A non-profit provider of free services which are in competition with similar services on the market is an undertaking.
Introduction
The decentralisation of State aid policy of the past decade has made it easier for the Member States to achieve their public policy objectives. By using blog exemption regulations and decisions, they can grant State aid faster, without having to wait for prior Commission approval, and they can do so at a lower administrative cost. The Commission has also been able to focus on important cases, by not having to commit resources to otherwise routine measures.
But, decentralisation has also had a hidden cost. There is less transparency in what Member States actually do and less legal certainty that what they do is fully compliant with EU State aid rules.
Therefore, Commission decisions that assess State aid measures on the basis of a block exemption regulation or decision are not only rare, they are also very useful because they improve our understanding of how the Commission interprets the provisions of such regulations or decisions.
A case in point is Commission decision in case SA.49313.[1] The case concerned compensation for the provision of services to deaf and mute persons in Italy.
The Commission received a complaint in 2017 about alleged unlawful aid of EUR 1 million to Ente Nazionale Sordi [ENS], the Italian association for deaf-mutes, for the development and operation of the so-called CAPS project [Centro per l’Autonomia della Persona Sorda (Centre for the Autonomy of Deaf People)].
After several contacts between the Commission and the Italian authorities, Italy notified in May 2021 the measure in question under the SGEI Decision 2012/21. This Decision is like a block exemption regulation. It relieves Member States from the obligation of prior notification of measures that fully comply with the requirements of the Decision.
ENS is a not-for-profit organisation, in the form of association with legal personality, that supports deaf and deaf-mute people and promotes their active participation in society. ENS is entrusted by law with certain social tasks and is subject to supervision by the Ministry of Employment and Social Policy. Any profit that ENS makes must be re-invested into its social activities.
The CAPS project is a free-of-charge online platform for the provision of video-remote interpreting [VRI] services in Italian sign language [LIS]. The CAPS project offers services for the benefit of individual persons.
The complainant argued that the CAPS project was economic in nature and that ENS was an undertaking that did not provide a service of general economic interest [SGEI].
Interestingly, Italy notified the measure under the SGEI Decision for purposes of legal certainty. Even though it believed that the funding for the CAPS project did not constitute State aid, in case it would be qualified as State aid it could still be regarded as compensation for a genuine SGEI in compliance with the SGEI Decision 2012/21.
Existence of State aid
Since there was no doubt that the measure was financed by state resources, that it conferred a selective advantage [Italy did not provide any evidence that the funding to ENS, as an SGEI provider, complied with the four Altmark conditions] and that it could affect trade and distort competition, the Commission focused its analysis on whether ENS was an undertaking.
First, the Commission acknowledged that “(72) ENS’ activities essentially consist in pursuing social and institutional goals related to the social development of deaf people within the society. In particular, ENS represents, promotes and values the dignity, role and human development of deaf people and their civil rights by engaging inter alia in volunteering activities, educational and health-related initiatives, collaborations with public institutions and charity events.”
“(73) In addition, ENS’ Statutes clearly foresee a ban on the distribution of profits (including in case of possible indirect distribution) […] In fact, ENS’ Statutes set out that profits, funds and reserves should be used for the fulfilment of ENS’ institutional activities as well as other related ancillary activities.”
But then, the Commission went on to noted that the “(74) CAPS project to be carried out by ENS […] would also include the provision of a VRI service on the Italian territory. In this regard, the Commission notes that […] there is a number of undertakings that provide, on a fee-paying basis, VRI services, including services targeted at deaf people and using Italian Sign Language, on the Italian territory. In addition, based on publicly available information it appears that VRI services are also being offered on the whole European territory.”
“(75) The application of the State aid rules does not depend on whether the entity is set up to generate profits, as non-profit entities can also offer goods and services on a market. In addition, the classification of an entity as an undertaking is always relative to a specific activity. In particular, an entity that carries out both economic and non-economic activities is to be regarded as an undertaking only with regard to the former.”
“(76) In light of the above, notwithstanding the fact that ENS does not appear to constitute an undertaking within the meaning of Article 107(1) TFEU when carrying out its social and institutional activities, the Commission cannot exclude that once ENS will be providing the envisaged CAPS project it may be offering services on the market for the provision of VRI services for deaf people. In this respect, the fact that the CAPS project will not be profit-based and will be provided for free to everyone, as opposed to other VRI services, does not seem sufficient to exclude that the service at issue will be provided on a market in competition with other operators. In accordance with the case-law, the fact that the offer of goods or services is made on a not-for-profit basis does not prevent the entity which carries out those operations on the market from being considered an undertaking, since that offer exists in competition with that of other operators which do seek to make a profit. Moreover, services normally provided for remuneration are services that may be classified as ‘economic activities’. The essential characteristic of remuneration lies in the fact that it constitutes consideration for the service in question. In this particular case, as the complainant argues, services such as the CAPS project, are provided normally for remuneration on the market. In addition, the economic nature of an activity does not depend on the service concerned being paid for by those for whom it is performed. The Commission, thus, cannot exclude that ENS constitutes an undertaking within the meaning of Article 107(1) TFEU when acting as the provider of the CAPS project.”
Once the Commission found the measure to constitute State aid, it proceeded to consider its compatibility with the internal market.
Compatibility on the basis of Decision 2012/21
First, the Commission explained why the compatibility of the measure was assessed on the basis of Decision 2012/21.
“(89) The Italian authorities envisage a payment to ENS of a maximum of EUR 1 million for the creation and annual functioning of the envisaged CAPS project, that is a service aimed at including socially vulnerable groups of people such as deaf-mutes. Therefore, such compensation falls within the scope of Article 2, letter c), of the SGEI Decision.”
“(90) Although under the SGEI Decision, Member States are exempted from the prior notification obligation provided for in Article 108(3) TFEU, Member States can notify any planned compensation such as the one envisaged for ENS in relation to the CAPS project for reasons of legal certainty. In this regard, according to recital 26 of the SGEI Decision, “’exemption from the requirement of prior notification for certain services of general economic interest does not rule out the possibility for Member States to notify a specific aid project. In the event of such a notification, or if the Commission assesses the compatibility of a specific aid measure following a complaint or ex-officio, the Commission will assess whether the conditions of this Decision are met.’”
Compatibility criteria
- Genuine SGEI: The measure addresses a social need, the service is provided universally to all those in need and fills a gap on the market in the sense that there are no comparable market services offered on similar terms.
Article 2(1)(c) of the SGEI Decision: Compensation may be granted for SGEI meeting social needs [health, childcare, social housing, care and social inclusion of vulnerable groups].
“(93) The CAPS project qualifies as a genuine SGEI that is organised and remunerated in compliance with the SGEI Decision, based on the following reasons:
First, the envisaged CAPS project will be a service […] within the meaning of Article 2(1)(c) of the SGEI Decision, as it is aimed at meeting “the essential needs of deaf people”, in particular in light of its purpose and characteristics (see recitals (22) to (26) and (45) above), notably to promote and support the social development of deaf people and facilitate their integration in the society. Second, while VRI services are available on the market at a cost (in Italy at around EUR 50 per hour), ENS will provide the CAPS project for free and it will have an universal character (i.e. it will be accessible both to deaf people and people who want to interact with them, including foreigners), not only available to ENS’ members. Hence, while there are VRI services available on the market, those services are not provided in comparable conditions with the CAPS project.”
“(94) First, the envisaged CAPS project will be a service […] within the meaning of Article 2(1)(c) of the SGEI Decision […] Second, while VRI services are available on the market at a cost (in Italy at around EUR 50 per hour), ENS will provide the CAPS project for free and it will have a universal character (i.e. it will be accessible both to deaf people and people who want to interact with them, including foreigners), not only available to ENS’ members. Hence, while there are VRI services available on the market, those services are not provided in comparable conditions with the CAPS project.”
“(95) In this regard, the Commission concludes that no manifest error has been made by the Italian authorities as regards the qualification of the CAPS project as an SGEI.”
- Tasks entrusted by an official act
Article 4 of the SGEI Decision: The SGEI is entrusted by an official act that includes a) the content and duration of the PSO; b) the undertaking and territory concerned; c) any exclusive or special rights; d) the compensation mechanism and the parameters for calculating the compensation; e) the arrangements for avoiding and recovering of overcompensation; and f) a reference to Decision 2012/21.
The Commission found in paragraphs 97-98 that the CAPS project complied with Article 4 of the SGEI Decision.
- Duration of the period of entrustment
Article 2 of the SGEI Decision: The period of entrustment should normally not exceed 10 years.
Since in the case of the CAPS project the entrustment was only for a period of 18 months, the Commission concluded in paragraph 102 that it was compliant Article 2 of the SGEI Decision.
- Amount of compensation
Article 5(1) of the SGEI Decision: The amount of compensation shall not exceed the net cost of the SGEI plus reasonable profit.
- No overcompensation and control of it
Article 5(10) & Article 6 of the SGEI Decision: Any overcompensation must be recovered & overcompensation must be prevented.
The compensation for the CAPS project was to be calculated according to the “the real costs methodology”. “ (105) In particular, the Italian authorities clarify that the measure shall be paid in accordance with the methodology for the reimbursement of the net costs effectively incurred by ENS when discharging the CAPS project. In this sense, only the expenditure which is effectively incurred by the beneficiary and that is duly entered into the accounts and reported in coherence with the feasibility project prepared by the Italian authorities will be reimbursed. The Italian authorities in particular stress that under no circumstances the total amount paid will exceed the expenditure effectively incurred and reported. In addition, since the service is provided for free, it will not generate any revenue and therefore no reasonable profit will be foreseen for the beneficiary. In this regard, the Italian authorities confirm that the compensation mechanism ensures compliance with Article 5 of the SGEI Decision, that the provision of the service will not generate any profit for ENS, as the service will be entirely free of charge for the users, and that therefore ENS will not be overcompensated.”
“(106) In particular, Articles 5(3) to 5(6) of the Draft Act set out a mechanism for the control of the overcompensation in line with Article 6 of the SGEI Decision. In fact, payment of the relevant amounts will be subject to administrative and accounting checks of the general statement of the expenditure incurred in implementing the activities covered by the measure. In this respect, the Draft Act sets out a recovery mechanism in case those administrative and accounting checks demonstrate that compensation received is in excess of the amount which should be determined in accordance with Article 5 of the SGEI Decision (see recital (109) below).”
“(107) The Italian authorities explained that the EUR 1 million grant shall be paid upon submission by ENS of the appropriate payment requests”.
“(108) In case the final expenditure incurred for carrying out the activities related to the project exceeds the maximum amount of the contribution set out in EUR 1 million ENS shall not be entitled to request any reimbursement for the additional expenditure.”
“(109) If, on the contrary, following the administrative and accounting checks described above, the final eligible expenditure will be lower than that paid under the first and second tranches, Article 3 and 5(6) of the Draft Act foresee that ENS will have to reimburse the Ministry of Employment and Social Policies with the difference between what it has already received and what has actually been recognised at the end of the verification of the project activities, in accordance with Article 4(e) of the SGEI Decision, in order to avoid any overcompensation. In addition, statutory interests will be charged on that higher amount in accordance with Article 2033 of the Italian Civil Code.”
The Commission found that the arrangements described above complied with the requirements of Decision 2012/21. It is worth noting that Italy committed to charge interest on recovered overcompensation. Unfortunately, Decision 2012/21 is silent on whether interest must be charged on recovered overcompensation, as is the normal practice with recovery of incompatible State aid. Perhaps this is to be understood without any extra explanation. But the Commission would have contributed to a better understanding of State aid rules, had it made an explicit comment in paragraph 109 on whether interest was required by EU rules.
- Separation of accounts
Article 5(9) of the SGEI Decision: If the SGEI provider carries out activities falling both inside and outside the scope of the SGEI, it must show separately the costs and receipts associated with the SGEI and those of other services.
“(112-113) ENS must commit to keep separate accounts as set out in Article 5(9) of the SGEI Decision, in particular separate accounts showing the costs generated by the service separately. […] in order to ensure the traceability of the financial flows relating to the CAPS project, ENS must have in place for the activities referred to in the CAPS project a separate accounting system that complies with all relevant laws and applicable accounting standards (see recital (52) above). In addition, the Circular provides for definitions and criteria with regard to expenditure eligibility and the appropriate cost ceilings and establishes the operational, accounting and financial documentation to be submitted during the administrative and accounting verification of the general statement of expenditure. Furthermore, the system of account separation involves the organisation of a specific project file and the traceability of the expenditure relating to the operation in the accounting system of the ENS. In this respect, ENS has to fulfil a number of obligations related to the adoption of a system of project cost accounting broken down according to the expenditure items provided for in the feasibility project in order to list and quantify the expenditure that will gradually be carried out in the execution of the project activities, report the CAPS’ expenditure by presenting the documentation provided for in the Circular, and have a bank or post account specifically dedicated to the realisation of the CAPS project’s activities. All financial movements relating to payments for goods and services necessary for carrying out these activities and for the financial management of the grant must be recorded in that account and carried out exclusively by means of bank or postal transfer or other means of collection or payment which enables the operations to be fully traceable, without prejudice to the obligations to document on the incurred expenditure.”
“(115) Finally, the allocation of the common costs is set out in the Circular and lays down methods of cost allocation that are based on the use of reasonable and objective allocation criteria, which ensure that only an appropriate proportion of the common costs is allocated to the CAPS project. These include, depending on the nature of the activities, the number of project staff in relation to the total staff, the hours of use or the square metres of the premises used for the project in relation to the total space used for the various activities of ENS, the proportion between the value of the project and the total turnover of the entity.”
The Italian authorities also committed to respect the requirements for transparency and publication of the relevant aid measure.
Given that all of the conditions of Decision 2012/21 were complied with, the Commission declared the measure compatible with the internal market on the basis of Article 106(2) TFEU.
[1] The full text of the Commission decision can be accessed at:
SA_49313_C08FE080-0100-CC64-960D-C75C3DCBA06C_271_1.pdf (europa.eu)
