state aid & EU internal market regulation | In Principle

More and more companies from outside the EU are operating on the internal market—investing, acquiring local companies, winning public tenders. Until recently, they could operate with the advantage of support from their home countries. But now, under the Foreign Subsidies Regulation, the European Commission can examine their situation to ensure fair competition on the internal market.

Usually, before a business decision is made to merge with or acquire a company, its financial and legal situation is analysed. In this assessment, sometimes state aid is overlooked and not considered a significant risk factor. However, M&A transactions almost always affect the conditions of aid obtained by the company from public funds. The most common source of risk is a change in the status of the business entity (which could mean that the aid becomes improper) or failure to comply with procedures under aid agreements. A finding that state aid was undue or misused may result in an obligation to repay the aid, as well as other legal and financial consequences.

Members of a company’s management board can be jointly and severally liable for the company’s obligations, including public-law liabilities, such as repayment of public funds granted for project financing. This liability can apply to both active and former members who were in office when the obligations arose. It is worth remembering when members of the management board can be held liable for the company’s obligation to repay financing, and the steps they can take to avoid this liability.

The automotive industry is one of the pillars of the European economy, with a long tradition and a significant contribution to job creation and industrial activity. But the sector is facing difficulties, impacting even leading manufacturers. As the automotive industry is an important part of the energy transition, a question increasingly being asked is whether the industry can count on public financial support in the transition, and if so, what the funds are earmarked for.

Pursuant to the EU’s Foreign Subsidies Regulation (2022/2560), the European Commission may, at its own initiative, investigate any foreign subsidy covered by the regulation, in any sector of the economy, relying on information from all available sources. The Commission may also review foreign subsidies based on advance notification by the company, especially in the case of large concentrations and procurement procedures exceeding certain thresholds.

For years, the European defence industry has been oriented towards peacetime production, resulting in low capacity. The war in Ukraine quickly exposed this, as well as the severe underinvestment which the EU’s defence sector has suffered from for years. Optimistically, the growing demand for defence equipment has also quickly raised the awareness that production capacity needs to be increased. But now this conviction must translate into action, first of all in the form of increased financial support.

Granting of state support in the EU, which businesses are increasingly taking advantage of, is based on a set of common principles. Mainly these include compatibility with the internal market, achievement of an objective of common interest, a clear incentive effect, proportionality, and full transparency. Violation of these rules when granting public support may mean a grant of unlawful state aid, incompatible with the common market and subject to recovery.

On 3 May 2024, Poland marked the third anniversary of submission of the first version of its National Recovery Plan to the European Commission. On the eve of that date, information was released on disbursement of the first funds under the plan, in the amount of c. EUR 6.3 billion. But this is not the only good news for those interested in financial support from European funds. Legislative work is also underway to help absorb funds the National Recovery Plan and other European funds.

In 2020, the EU’s General Court held in T-745/17, Kerkosand v Commission, that SME status is determined based on three criteria verifiable in two successive accounting periods (known as the “two accounting years rule”). It has been four years since the General Court issued this ruling, but the authorities acting as intermediate or managing institutions under EU programmes, as well as national administrative courts (albeit with commendable exceptions), continue to take the position that changes in a beneficiary’s corporate ownership structure (acquisition of a majority of its shares) result in automatic loss of SME status on the date of the change.

The Council of Ministers has adopted an amendment to the Programme for Supporting Investments of Strategic Importance to the Polish Economy for 2011–2030, under Resolution 91/2023 of 5 June 2023. The changes will be in effect until the end of the support period (2025).

Starting 12 July 2023, the European Commission can initiate investigations into financial support granted to undertakings by countries outside the European Union, pursuant to the Foreign Subsidies Regulation (FSR). The purpose of the regulation is to combat distortions in the EU single market caused by foreign subsidies, while keeping the EU open to trade and investment.

Rail infrastructure and the land on which it is located are exempt from property tax in Poland. Is that unauthorised state aid? The answer from the Court of Justice could have far-reaching consequences.