Article 107 of the Treaty on the functioning of the EU (ex Article 87 TEC) stipulates that "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal common market". Given the high degree of integration of the European economy, most national subsidies are likely to be considered trade-distorting, even for products which are not exported to other Member States, if they compete on their home market with imports from other Member States. The Commission has devised a mechanism for fixing and revising the reference rates used to calculate the grant equivalent of aid. The form of the aid is irrelevant: for example outright grants, soft loans, tax concessions, guarantees, the supply of goods or services at less than cost are all subject to European State aid control. However, under the "de minimis Regulation", aid of less than EUR 200 000 over three years and guarantees of up to EUR 1,5 million are judged not to affect trade between Member States and thus need not be notified to the Commission [Regulation 1998/2006].
Paragraph 2 of Article 107 (TFEU) considers that the following shall be compatible with the internal market: (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; (b) aid to make good the damage caused by natural disasters or exceptional occurrences; and (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the Commission, may adopt a decision repealing this point.
Paragraph 3 of Article 107, for its part, stipulates that the following may be considered to be compatible with the common market: aid to promote the economic development of areas with economic or social problems; aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State; aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions; aid to promote culture and heritage conservation; and such other categories of aid as may be specified by decision of the Council.
So that the Commission may adopt a position on the possible application of one of the above derogations from the incompatibility of aid, the Member States are obliged, under Article 108 paragraph 3 of the TFEU (ex Article 88 TEC) to inform it in sufficient time, through a detailed questionnaire, of any plans to grant new aid or alter existing aid. Such aid may not be granted by Member States until the Commission has taken a final decision on it. The Commission reserves the right to take a provisional decision requiring a Member State to recover, with interest, any aid paid illegally pending a final decision by it on the compatibility of the aid with the internal market [Commission communication].
If the Commission finds that aid granted by a State or through State resources is not compatible with the internal market or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission. If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may refer the matter to the Court of Justice of the European Union direct. On application by a Member State, the Council may, acting unanimously, within three months of the said application, decide that aid which that State is granting or intends to grant should be considered to be compatible with the internal market, in which case the Commission should drop the proceedings against the Member State (Article 108 § 2 TFEU). In order to increase legal certainty and transparency in the Commission's decision-making process, a Council Regulation lays down detailed rules for the application of Article 88 of the EC Treaty (new Article 108 § 2 TFEU) [Regulation 659/1999] and a Commission Regulation sets out the form, content and other details of notifications and annual reports concerning State aid [Regulation 794/2004].
Under the procedure of monitoring national aids, the Commission gives notice to the Member State proposing to grant aid to submit its comments within a given time limit, normally set at one month. The other Member States are also invited to submit their comments on the proposed aid in question, as are other interested parties, which are apprised through publication in the Official Journal of the European Union. In the light of those comments, the Commission may decide either not to object to the proposed aid or to require that it be abolished or to call for certain alterations to be made to it. If the Member State concerned is not in agreement with the Commission's decision it may, within two months, refer the matter to the Court of Justice. According to the Court, however, the only defence available to a Member State in such a case is to plead that proper fulfilment of its obligations under Article 87 § 2 (TEC, Article 107 § 2 TFEU) was absolutely impossible [Case C-280/95].
A Court of Justice ruling of February 14, 1990 provided some highly useful clarifications to the State aids vetting system and more specifically: to the procedural rules of Article 93, paragraph 3 (EEC, Article 108 § 3 TFEU), which oblige the Member States to inform the Commission of planned State aids so that it can take a decision on their compatibility prior to implementation; and to the obligation for the Member States to demand repayment of aid not eligible for one of the dispensations provided for under Article 92 EEC (Article 107 TFEU) and which is consequently incompatible with the common market [Case C-301/87]. In another judgment the Court specified that only benefits granted directly or indirectly out of State resources are to be regarded as aid within the meaning of Article 92 (EEC) [Case 82/77]. According to the Court, if a firm in receipt of State aid has not brought direct annulment proceedings under the second paragraph of Article 173 of the EEC Treaty (Article 263 TFEU) against a Commission decision declaring the aid to be unlawful (even though it was fully informed of the decision) within the periods prescribed, that firm cannot plead that the Commission decision is unlawful [Case C-188/92]. Τhe Council has no power to declare a measure of State aid compatible where the Commission has already declared the aid in question incompatible with the common market [Case C-110/02].
In order to enhance transparency in the field of State aid policy, the Commission opened, in 2001, a State aid register and a State aid scoreboard [COM/2001/412 and COM/2001/782]. The latter instrument, which is a source of information on the State aid situation in the European Union and the Commission's activities in the State aid monitoring field, is available on the Europa server.
On the basis of Article 89 TEC (new Article 109 TFEU), the Council has empowered the Commission to adopt block exemption regulations for certain categories of horizontal aid (in favour of small and medium enterprises, research and development, environment protection, employment and training) and for aid below a given threshold [Regulation 994/98]. On this basis, a new General Block Exemption Regulation (GBER) of the Commission consolidates into one text and harmonises the exemption rules previously existing in five separate Regulations, and enlarges the categories of state aid fulfilling the conditions of compatibility outlined in Article 87 § 3 of the EC Treaty (Article 107 § 3 TFEU) [Regulation 800/2008]. The general block exemption means automatic approval by the Commission for aid in favour of SMEs, research, innovation, regional development, training, employment and risk capital. The Regulation also authorises environmental protection aid, aid measures promoting entrepreneurship, such as aid for young innovative businesses, aid for newly created small businesses in assisted regions, and measures tackling problems, like difficulties in access to finance, faced by female entrepreneurs. The GBER applies to transparent aid in all sectors of the economy except for fisheries and aquaculture, agriculture and coal By allowing Member States to grant the above-mentioned types of aid without first notifying the Commission, the GBER encourages Member States to focus their state resources on aid that is of real benefit to job creation, environment protection and Europe's competitiveness, along the lines of the Lisbon strategy [see section 17.1.3]. Moreover, a Temporary Community Framework for State aid measures supports access to finance in the financial and economic crisis of the years 2009 to 2011 [Communications of the Commission 2009/C 83/01 and 2011/C 6/05, see section 15.5.2].
The General Block Exemption Regulation (GBER) is particularly important for SMEs, in that it provides for special rules on investment and employment aid exclusively for SMEs. In addition, all the 26 measures covered are open to SMEs, allowing Member States to accompany SMEs during the different stages in their development. The GBER allows Member States to grant several types of employment aid up to certain thresholds, without prior notification to the Commission, notably in regions eligible for regional aid, to SMEs and for pure social policy considerations, i.e. for the recruitment of disadvantaged workers. It also allows Member States to grant both general and specific training aid to companies totalling up to 80% of the eligible costs. A specific Regulation applies to transparent aid granted to small and medium-sized agricultural holdings (farms) active in the primary production of agricultural products [Regulation 1857/2006]. Another Regulation of the Commission regulates the application of Articles 107 and 108 of the TFEU to de minimis aid granted to undertakings providing services of general economic interest [Regulation 360/2012].
Community Guidelines on State Aid to Promote Risk Capital Investments in Small and Medium-sized Enterprises set out the criteria the Commission applies in the compatibility assessment of the risk capital measures in accordance with Article 87 § 3 TEC (Article 107 § 3 TFEU) [See also amendments to guidelines]. However, aid for risk capital has been included in the GBER.
Under the existing Community guidelines on State aid for rescuing and restructuring firms in difficulty, Member States can also grant aid to companies justified, in particular, by social or regional policy considerations, by the need to take into account the beneficial role played by small and medium-sized enterprises (SMEs) in the economy or, exceptionally, by the desirability of maintaining a competitive market structure when the demise of firms could lead to a monopoly or to a tight oligopolistic situation.
New Community guidelines on State aid for environmental protection authorise Member States to grant State aid for renewable energies and cogeneration, energy saving and reduction of green house emissions. The Community framework for State aid for research and development and innovation encourages Member States to grant aid specially targeted at SMEs, job creation and innovation along the lines set out in the Lisbon Strategy [see section 17.1.3].