Concept and Fundamentals of the Subsidies System in European Community Law
The subsidies system in European Community law encompasses all rules, principles, and procedures regarding the granting, control, and potential restriction of state aid by member states of the European Union (EU). The objective is to ensure fair competition within the internal market and to prevent market distortions. The relevant provisions are found especially in the Treaty on the Functioning of the European Union (TFEU), supplemented by numerous secondary legal acts and interpretative guidelines of the Union’s institutions.
Definition and Delimitation
In the context of European legality, subsidies are understood primarily as direct or indirect economic advantages granted by public authorities to companies or branches of production, which are capable of creating competitive advantages in the internal market. The term covers a broader scope than national subsidy law and is referred to as “state aid.”
Objectives of State Aid Law
The main objectives of community law on subsidies are:
- Ensuring undistorted competition within the internal market,
- Elimination and prevention of trade barriers between member states,
- Support of structural and regional policy objectives while maintaining competition.
Legal Basis
Primary Law Provisions (TFEU)
Prohibition under Article 107 TFEU
Article 107(1) TFEU contains the fundamental prohibition of state aid. Accordingly, all advantages granted by the state or from state resources which, by favoring certain companies or sectors of production, distort competition and affect trade between member states, are in principle incompatible with the internal market and therefore prohibited.
Exceptions to the Prohibition of State Aid
Article 107(2) and (3) TFEU specify substantive exemptions and the possibility to approve aid by way of exception. These include, among others:
- Social aid to individual consumers (para. 2a),
- Aid to compensate for damages caused by natural disasters or exceptional occurrences (para. 2b),
- Aid to promote certain economic sectors or regions, especially in relation to regional development, research, or environmental protection (para. 3).
Role of the European Commission
According to Article 108 TFEU, the European Commission is responsible for the monitoring and enforcement of state aid law. It examines aids for their compatibility with the internal market and can declare unauthorized or misused aids to be inadmissible.
Secondary Law Regulations and Guidelines
In addition to primary law, there are numerous regulations, directives, and notices that govern practical implementation and interpretation. These include in particular:
- General Block Exemption Regulation (GBER; Regulation (EU) No 651/2014): It sets out the conditions under which aid can be granted directly without prior Commission approval (“block exemptions”).
- De minimis Regulation: Regulates minor aid amounts, which are considered not to distort competition due to their low volume and are therefore exempt from the prohibition of aid.
- State Aid Guidelines, for example, for environmental and energy aid, rescue and restructuring aid, or state funding for research, development, and innovation.
Elements Constituting State Aid
To classify a measure as state aid within the meaning of the European subsidies system, the following elements must cumulatively be met:
Conferral of an Advantage
There must be an economic benefit which the beneficiary would not have received under normal market conditions. This may take the form of grants, tax privileges, guarantees, subsidized loans, or the provision of public infrastructure.
State Origin
The funds must come directly or indirectly from public budgets or resources controlled by the state. Advantages granted by companies financed through state resources are also covered by this criterion.
Selectivity
The measure must favor certain companies or sectors over other market participants (economic selectivity). Even if an advantage is granted to all companies in a sector or country, selectivity may still exist if objective differences are disregarded.
Distortion of Competition and Effect on Trade
There must be a potential or actual distortion of competition affecting trade between member states. An actual effect is not required; a potential impact is sufficient.
State Aid Control Procedures
Notification and Review Procedures
All intended state aids must be notified to the European Commission before implementation (“notification”). The Commission then examines whether the requirements for approval are met. The measure may only be implemented after a positive decision (“approval”).
Recovery of Unlawful Aid
If the Commission finds that unlawful aid has been granted, it may order its recovery. The recovery obligation serves to restore the competitive status quo ante. Decisions of the Commission are subject to judicial review by the courts of the EU.
Legal Standing and Legal Protection
In addition to the formal procedure by the Commission, private market participants are also entitled to assert violations of law, for example, by challenging aid decisions before national courts or Union courts. National courts are bound by the Commission’s finding of incompatibility.
Special Categories and Development Trends
Regional and Structural Aid
Regional policy is one of the most important areas of European subsidy law. Here, less developed regions are supported through targeted funding measures, provided the requirements of the TFEU and the relevant guidelines are observed.
Aid in Agriculture and the Transport Sector
Special rules apply to the areas of agriculture and transport, as these economic sectors are shaped by specific market regulations and support policies.
Crisis-related Aid
In economic emergencies, such as the COVID-19 pandemic, temporary aid frameworks are created that allow the member states additional support options—always in compliance with the principles of competition law.
Importance and Effects on the Internal Market
The subsidies system in European Community law makes a decisive contribution to securing the functioning of the internal market. Through close monitoring and targeted limitation of state aid, equal opportunities are ensured, market distortions are reduced, and a legally secure foundation for economic activity throughout the Union is established.
Literature References and Further Sources
- ECJ case law on state aid law (including Case C-730/79, Philip Morris; Case C-143/99, Adria-Wien Pipeline)
- European Commission: Guidelines and notices on state aid law (available at ec.europa.eu)
- Bungenberg/Heidemann (eds.): EU State Aid Law, Handbook, 2nd ed. 2021
- Calliess/Ruffert (eds.): TEU/TFEU, Commentary, current edition.
This article provides a structured overview of the subsidies system (European Community law) and covers all essential legal aspects from the perspective of European law.
Frequently Asked Questions
How are state aids notified to the European Commission?
According to Art. 108(3) of the Treaty on the Functioning of the European Union (TFEU), member states are obliged to notify the European Commission of planned state aid measures in good time. Notification must occur before the implementation of the measure and must include all relevant information required to assess compatibility with the internal market, especially information on the purpose, form, recipients, amount, and duration of the aid as well as the legal justification under state aid law. The Commission examines the notification for formal completeness and decides in the so-called preliminary procedure (preliminary examination) whether the measure is compatible with the internal market or whether a formal investigation procedure must be initiated. During the investigation procedure, there is generally a prohibition on implementation (“prohibition of execution”), i.e., member states may not grant aid before the Commission’s approval (“standstill clause”).
What are the legal consequences of granting an unauthorized aid?
If state aid is granted before it has been approved by the European Commission, it is considered unlawful aid. The Commission may, in the context of a formal investigation procedure, subsequently order the recovery of the granted aid to restore the original situation. This recovery obligation follows directly from Art. 108(2) and (3) TFEU and has been specified by the case law of the European Court of Justice (ECJ). The beneficiaries must repay the advantage received, including any accrued interest, to the public authorities. In addition, an unnotified aid may lead to infringement proceedings against the member state concerned pursuant to Art. 258 TFEU.
What is meant by the so-called “de minimis” rule in European subsidy law?
The de minimis rule, set out in, among others, Regulation (EU) No 1407/2013, provides that certain minor aids are considered so insignificant that they do not affect trade between member states and therefore do not constitute state aid within the meaning of Art. 107(1) TFEU. The upper limit for de minimis aid is 200,000 euros per company within a three-year control period (lower thresholds apply in the transport sector). Such aids do not require notification, but they are subject to strict accumulation checks to ensure that the threshold is not exceeded. Beneficiary companies must keep records of the aid received and provide information to the authorities.
What role do the transparency register and publicity obligations play in European subsidy law?
Transparency and publicity obligations are important instruments for the control and monitoring of state aid law. They form a component of virtually all state aid rules of the European Union and have required member states, since July 2016, to enter individual aids exceeding 500,000 euros into a central, publicly accessible state aid register. The aim is to enable competitors, the Commission, and the public to monitor compliance with state aid rules. These publications must contain specific information such as the type, recipient, amount, region, and purpose of the aid. Failure to fulfill this obligation can result in sanctions.
To what extent is the right of competitors to bring actions shaped in state aid control law?
Competitors who consider themselves to be adversely affected in their rights by the granting of state aid to a rival can seek legal remedies. After a positive state aid decision, they may turn to the Union courts under Art. 263 TFEU. However, this requires direct and individual concern (“Plaumann formula”). Furthermore, before national courts, the nullification or prohibition of the aid may be claimed, for example due to the prohibition of granting unnotified aid. National courts are often required to enforce rights derived from Union law, such as ordering recovery, injunctive relief, or allowing damages claims.
How are existing aids and existing state aid schemes treated under European state aid law?
Existing aids, meaning aids granted or introduced before a state’s accession or before the TFEU came into force, are considered existing aids under Art. 108(1) and (2) TFEU and generally enjoy protection until the Commission takes action. Existing aid schemes may be reviewed by the Commission at any time but continue to apply until an incompatibility is found. The Commission may require the suspension or modification of the measure, and only then does the recovery obligation apply to any subsequent payments. New aids, on the other hand, must be notified before implementation and do not enjoy any protection.
When does an “incentive effect” of state aid exist within the meaning of state aid law?
The incentive effect is a central criterion in assessing the compatibility of state aid with the internal market. It exists when, without the state aid, the beneficiaries would not have invested at all, to the same extent, or in the same location, or would not have initiated research and development activities. The decision to start the investment or project must be made after the application for aid and not before. The European Commission examines, as part of its assessment, whether the proposed measure actually provides the intended behavioral incentive for the beneficiaries and does not merely result in a windfall gain. This is verified through the submission of detailed cost–benefit analyses and project descriptions.
