State aid beneficiaries must assess the lawfulness of the aid

Judgment of the Court of 5 March 2019 in case C-349/17, Eesti Pagar (preliminary ruling)

By assistant attorney Anna Haldbo Michelsen and senior intern Clement Hoff Munk

Background

In 2008, Eesti Pagar, an Estonian company, was granted state aid to purchase a sandwich loaf bread production line. The aid was granted by the Estonian Entrepreneurship Development Fund (EAS) under the general block exemption regulation, according to which aid may be granted without prior notification to the European Commission as long as it has an “incentive effect”. This means that the state aid must induce the beneficiary to change its behaviour in a way that it would not have done without the aid. 

However, EAS later established that the contract for purchase of the production line had been entered into before Eesti Pagar had applied for state aid. In these circumstances, EAS found that the aid did not meet the requirement for an “incentive effect”, and that it was therefore unlawful. Consequently, EAS claimed repayment of the aid together with interest and compound interest. Eesti Pagar subsequently filed complaints with both the administrative bodies and the national courts, and the action is now pending before the Tallinn Court of Appeal.

The Court of Appeal referred five questions to the Court of Justice for a preliminary ruling, with focus being on two general issues:

1. The interpretation of the concept of "incentive effect".
2. How Member States should react if the aid has been granted unlawfully.

Advocate General M. Wathelet’s opinion was published on 25 September 2018. 

Read our previous news article on the Advocate General’s opinion: Advocate General: Member States are obliged to recover unlawful state aid.

The Court’s decision

The Court of Justice generally agrees with the Advocate General, noting that the national authorities have an obligation to recover unlawful aid on their own initiative. The national authorities must do so within four years and must also claim interest from the beneficiary in accordance with the rules of the applicable national law and the state aid rules. In the light of the Court’s finding that the aid granted by EAS did not create a “legitimate expectation” on the part of Eesti Pagar, EAS was right in claiming repayment from Eesti Pagar.

The Court also held that the aid had probably been wrongly granted, because it did not have an “incentive effect”. The reason was that Eesti Pagar had entered into the contract for the purchase of the production line before submitting the state aid application. For the aid to induce the beneficiary to change its behaviour, the Court found it decisive that the application is filed before commencement of the activity or project. The final decision on this issue in the specific case will be made by the Tallinn Court of Appeal. 
 

Implications of the judgment

The Court’s decision has far-reaching consequences for state aid beneficiaries and emphasises the importance for beneficiaries to make their own assessment of the lawfulness of the aid. 

As it has now been established that the granting of aid does not per se create a “legitimate expectation”, beneficiaries risk that a specific aid measure is subsequently found unlawful.

Further, beneficiaries should not enter into contracts for projects or activities before they have submitted the aid application. 

Read the judgment (preliminary version).