On 19 March 2020, the European Commission adopted a Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (“The Framework”). The Framework is based on Article 107(3)(b) of the TFEU, which allows State aid to be granted in order to remedy a serious disturbance in the economy. It sets out the conditions under which the Commission will assess State aid granted by Member States to remedy liquidity shortages and problems in access to finance undertakings are faced with and to ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability. Measures that meet the conditions set out in the Framework must be notified to the Commission but will be considered to be compatible with the Internal Market.

The Framework applies to aid granted after 1 February 2020 and before 31 December 2020. It provides for five types of aid:

  1. Aid in form of direct grants, repayable advances or tax advantages: Member States may grant to undertakings facing liquidity shortage aid in the form of direct grants, repayable advances or tax advantages. The aid must not exceed EUR 800,000 and meet the conditions set out in paragraphs 22 b) to e) of the Framework; inter alia, it must be granted on the basis of a scheme with an estimated budget and should not be granted to undertakings that were already in difficulty before 31 December 2019. Specific conditions and lower amounts of aid apply for aid granted to undertakings active in the agricultural, fisheries and aquacultural sectors.
  2. Aid in the form of guarantees on loans: Member States may grant to undertakings a guarantee on investment and working capital loans with a duration of up to six years. The guarantee premium must be set at the minimum level set out in paragraph 25 a), and the loan amount must not exceed the thresholds set out in paragraph 25 d), which are based on the undertaking’s annual wage bill and turnover. The guarantee can cover up to 90% of the loan principal if losses are borne proportionally by the State and the credit institution and up to 35% if losses are first attributed to the State. Further, the aid should not be granted to undertakings that were already in difficulty before 31 December 2019.
  3. Aid in the form of subsidised interest rates for loans: Member States may grant loans with reduced interest rates with a duration of up to 6 years, in order to finance investment and working capital. The interest rates must be at least equal to the base rate (1 year IBOR or equivalent as published by the Commission) applicable on 1 January 2020 plus the credit risk margins set out in paragraph 27 a) of the Framework. The loan amount must not exceed the thresholds set out in paragraph 27 d), which are based on the undertaking’s annual wage bill and turnover. Further, the aid should not be granted to undertakings that were already in difficulty before 31 December 2019.
  4. Aid in the form of guarantees and loans channelled through credit institutions or other financial institutions: Aid in the form of guarantees and subsidised loans discussed in points ii) and iii) above may be granted directly or channelled through credit institutions and other financial institutions. In the latter case, the aid could also constitute indirect aid to the financial intermediary. To avoid this, the Framework provides that such indirect aid will not be considered to constitute State aid to the financial intermediaries. The Framework also introduces safeguards to limit the undue distortion of competition that might result from this indirect aid: financial intermediaries will be required to demonstrate that they operate a mechanism that ensures that the advantages are passed on to the largest extent possible to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates.
  5. Short-term export credit insurance: The rules applying to State aid in the form of short-term export credit insurance are set out in the Commission’s STEC Communication, which provides that public insurance for short-term export credit cannot cover marketable risk. The Framework provides Member States with additional flexibility to demonstrate that certain countries are non-marketable risks as a result of the COVID-19 outbreak and that the prohibition set out in the STEC Communication should not apply.

The Framework complements the Commission’s Communication on a Coordinated economic response to the COVID-19 outbreak of 13 March 2020, which discussed other forms of State support.  As stated in that Communication, Member States can also adopt several types of measures to tackle the Covid-19 outbreak that fall outside the scope of State aid rules, such as wage subsidies and suspension of payments of corporate tax, VAT and/or social contributions that are available to all companies. Such measures must not be notified to the Commission.

In addition, State aid granted to tackle the COVID-19 outbreak may also be exempted under other provisions of the TFEU than Article 107(3)(b). For example, Article 107(2)(b) TFEU enables Member States to compensate companies for the damage directly caused by exceptional occurrences, such as those caused by the COVID-19 outbreak. This includes measures to compensate companies in sectors that have been hit particularly hard (e.g., transport, tourism and hospitality) and measures to compensate organisers of cancelled events for damages suffered due to the outbreak. The Commission has committed to approve swiftly notified State aid measures and take decisions within days, if not hours, of receiving a complete notification.

The Covington State aid team will continue to monitor the situation and update you on any new developments.