Member State governments may grant financial assistance or other forms of aid to their companies and/or sectors in difficulty so long as this aid is compatible with EU State aid rules namely Articles 107(2) or Article 107(3) of the Treaty on the Functioning of the EU ("TFEU").
With the outbreak of the Covid-19 pandemic, in an attempt to act fast and stop the bleeding, Article 107(3) was immediately used as a legal basis for the adoption of the European Commission's Temporary Framework. This Temporary Framework provides for five types of aid namely (i) direct grants, selective tax advantages and advance payments up to a maximum cap of ?800,000 to address urgent liquidity needs, (ii) state guarantees for loans taken by companies from banks, (iii) subsidised public loans to companies (with favourable interest rates), (iv) safeguards for banks and (v) short-term export credit insurance.
In turn Member States frantically began making use of this remedy to support their companies mostly through short term loans, guarantees and grants.
Temporary Framework Amendments
The Temporary Framework was amended twice to widen the scope of what sort of assistance governments could give their industries with the last amendment adopted on the 8th May 2020 to allow Member States to provide recapitalisations and subordinated debt to companies in need, whilst protecting the level playing field in the EU. This amended Temporary Framework will be in place until the end of June 2021.
While this is all laudable, the name given to this remedy is in itself telling in that it is a 'temporary' solution. And while governments are busy implementing the remedies allowed under the Temporary Framework, other - possibly better - remedies are being put aside, such as those available to Member States under Article 107(2).
Article 107(2)(b) allows for more targeted interventions by providing for "aid to make good the damage caused by natural disasters or exceptional occurrences." The Commission has recognised that Covid-19 outbreak qualifies as an 'exceptional occurrence' under Article 107(2)(b) TFEU, as it is an extraordinary, unforeseeable event having a significant economic impact. As a result, Member States can adopt measures to compensate companies in sectors that have been particularly hard hit (e.g. transport, tourism and hospitality) as well as organisers of cancelled events for the damages suffered due to the outbreak.
Any aid granted under Article 107(2) must be compatible with the internal market and therefore must be:
- directly linked to the damage caused by the Covid-19 outbreak; and
- proportionate, i.e. the compensation should not exceed what is necessary to make good the damage.
Through Article 107(2)(b) Member States can therefore directly compensate companies or specific sectors who've been hardest hit by the crisis and have seen the biggest falls in revenues, such as, in the case of Malta, the hospitality sector, airlines or events organisers.
Proof of Damages
The flipside is that, unlike Article 107(3), this remedy entails the gathering and submission of proof of damages suffered. One must demonstrate the exact damage that a company or sector has suffered, and that it has been harder hit than others. There is also the risk of having to pay back excessive aid if the Commission later establishes that there has been an over-payment.
Notwithstanding, Article 107(2) can be instrumental in getting our economies back on track. With an economy so heavily based on, for example, tourism, it is not inconceivable that the hospitality sector in Malta will be able to put together the required level of proof of damage sustained to demonstrate it has been hit harder than another sector. However, while the government is so busy implementing the remedial measures under the Temporary Framework, the private sector can do their part too by gathering and providing reliable evidence quantifying the exact damage suffered by their company or sector. This will assist the government to assess the possibility of providing support under Article 107(2) with solid justification in order to ensure this aid will not later be declared excessive and hence illegal.
Therefore, if your company or business has sustained demonstrable loss of revenue due to Covid-19, you may be eligible to receive funds and assistance which far exceed those currently being publicised (grants, guarantees etc).
Originally published JUN 03, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.