State aid is an objective concept. When the Commission assesses a measure it has to examine its effects and cannot be bound by a decision of the Council. A beneficiary of State aid cannot entertain legitimate expectations simply because the Commission does not appear to object to the aid.
Introduction
On 22 April 2016, the General Court rendered its judgment in cases T‑50/06 RENV II, Ireland v Commission, T-56/06 RENV II, France v Commission and T-60/06 RENV II, Italy v Commission. All three are dealing with almost identical issues, so in this article I review only the judgment on Ireland v Commission.[1]
These are extraordinary cases for a number of reasons. First, the legal proceedings have been dragging on for more than a decade. Second, the judgment of the General Court was quashed twice before. In other words, this is the third time that the General Court deals with the same questions. Third, the cases address the thorny issue of the division of competences between the Council and Commission and what the Commission may do when it exercises its independent powers conferred to it directly by the Treaty.
This is how the cases came to court. Ireland, France and Italy asked the Council to authorise exemptions from excise taxes on heavy oil for their alumina producers. A decision of the Council on this matter requires first a proposal from the Commission. The Commission’s proposal was in favour of granting the requested exemptions on the grounds that it was necessary for the competitiveness of the alumina producers and because it would not distort competition in the internal market.
A short time after the exemption was granted, the Commission opened the formal investigation procedure and concluded in decision 2006/323 that the exemption constituted incompatible State aid.
In December 2007, the General Court found in case T‑50/06 that the measure could not be imputed to Ireland [and, in the related cases, to the other two countries] because it was a decision of the Council. In addition, it criticised the Commission for being inconsistent with its assessment of the distortion of competition. The General Court said that the concept of competition with respect to tax matters was the same as with that in the meaning of Article 107(1) TFEU. The Commission could not conclude that competition was not distorted when it made the recommendation to the Council but then find that it was distorted when it applied Article 107(1). Consequently, it annulled Commission decision 2006/323.
I think the General Court was right to demand that the Commission maintained consistent views and that the concept of competition in the internal market was the same under the tax provisions and the competition provisions of the Treaty. However, the General Court was wrong in attributing the measure to the Council. The three countries were not obliged by EU law to apply exemptions. They exercised an option afforded to them by EU law and, therefore, the measure must have been attributed to them.
The Commission appealed and in December 2009 it succeeded to get the Court of Justice, in case C‑89/08 P, to set aside the first judgment of the General Court. However, in March 2012, the General Court, in case T‑50/06 RENV, annulled again the initial Commission decision for finding the tax exemption to constitute State aid.
The Commission appealed again and, in December 2013, the Court of Justice, in case C‑272/12 P, set aside the second judgment of the General Court. In its third judgment [April 2016] the General Court rejected the appeal of Ireland [and those of France and Italy] conferring a legal victory to the Commission.
The powers of the Commission to initiate State aid procedures and attribution of State aid measures to Member States
The General Court, following the judgment of the Court of Justice, finds in paragraph 63 that the “Council decision authorising a Member State […] to introduce an exemption from excise duties could not have the effect of preventing the Commission from exercising the powers conferred on it by the EC Treaty and, consequently, setting in motion the procedure laid down in Article [108 TEFU] in order to review whether that exemption constituted State aid”.
The Commission, therefore, could deviate from the proposal it had made to the Council. Indeed, the General Court further clarified that “66 […] the fact that the Council’s authorisation decisions had been adopted on a proposal from the Commission and that the Commission had never used the powers available to it, under Article 8(5) of Directive 92/81 or Articles 230 EC and 241 EC, in order to secure the abolition or alteration of those authorisation decisions could not preclude the exemptions from excise duty from being classified as State aid, within the meaning of Article [107(1) TFEU], if the conditions governing the existence of State aid were met.”
Moreover, “70 […] the concept of State aid corresponds to an objective situation and cannot depend on the conduct or statements of the institutions, that the fact that the Commission had taken the view, at the time when the Council adopted the authorisation decisions, that the exemptions from excise duty did not give rise to a distortion of competition and did not impede the proper functioning of the common market could not preclude those exemptions from being classified as State aid, within the meaning of Article [107(1) TFEU], if the conditions governing the existence of State aid were met.”
This is good news for the Commission. The decisions of other institutions do not shackle it, nor do other decision-making procedures in which it participates constrain its freedom to act on the basis of Article 107 and 108.
The problem, however, is that this judgment is silent on the important issue of whether authorisation by the Council is sufficient for a measure to be attributed to the EU rather than the Member State that requested the authorisation in the first place. One may think that since the actions against the initial Commission decision were dismissed, then that decision stands and therefore the measure was attributed to the Member States. Unfortunately, the text of the Commission decision does not mention anything explicit on the attribution of the measure. The Commission did not expect that on appeal the attribution of the measure would become an important issue so its own initial decision is silent on this point.
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Distortion of competition
In response to the argument of Ireland that there was a “conflict” between the proposal of the Commission to the Council [no distortion of competition] and the finding of State aid [competition was distorted], the General Court merely reiterated the view of the Court of Justice that the concept of State aid is objective, it “cannot depend on the conduct or statements of the institutions” and therefore the Commission was not bound by the Council’s authorisation decision. [Paragraphs 88-91]
This is not a satisfactory answer. The dispute was not about the concept of aid or division of powers. It was about the inconsistent assessment of the Commission. It leaves unresolved the issues identified in the first judgment of the General Court according to which, first, the Commission, like all institutions, has to act consistently and that, second, the concept of competition is the same regardless of whether the Commission assesses tax measures or State aid measures.
Affectation of trade
Ireland then raised a plea that the exemptions did not affect trade. The General Court rejected the plea and referred to well-established case law. “112 […] in assessing the conditions that trade between Member States be affected and that competition be distorted, the Commission is required, not to establish that such aid has a real effect on trade between Member States and that competition is actually being distorted, but only to examine whether that aid is liable to affect such trade and distort competition […]. It follows that the Commission is not required to carry out an economic analysis of the actual situation on the relevant markets, of the market share of the undertakings in receipt of the aid, of the position of competing undertakings or of trade flows between Member States”.
“113 Next, it is apparent from the case-law that the conditions that trade between Member States must be affected and competition distorted are as a general rule inextricably linked […]. In particular, the case-law states that any grant of aid to an undertaking pursuing its activities in the common market is liable to cause distortion of competition and affect trade between Member States”.
“114 In addition, with regard to the condition relating to distortion of competition, the case-law lays down a presumption that operating aid of an undertaking, that is to say, aid intended to relieve an undertaking of the expenses which it would itself normally have had to bear in its day-to-day management or its usual activities, provides that undertaking with artificial financial support which, in principle, distorts competition in the sectors in which it is granted”. It follows that, where the Commission finds the existence of operating aid, it is not required to give the reasons why that aid distorts or threatens to distort competition”.
“115 Last, so far as concerns the conditions that trade between Member States be affected and that competition be distorted, the case-law states that, when State financial aid strengthens the position of an undertaking compared with other undertakings competing in trade between Member States the latter must be regarded as affected by that aid”. There is no threshold or percentage below which trade between Member States can be said not to be affected. In particular, the condition that the aid must be capable of affecting trade between Member States does not depend on the scale of the field of activity concerned”.
Irish alumina producers derived an advantage from the exemption which cannot be “called into question by […] the compensatory function performed by the exemption at issue, taking into account the objective competitive disadvantage it claims it suffered, in terms of production costs, compared with other European alumina producers, particularly those established in Germany. It is sufficient to note in that regard that, according to settled case-law, the fact that a Member State seeks to approximate, by unilateral measures, the conditions of competition in a particular sector of the economy to those prevailing in other Member States cannot deprive the measures in question of their character as aid”. [Paragraph 120]
“122 […] Any grant of aid to an undertaking pursuing its activities in the common market is liable to cause distortion of competition and, second, the operating aid of an undertaking, namely aid intended to relieve an undertaking of the expenses which it would normally have had to bear in its day-to-day management or its usual activities, is assumed to distort the conditions of competition in the sectors in which it is granted.”
Legitimate expectations
Ireland argued that the previous stance of the Commission on similar exemptions and the fact that it took the Commission about 50 months to reach its conclusions created legitimate expectations that the exemptions were either free of aid or the aid was compatible.
The General Court, first, recalled the relevant principles in the case law. “213 The right to rely on [the principle of legitimate expectations] assumes that three conditions are satisfied. First, precise, unconditional and consistent assurances originating from authorised and reliable sources must have been given by the authorities to the person concerned. Second, those assurances must be such as to give rise to an expectation that is legitimate on the part of the person to whom they are addressed. Third, the assurances given must be consistent with the applicable rules”.
“214 It is appropriate, next, as regards more specifically the applicability of the principle of protection of legitimate expectations in the area of State aid, to recall that a Member State whose authorities have granted aid contrary to the procedural rules laid down in Article [108 TFEU] may rely on the legitimate expectations of the recipient undertaking to challenge before the EU judicature the validity of a Commission decision instructing it to recover the aid, but not to justify a failure to comply with the obligation to take the steps necessary to implement it […]. It is apparent, moreover, from the case-law that, in view of the fundamental role played by the notification obligation to render effective the review of State aid by the Commission, which is mandatory, the recipients of aid may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure provided for in Article [108 TFEU] and a diligent business operator must normally be in a position to confirm that that procedure has been followed. In particular, where aid is implemented without prior notification to the Commission or, as in the present case, without giving prior notice of the implementation as required by the Lorenz case-law […], so that it is unlawful under Article [108(3) TFEU], the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful […], except where there are exceptional circumstances”.
The General Court found that Ireland could not claim legitimate expectations because the measure had not been notified to the Commission and because the Commission had opened the formal investigation procedure.
Then the Court noted that “216 a delay by the Commission in deciding that aid is unlawful and that it must be abolished and recovered by a Member State may, in certain circumstances, establish a legitimate expectation on the recipients’ part so as to prevent the Commission from requiring that Member State to order the refund of that aid”.
Consequently, the Court went on to examine whether the Commission was justified to need 50 months to reach its conclusions. The Court found that, because the case presented no legal or practical problems, the long investigation period was “unreasonable” [paragraph 248]. However, it still concluded that the Commission’s long inaction was “255 […] not particularly significant from the perspective of applying the State aid rules to the aid at issue, which was implemented unlawfully. Therefore, it is insufficient for finding the existence of exceptional circumstances capable of having given rise […] to a legitimate expectation that the aid at issue was lawful under the State aid rules. It follows that the mere infringement, in the present case, of the principle that action must be taken within a reasonable time in the adoption of Alumina Decision I did not prevent, in that decision, the Commission from ordering the recovery of the aid at issue.”
Conclusions
The judgment is important because it confirms the concept of affectation of trade and elaborates on the conditions under which legitimate expectations may be entertained. Unfortunately, we are not wiser on the question whether an exemption granted by the Council removes the corresponding aid measure from the discretion of Member States and attributes it to the EU.
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[1] The full text of the judgment can be accessed at:
