block Exemption. That General Block Exemption is the outcome of a state aid measures reform package introduced in the past (State Aid Modernisation (“SAM”)). The General Block Exemption that will enter into force on 1 July 2014 provides for a relatively wide range of state aid measures that do not have to be notified to the European Commission. It is expected that approximately 75% of state aid measures need not be notified under the General Block Exemption. The General Block Exemption will therefore make it easier for governments to grant aid without notification.

General Block Exemption conditions

The General Block Exemption applies to many types of state aid, including regional aid, investment aid for the SME sector, aid for the installation of broadband networks, for the protection of the environment and for employees with an unequal position on the job market. The General Block Exemption sets out specific conditions for each of these types of aid that must be met in order to qualify for the exemption. A maximum amount is specified for each type of aid which, for instance, may vary from €2 million for consultancy aid for SMEs to €100 million for regional investment aid. Other conditions for exemption are that the aid must be transparent (e.g. in the form of a guarantee or a loan) and must have a stimulating effect

Practical consequences

State aid that does not meet the conditions of the General Block Exemption is not prohibited by definition. The European Commission stated earlier this month, for instance, that the state aid given to Airport Eelde is consistent with the internal market. State aid that is not exempted from notification must, however, be notified to the European Commission and its consistency with the internal market must be investigated. To avoid that often timely and costly administrative process, it is worthwhile to organise the state aid measures in such a way that they meet the conditions of the General Block Exemption.