Introduction
Very often Member States claim that subsidies they grant as compensation for the costs incurred by the recipient undertakings do not confer an advantage to them and therefore do not constitute State aid.
The Court of Justice of the EU [CJEU] has on the whole rejected this claim even if the subsidy is less than the costs which are incurred. The reduction of a disadvantage is an advantage in the meaning of Article 107(1) TFEU. However, the CJEU has also stated on numerous occasions that compensatory payments do not constitute State aid only in two situations: when they satisfy the four Altmark conditions in the context of public service obligations and when the state is liable for damage it has caused. The state is not liable when it limits what undertakings may do by acting as a regulator or by exercising its legislative powers.
It is therefore puzzling why the reply the CJEU gave on 13 March 2025 to a request for a preliminary ruling on whether a compensatory measure was State aid was hesitant and qualified. The state – Italy in this case – had not imposed any public service obligations, nor had it incurred any liability. The reply was in the context of a judgment in joined cases C-746/23 and C-747/23, Cividale, Flag, & Duferco v Ministero dello Sviluppo Economico & Others concerning proceedings that had been initiated by steel companies Cividale, Flag and Duferco against the Italian Ministero dello Sviluppo Economico [(MISE) Ministry of Economic Development] and other Italian public authorities.[1] MISE had authorised payment of financial contributions linked to the participation of the three companies in a programme for the rationalisation of the steel sector. The contributions were smaller than the amounts requested by the companies.
Some twenty-five years ago, Italy designed a programme for the managed reduction of the iron and steel sector which experienced excess capacity. The programme provided for contributions to incentivise companies to close their surplus facilities and production sites.
In 2003, MISE attempted to notify the rationalisation programme, as planned aid, to the Commission. However, that notification was withdrawn following indications from the Commission that any aid would be incompatible with the internal market. For that reason, MISE did not complete the notification procedure.
At that time, Cividale and its subsidiary, Flag, applied for public funding to offset the cost of scrapping certain of their production facilities. However, in May 2013, MISE authorised only the payment of EUR 200,000 as de minimis aid. Then, Cividale and Flag initiated legal proceedings against that decision, arguing that the financial contribution at issue was not State aid, but merely compensation which conferred no economic advantage. Duferco also requested funding that was refused and also lodged an appeal against the decision of MISE.
The referring Italian court submitted a number of questions to the Court of Justice of the EU [CJEU] seeking in essence clarification on whether the financial contributions in the context of the rationalisation programme constituted State aid. The referring court was uncertain about their classification as State aid because those contributions were subject to certain limits in relation to the value of the closed production facilities.
The notification obligation and the concept of State aid
The CJEU stressed, first, the significance of compliance with the notification obligation in Article 108(3) TFEU and then recalled the components of the concept of State aid.
“(31) The notification requirement is one of the fundamental features of the system of control put in place by the FEU Treaty in the field of State aid. Within that system, Member States are under an obligation, first, to notify to the Commission each measure intended to grant new aid or alter aid within the meaning of Article 107(1) TFEU and, second, not to implement such a measure, in accordance with Article 108(3) TFEU, until that EU institution has taken a final decision on the measure”.
“(33) The classification of a national measure as ‘State aid’, within the meaning of Article 107(1) TFEU, requires all the following conditions to be fulfilled. First, that measure must constitute an intervention by the State or through State resources. Second, that intervention must be liable to affect trade between Member States. Third, it must confer a selective advantage on the beneficiary. Fourth, it must distort or threaten to distort competition”.
“(34) It is necessary, more specifically, to examine whether the financial contributions at issue in the main proceedings are capable of constituting for those who receive them an advantage which distorts or threatens to distort competition and trade between Member States, bearing in mind that the referring court has full jurisdiction to examine whether all the conditions referred to in the preceding paragraph of the present judgment are satisfied.”
Effect on trade
In response to a question by the referring court, the CJEU began its analysis by examining the possible impact on trade.
“(35) In the first place, […] it is not necessary for an aid measure to have a real effect on trade between Member States or to create an actual distortion of competition. It is sufficient that that measure is liable to affect such trade and distort competition […] In addition, an intervention by the State or through State resources is liable to affect trade between Member States and to distort or threaten to distort competition where, at the time of entry into force of an aid measure, there is a situation of effective competition on the relevant market […] there being no need for the recipient undertakings themselves to be involved in trade between Member States”.
It is puzzling why at this point the CJEU referred to the presence of “effective competition”. In the judgment it cited a case which concerned the electricity market that at the time was only partially liberalised. But in the present case, the CJEU went on to find that there was trade in steel products. So there was competition on the Italian steel market. Afterall, without competition there would be no surplus production capacity.
The CJEU went on to recall that “(36) there is no threshold or percentage below which it may be considered that trade between Member States is not affected. The relatively small amount of aid or the relatively small size of the undertaking which receives it does not as such exclude the possibility that trade between Member States might be affected”.
“(37) In the present case, it is common ground that the iron and steel foundries sector was open to competition and was the subject of cross-border trade at the time when the programme providing for the financial contributions at issue in the main proceedings was implemented.”
“(38) It follows that, subject to verification by the referring court, it is apparent from the file before the Court that the payment of the financial contributions at issue in the main proceedings was liable to affect trade between Member States and competition.”
Advantage
Then, the CJEU turned its attention to the main question which was whether the contributions conferred an advantage to the three steel companies.
“(39) In the second place, […] the referring court is uncertain whether the financial contributions at issue in the main proceedings constitute an advantage, given that they are linked to the reduction, or even the disappearance, of the production capacity of the recipient undertakings, and do not correspond to the value which the production facilities to be destroyed could have after negotiation.”
“(40) In that regard, it must be recalled that any State measure which, whatever its form or objectives, is likely to favour one or more undertakings directly or indirectly, or which confers an advantage on them which they would not have been able to obtain under normal market conditions, constitutes an advantage within the meaning of the case-law”.
“(41) Accordingly, the agreed benefits may include positive benefits, such as subsidies, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking”.
Then the CJEU referred to the behaviour of a market operator. “(42) By contrast, the concept of ‘aid’, within the meaning of Article 107(1) TFEU, cannot cover a measure granted in favour of an undertaking through State resources where that undertaking could have obtained the same advantage in circumstances which correspond to normal market conditions. The assessment of the conditions in which such an advantage has been granted is, in principle, carried out by applying the market economy operator principle, unless there is no possibility of comparing the State conduct at issue in a particular case with that of a private operator because, for example, that conduct is inseparably linked with the existence of infrastructure that no private operator would ever have been able to create, or the State acted in its capacity as a public authority […] In other words, the applicability of the private investor test ultimately depends, therefore, on the Member State concerned having conferred, in its capacity as shareholder and not in its capacity as public authority, an economic advantage on an undertaking. As the Court has already had occasion to point out, the nature and subject matter of the measure at issue, its context, the objective pursued and the rules to which it is subject may, in particular, be relevant”.
“(43) It is on the basis of those factors that the referring court, which alone has jurisdiction to establish and assess the facts of the dispute in the main proceedings and to assess the exact scope of the national provisions, will be called upon to determine whether the financial contributions at issue in the main proceedings are liable to confer an advantage on the undertakings to which they are addressed. That said, the Court remains competent to provide the referring court with guidance having regard to the documents relating to the main proceedings and the written observations which have been submitted to it, in order to enable that court to give judgment […] In that context, it is appropriate to provide the referring court with the following guidance with a view to enabling it effectively to give judgment in the disputes before it.”
“(44) First, it is in no way apparent from the file before the Court that the decisions to grant the financial contributions at issue in the main proceedings were taken by the Italian State as a private economic operator. Consequently, subject to verification by the referring court, it does not appear possible, in the present case, to apply the private operator test in order to determine whether those contributions constitute a selective advantage.”
“(45) Second, it appears to follow from the objectives set out in [the relevant Italian law], namely improving the quality of production, in particular by reorganising production capacity and developing conditions conducive to its concentration, that the financial contributions at issue in the main proceedings seek to reduce, at least in part, the burdens associated with ceasing production in a sector characterised by a certain production overcapacity. Such charges form part of the charges which are normally included in the budget of an undertaking”.
“(46) Third, it should be noted that, according to the referring court, the financial contributions at issue in the main proceedings are calculated on the basis of the book value of the production facilities dismantled by the applicant undertaking, after deduction of depreciation already implemented, or, if higher than the previous book value, the current value of the fixed cost contribution margin of the output of those facilities for a period prior to the adoption of the programme establishing those financial contributions.”
“(47) The referring court appears to infer therefrom that the financial contributions at issue in the main proceedings are of an amount lower than the inherent value of the dismantled units, since that value has to be calculated, under normal market conditions, by cumulating the value of the investment which the dismantled production unit comprises and the value resulting from the capacity of that unit to generate income.”
“(48) However, such a circumstance is not sufficient, in the present case, to rule out there being an advantage, within the meaning of Article 107 TFEU. It is hard to conceive that a production unit could be sold at a price which reflects its inherent value where the market concerned is characterised, as in the present case, by overproduction. Accordingly, it appears likely that the financial contributions paid in the context of a programme which, as is the case for the programme at issue in the main proceedings, is intended to encourage undertakings to dismantle certain production units present on a market characterised by overproduction would be economically more advantageous than the consideration which those undertakings could have obtained, in the conditions specific to such a market, for discarding those units.”
Even though, as is evident in the next paragraph, the CJEU found that the contributions conferred an advantage, perhaps it should have been more absolute in its analysis in the preceding paragraph. Regardless of the value of the scrapped production units, the Italian state received no return on its payments. Therefore, it acted as a public authority. The payments conferred an advantage precisely because the cost of closure of production units is normally borne by companies themselves. And, the steel companies, being rational operators, would not voluntarily accept payment for scrapping production units that could generate more revenue than the amounts paid by the state. Indeed, I do not see how in the alternative situation of the production units being more valuable would have altered the conclusion that the payments conferred an advantage. In that hypothetical alternative situation, the payments would reduce the net losses of the steel companies. That is an advantage too!
At any rate, the CJEU “(49) concluded, subject to verification by the referring court, that the financial contributions at issue in the main proceedings constitute an economic advantage which the recipient undertakings would not have been able to obtain under normal market conditions”.
Conclusion
Before it concluded, the CJEU added that, “(50) fourth, subject to verification by the referring court, it is also not apparent from the file before the Court that the beneficiaries of the financial contributions at issue in the main proceedings are not ‘undertakings’, within the meaning of Article 107(1) TFEU, whose business is the only one referred to in that provision”.
The overall answer of the CJEU was that “(52) Article 107(1) TFEU must be interpreted as meaning that the financial contributions provided for in the context of a rationalisation programme from which undertakings in the iron and steel foundries sector may benefit, which amount to either 100% of the book value of the production facilities dismantled by the applicant undertaking, after deduction of depreciation already implemented, or of the current value of the fixed cost contribution margin of the output of those facilities for a period prior to the adoption of that programme, if that latter value is higher, where the reduction in production capacity is accompanied by a merger or agreements between undertakings in that sector, one of which is that applicant undertaking, providing, inter alia, for an appropriate solution to the employment problems, or 60% of the highest of those two values in the event of the simple dismantling of the production facilities of that applicant undertaking, confer an advantage which is liable to affect trade between Member States and competition, provided that it is established, first, that the same undertaking would not have been able to obtain the same advantage in circumstances corresponding to the normal conditions of the market concerned and, second, that there is effective competition on that market.”
I must say, however, that it is not clear to me why the CJEU felt it necessary to include in its conclusion the last part of the sentence “[…] provided […] on that market”. The CJEU often refers to effective competition in the context of Article 102 TFEU on abuse of market dominance. However, in the field of State aid, the concept of “effective competition” is mostly used in the context of recovery of incompatible State aid, the purpose of which is to restore competition. The case law does not indicate that the presence or absence of State aid under Article 107(1) TFEU depends on the absence or presence, respectively, of effective competition.
[1] The full text of the judgments can be accessed at:
