It is sometimes the case that a government wishes to provide certain incentives or benefits to specific participants in the economy, for example as in the case of innovation by entrepreneurs. Accepting such benefits can, however, turn out to be a costly exercise unless the government has properly applied procedural requirements for the granting of such aid.
The European Community Treaty, which is binding both for individuals and for government, establishes in Article 87 that aid provided by the state (national, regional or local authorities) is, in principle, incompatible with the general idea of the European common market and is therefore prohibited. State aid can only escape the prohibition provided for in the Treaty if it is either notified by the government to the European Commission and declared by the European Commission permissible prior to the actual transfer to the beneficiary, or, if it falls within the scope of the so called "block exemption" adopted by the European Commission which declares aid of specific purpose that meets certain criteria outside the scope of state aid prohibition.
If the government fails to notify aid which falls outside the scope of the block exemption the aid is automatically regarded as illegal and European Commission is obliged to ask the beneficiary to repay the aid received plus the interest at any time within a 10 year period after the aid has been granted (currently the interest as set by the European Commission is 6.64 percent for Latvia, 6.49 percent for Lithuania and 5.50 percent for Estonia). Illegal aid usually has to be returned by the beneficiary within four months' time. The obligation to repay the aid must be enforced by national authorities despite the fact that it was the government who had to notify the European Community of the aid before granting it, that repayment of the aid might result in bankruptcy of the beneficiary, or that owners of the beneficiary have changed.
The concept of "state aid" is interpreted by the European Commission very broadly and catches various forms of transfer of resources far beyond the subsidies or grants. Thus, according to the European Community Treaty, any benefit which comes from state resources, confers to the company receiving such benefit economic advantage and is not available to everyone (thus placing the particular entrepreneur in a competitively advantageous position) is state aid.
The following measures have been recognized by the European Commission as state aid: interest rebates; loan guarantees; a possibility for the company to buy or rent publicly owned land or buildings at less than the market price; a possibility for the company to sell land or buildings to the government at higher than the market price; privileged access to infrastructure; tax deduction not generally available to other companies.
Even establishment of a joint venture together with the government or other kinds of capital injections may be regarded as state aid unless it can be proven that the government has made investments on terms acceptable to private investors in a market economy. Furthermore, for the aid to qualify as state aid it does not have to be granted to the beneficiary directly by the government, it can be also transferred by an intermediary body assigned by the government, either private or public. It is worth noting though that according to "de minimis" rule applied by the European Commission, aid to a particular company which does not reach the threshold of 200,000 euros over a period of three fiscal years usually will not be regarded as state aid.
Considering the potentially grave consequences of receiving illegal state aid, it is wise to make sure that benefits granted to your company from government resources either fall within the scope of the block exemption or have been authorized by the European Commission.
Zane Veidemane is a lawyer at Kronbergs & Cukste. Together with Teder Glickmann & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, Kronbergs & Cukste belongs to Baltic Legal Solutions, giving seamless legal service across the Baltics. Baltic Legal Solutions is also a member of the Pinsent Masons Luther Group, a pan European network of law firms, including the United Kingdom, France, Germany, Hungary, Austria and the Baltics
