The EU’s governing treaty includes a general prohibition on member states providing “state aid” to private enterprises. Most types of state aid up to a “de minimis” level of €200,000 are exempt from this prohibition, but specific exemptions may also apply depending on the circumstances of the aid and the enterprise.

The regulation which governs many of these specific exemptions (the General Block Exemption Regulation, or “GBER”) was updated in 2014 in response to a developing understanding of the concept and effect of prohibited state aid.

Importantly, the GBER could allow start-ups to receive €400,000 or even €800,000 in state aid in the form of grants or investments

Is it state aid at all?

The general prohibition is designed to stop member states distorting competition within the EU by favouring certain enterprises.

So, if there is no possibility that the aid could distort competition within the EU, it would not be right to say that the aid is subject to state aid rules. Many enterprises, particularly in the social sector, may not be operating in a market capable of distortion, and so should not have to consider state aid rules at all.

However, many public authorities or the organisations responsible for distributing public funds, which must make this fundamental assessment, will often have difficulty answering it with certainty. Given that a breach of the state aid rules can ultimately require repayment of the aid, a conservative approach is often adopted, as reflected in the terms which public authorities impose on responsible organisations, and which are passed down to recipients.

What does the GBER offer?

The GBER identifies categories and within those categories the extent of state subsidy that is accepted as being compatible with the free market principles of the EU.

So, the GBER provides exemptions for a diverse range of aid that would otherwise be caught by the general prohibition. Importantly, it offers the opportunity for public authorities to offer a higher level of aid to start-up businesses than the de minimis amount.

This article focuses on the exemptions for “start-ups”, contained specifically at Article 22 of the GBER, but the GBER contains other exemptions which may be useful, including aid relating to environmental protection, research and development, employee training and support for disadvantaged and disabled workers.

“Start-up” means:

  • an unlisted, “small enterprise” (employing fewer than 50 people with turnover of less than €10m);
  • not more than five years old; and
  • which has not distributed profits or been through a merger.

The GBER allows aid to start-ups up to certain limits, depending on the kind of instrument used to supply the aid and the location of the enterprise.

If an enterprise is established in an “assisted area”, the permissible aid limits are higher (the government has produced a map of these areas).

  • For aid in the form of a loan, where the interest rate demanded is less than a market rate (therefore triggering state aid considerations), a start-up may borrow up to €1m, or up to €2m in assisted areas, for a period of 10 years. Loans of shorter duration have the allowable limit adjusted proportionately.
  • For aid in the form of guarantees where the premium demanded is less than a market rate, a start-up may receive up to €1.5m, or up to €3m in assisted areas, for a period of 10 years, provided that the guarantee does not exceed 80% of the underlying loan. Guarantees of shorter duration have the allowable limit adjusted proportionately.
  • Grants of up to €400,000, or up to €800,000 in assisted areas are permitted, and “Grants” includes both equity and “quasi-equity” investments.

Recipients can receive aid through a mixture of these instruments, provided that the limits of each are respected on a proportionate basis. So, if 70% of the limit for loans is supplied in one instrument, a grant instrument could use only 30% of the limits for grants.

As a further allowance, if the start-up can be considered “small and innovative”, the financial limits above can be doubled.

An “innovative enterprise” means:

  • an enterprise that can demonstrate through expert evaluation that it will in the foreseeable future develop products, services or processes which are new or substantially improved compared to the state of the art in its industry, and which carry a risk of technological or industrial failure; or
  • where its research and development costs represent at least 10 % of its total operating costs in at least one of the three years preceding the granting of the aid or, in the case of a start-up enterprise without any financial history, in the audit of its current fiscal period.

So, if a start-up is established within an assisted area, it could receive up to €1.6m in exempted aid under Article 22, far above what is commonly considered the threshold for permissible aid.

Other exemptions

The De Minimis Regulation

The rules on using the de minimis exemption are set out in a separate regulation (the “De Minimis Regulation”), exempting almost all types of aid up to €200,000 over a three year period.

The rationale is that support below defined de minimis levels is deemed not to interfere with the market in a way that will or may affect trade between member states, and so is outside the scope of the prohibition on State Aid.

De minimis aid is often the only exemption identified by public authorities, regardless of the fundamental assessment addressed above, or the availability of other exemptions. However, the updates to the GBER could encourage public authorities properly to recognise, interpret and apply a wider range of exemptions.

Services of General Economic Interest or “SGEI”

SGEI are activities of particular importance to society that the market would not provide, or would not provide to an acceptable standard, if there were no public intervention – in other words, there is an existing, but underdeveloped, market. Although SGEI are not considered in detail here, many social sector services will fall within this regime.

The SGEI regime is significant in that the de minimis threshold for SGEI is €500,000, not the usual €200,000, and, subject to manifest unreasonable or inappropriate designation, SGEIs generally can be supported to a level of €15m, and a limited range of specified social SGEIs can be supported to an unlimited level. (Note that Services of General Interest, or “SGIs”, as opposed to SGEIs, do not interfere with the market and so are outside the definition of State Aid).

Can start-up aid be combined with other aid?

Start-up aid exempted under Article 22 of the GBER can be combined with other permitted aid as follows:

  • where the other aid is applicable to identifiable costs - such as a contribution to specific project or service – start-up aid can be completely combined with that aid.  For example, aid of €100,000 to cover costs of a particular project under other state aid provisions contained in the GBER or elsewhere could be combined with start-up aid of €400,000, €800,000 or even €1.6m, depending on which provisions of Article 22 applied to the start-up aid.
  • where the other aid did not apply to identifiable costs, start-up aid can be combined with that other aid, but only up to the limit for the start-up aid set out in the GBER, or the limit applying to the other aid. For example, if the enterprise would qualify for €400,000 of start-up aid under Article 22, other aid of €200,000 under the De Minimis Regulation could be combined with €200,000 of start-up aid. (Though note that different rules apply to combining aid under the SGEI regime).

It will be important in each case to check the specific provisions of each aid, but it is clear that the GBER offers more opportunities for support to start-ups, including social start-ups, than is often realised.

 

This information in this article is intended to be of a general nature and is not a substitute for detailed legal advice.


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Julian Blake

Partner and Joint Head of Charity

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+44(0)20 7551 7746 / 020 7551 7750

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j.blake@bwbllp.com
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Oliver Hunt

Solicitor

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+44(0)20 7551 7629

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o.hunt@bwbllp.com
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Posted on 26/09/2014 in Legal Updates

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