State aid is an important area of European competition law which has come under greater scrutiny than ever in the current economic downturn. State aid arises where an EU Member State uses state resources (directly or indirectly) to confer a "selective advantage" on any economic operator, where this would distort competition and affect cross-border trade. State aid is unlawful – and may have to be repaid by the recipient – unless it is notified by the national government to the European Commission for prior approval. Effective legal advice can prevent substantial financial losses for the recipients of State aid, while providing opportunities for companies which believe that a competitor may have received unlawful state aid.
Common situations in which companies can benefit from instructing specialist State aid lawyers include working on state-funded or state-guaranteed projects in an EU Member State, receiving aid in response to the economic crisis, and challenging a tax or a subsidy to a competitor.
Issues upon which Herbert Smith regularly advises include the following:
Tax benefits to attract investment in major projects
Competing EU countries offer generous tax breaks to attract inward investment on major projects. Failure of the investing company to ensure that the Member State complies with EU state aid law may have severe financial consequences. The company leaves itself exposed to the risk that the European Commission may oblige the repayment of aid to the investing company, potentially resulting in a conflict of interest between the Member State and the investor: if the infrastructure has already been built it would be in the Member State's interest to obtain repayment.
State guarantees for loans
Banks often finance projects that are guaranteed by the state. Such a State guarantee can qualify as State aid and the failure of the bank to ensure that it is provided in accordance with State aid rules potentially exposes the bank to the risk that the guarantee cannot be enforced.
Environmental taxes
Governments are increasingly making use of environmental taxes, ie, taxes structured to impose a higher tax burden on polluting products or processes. Countries risk violating state aid law if taxes appear to benefit domestic industries. In this situation, the law may allow companies that paid the tax to reclaim it. Alternatively, companies that benefited from an exemption may be at risk of having to pay the tax retroactively.
Outside of the EU, State aid is subject to scrutiny in member states of the World Trade Organisation ("WTO"). WTO disciplines on subsidies can have a significant impact on the business environment, as demonstrated by the ongoing Boeing-Airbus dispute between the EU and the US.