State aid law in times of Brexit – How to maintain a level playing field?

Since 1 February 2020, the UK is no longer part of the EU. Until the end of the transition period (31 December 2020), EU state aid rules remain fully applicable in the UK. Unless an extension of the transition period is agreed between the UK and the EU (the Parties), the future relationship between any UK state aid system and EU state aid rules will depend on what both sides are able to agree to (or not) in a future EU – UK trade agreement, whatever form this may take. The big unknown today is whether the UK will embark on a path of `dynamic alignment´ in terms of its future state aid regime or whether it seeks genuine political and economic independence.

Pending the outcome of the Parties’ future relationship negotiations, the EU Withdrawal Agreement (the EU WA) and the Protocol on Ireland/Northern Ireland (the Protocol) already contain several important provisions on the applicability of state aid rules in relation to the UK worth highlighting.

1. Status quo: transition period 

The EU WA provides for a transition period until 31 December 2020. It includes the following provisions on EU state aid law as well as the Commission’s competence to initiate and conclude state aid procedures against the UK:

• Art. 87 EU WA: Competence of the CJEU to remain the ultimate arbiter over treaty breaches of the UK stemming from aid granted before 31 December 2020 (this shall apply until 31 December 2024);
• Art. 92 (1) (3a) EU WA: Commission competence for ongoing administrative procedures initiated before the end of the transition period; and
• Art. 93 (1) EU WA: Further competence of the Commission to initiate new procedures for aid granted before the end of the transition period.

This means that the Commission retains the right to commence new state aid procedures against the UK (until the end of 2024) and any resulting appeals of Commission decisions in front of the EU courts may extend (well) beyond the end of the four-year period (31 December 2024).

2.  The future as of 1 January 2021

EU – UK trade agreement or WTO terms

As of 1 January 2021, the relationship between any UK state aid regime and EU rules will depend on the outcome of the trade deal negotiations between the Parties. There are various options ranging from a close relationship and alignment of both Parties’ state aid systems under a future trade deal to a cliff-edge scenario and a fall back situation on WTO terms (including the WTO rules on subsidies). Notably, the UK’s trade negotiation mandate published last week includes references to both the WTO Agreement on Subsidies and Countervailing Measures as well as to the EU-Japan EPA as a starting point for the UK’s position on subsidies.

However, regardless of the final terms of any future relationship agreement on 1 January 2021, EU state aid law may continue to apply in the UK for some time post the transition period through the “backdoor” of the Protocol.

Special rules for trade between Northern Ireland and the EU 

The Protocol is part of the EU WA and directly applicable to the UK after the end of the transition period. It foresees a termination procedure every four years.

Regarding EU state aid rules, Article 10 of the Protocol states that:

“The provisions of Union law listed in Annex 5 to this Protocol shall apply to the United Kingdom, including with regard to measures supporting the production of and trade in agricultural products in Northern Ireland, in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.”

Annex 5 contains a list of all EU state aid rules currently in force. This means that, contrary to the rest of the UK, EU state aid rules will continue to apply at least until 31 December 2024, to the extent that such measures relate to Northern Ireland.

Moreover, the scope of Art. 10 Protocol is currently subject to debate among politicians and practitioners since it gives rise to considerable legal uncertainty and potentially opens up for EU state aid rules applicability beyond Northern Ireland:

• Scope of trade: is the scope of trade limited to trade between Northern Ireland and the EU within the meaning (and subject) to the Protocol, when the Protocol does not define trade?
• Measures which affect trade: can the definition of trade be based on the established trade criterion under Art. 107 (1) TFEU? Does this include actual and potential effects on trade?

How to interpret Art. 10 of the Protocol is, as of today, an open question. A broad interpretation could potentially lead to direct applicability of EU state aid rules on aid measures granted by the UK to undertakings located in the UK, if trade between Northern Ireland and the EU is affected by them. This would grant the Commission jurisdiction over UK aid measures that affect trade between Northern Ireland and the EU post 31 December 2020 (or later if the transition period is extended). One argument in favour of such a broad interpretation is that Art. 10 Protocol does not refer to ‘undertakings’ (in Northern Ireland) but to trade between Northern Ireland and the EU. Such trade may arguably be indirectly affected by measures and decisions taken in the UK and granted to undertakings located in the UK.

3. Implications for businesses in the UK

While the UK’s position will likely reject any suggestions that the Commission would supervise ‘level playing field’ conditions designed to balance both Parties’ positions, the EU has publicly required a dynamic alignment of state aid rules post 31 December 2020 (or later if the transition period is extended). For companies involved in business in the UK, the EU’s state aid regime therefore remains applicable until the end of this year. Beyond this point, market participants should remain alert to a potential Commission competence to review UK aid measures should they affect trade between Northern Ireland and the EU. The Commission’s appetite (and need) to intervene on state aid grounds, however, remains to be seen – also in light of the fact that the UK has historically kept a rather clean state aid record. 

For additional insights on this and other topical issues, visit our Global antitrust in 2020: 10 key themes report.

Tune in also to our recent Essential Antitrust podcast, which examines the interaction between the EU and UK competition regimes during the Brexit transition period and beyond.