Further guidance for businesses on the continued application of EU State aid rules in the UK

Two and a half years after the end of the transition period, the European Commission has provided further clarity on the application of the EU state aid regime to the UK post Brexit. 

As a reminder, since the end of the transition period, the European Union (EU) State aid regime no longer applies to the UK, except insofar as State aid granted by the UK affects trade between Northern Ireland and the EU.[1] 

In a notice published on 9 June (which replaces a previous February 2021 notice), the European Commission (Commission) has provided interested parties with further clarity on:

• what constitutes a ‘direct and genuine link’ to Northern Ireland for businesses in the UK, such that EU State aid law continues to apply; and
• specific examples of when large manufacturers in the UK could fall within the scope of the EU State aid regime.

The UK Government, on the same date, similarly published guidance outlining how public authorities giving subsidies must comply with the UK’s international subsidy control commitments, including guidance on when the EU State aid rules will continue to apply to the UK in respect of measures which affect trade in goods or the electricity market.

Both the Commission and the UK Government have now issued a joint declaration setting out the agreed position on the application of EU State aid rules post Brexit.

Some legal certainty on UK and EU conflicting views

The Commission had previously taken an expansive view on when the EU State aid rules would apply to UK measures, including those granted to beneficiaries in Great Britain.  In contrast, the UK Government has indicated that EU State aid rules would only continue to apply in a handful of cases post-Brexit.  The latest set of guidance closes the gap on these divergent views, giving public authorities and beneficiaries some legal certainty that measures granted to beneficiaries in Great Britain are indeed less likely than those in Northern Ireland to be subject to EU State aid rules.

Key takeaways from the new guidance

Important points relating to the regime which have been restated in this new notice:

• A subsidy will be caught by the EU State aid regime where it is liable to have ‘real foreseeable effects’ on trade between Northern Ireland and the EU (i.e., material, and not merely hypothetical or presumed).
• Aid will be liable to affect such trade where it strengthens the position of an undertaking as compared with other undertakings competing in trade between Northern Ireland and the EU.
• The beneficiary of the aid does not necessarily need to be located in Northern Ireland or the EU, or indeed involved itself in trade between Northern Ireland and the EU.

Key new points highlighted by the guidance include that:

• The size of the undertaking and of the subsidy may be relevant to the Commission’s assessment of whether aid is material or not.
• The mere placement of goods on the Northern Ireland market is not sufficient, on its own, to represent a ‘direct and genuine link’ to Northern Ireland.  However, measures that are granted to beneficiaries located in Northern Ireland are more likely to have material effects.
• For measures granted to any beneficiary that is located in Great Britain that have a material effect, it must be further demonstrated that the economic benefit of the subsidy would be wholly or partially passed on to an undertaking in Northern Ireland, or through the relevant goods placed on the market in Northern Ireland, for example through selling below market price.
• In case of measures in favour of service providers, the Commission needs to establish that an advantage is passed on to undertakings engaged in the relevant trade in goods between Northern Ireland and the Union.  Such an indirect advantage is normally only present if the measure is designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings.

By way of examples for businesses, the notice indicates that the following will likely fall under the EU State aid regime:

• A subsidy scheme aimed at providing support to manufacturers of goods located in Northern Ireland.
• Substantial subsidies to large manufacturers located in other parts of the United Kingdom than Northern Ireland, but where there is a real risk that an economic benefit could be passed on so as to affect the market in Northern Ireland.[2]
• A subsidy scheme aimed at providing financial incentives to service providers designed to reduce the cost of services for undertakings located in Northern Ireland engaged in trade in goods between Northern Ireland and the Union.

That said, the notice also indicates that the following will not normally fall under the EU State aid regime:

• A subsidy of limited amount provided to a small enterprise located outside Northern Ireland and without a significant market presence on the Northern Ireland.
• A subsidy scheme to cover certain training costs of service providers.

In the event that any subsidy measures are likely to have an economic impact in Northern Ireland, beneficiaries should engage with the granting public authority at an early stage on the design of the subsidy and discuss early engagement with the UK Government’s Department of Business on next steps. Please do get in touch with our team if you have any questions about the EU State aid regime and how it might affect your business, whether in the UK or the EU.

Other relevant articles on this subject:

• Trade and Subsidy Control | Freshfields Bruckhaus Deringer [2023] – Extract from Freshfields’ 10 Key Themes for 2023, diving into key trends and developments in Trade and Subsidy Control
• The UK Subsidy Control Act comes into force – Practical considerations for beneficiaries of subsidies [5 January 2023]
• British Sugar legal briefing [15 June 2022] - A briefing on a key judicial review looking at the application of Article 366 of the Trade and Cooperation Agreement under which the UK government assumed an international obligation to put in place and maintain a system of subsidy control which ensured that the granting of a subsidy respected certain principles. This explores the substance of the “effect on trade” test under the Windsor Framework.

[1] Such a nexus would bring the aid within scope of Article 10 of the Windsor Framework (formerly known as the Northern Ireland Protocol). Guidance on the UK’s international subsidy control commitments can be found here.

[2] Except if the measure is designed in a way to avoid that there is a real risk that the economic benefit could be passed on so as to affect the market in Northern Ireland.