Subsidy control under the EU-UK Trade and Cooperation Agreement

Background

1,366 days after the UK formally began its withdrawal from the EU by invoking Article 50 of the Treaty of the European Union, the UK and the EU finally reached agreement on their future trading relationship on Christmas Eve last year. As has been well publicised, securing a level playing field for competition between the EU and the UK while at the same time satisfying both sides’ political demands was one of the most hotly disputed aspects of the negotiations, with the parties’ divergent positions on subsidy control proving to be particularly contentious.

Following on from our previous blog (The future of UK subsidy control – known knowns and known unknowns) in which we highlighted some of the key aspects of the future UK subsidy control regime, this blog considers (i) what the combination of the EU:UK Trade and Cooperation Agreement (TCA) and Northern Ireland Protocol of the Withdrawal Agreement now tells us about the future of the UK subsidy control regime in terms of structural framework, substance and enforcement (ii) the TCA’s dispute resolution mechanism, and (iii) what the practical implications of the subsidy control chapter within the TCA are for businesses trading in the EU and/or UK.

The future of the UK’s subsidy control regime

The commitments under the TCA that will govern the UK subsidy control regime’s structural framework

A central tenet of the UK Government’s negotiating position was that the TCA should respect both parties’ sovereignty and that, accordingly, it should not include any regulatory alignment, any jurisdiction for the CJEU over the UK’s laws, or any supranational control.¹

Against this backdrop, the TCA provides the UK with the flexibility required to introduce a new UK subsidy control regime, distinct from the EU’s existing State aid regime and (for the most part) falling outside the jurisdiction of the CJEU.

Subsidy control is dealt with in Part 2, Title XI, Chapter 3 of the TCA. It lists various reciprocal commitments relating to both parties’² subsidy control regimes, including requirements for both parties to, amongst other things:

• have in place and maintain an effective system of subsidy control that ensures that the granting of subsidies respects certain principles (i.e. the criteria to qualify as a subsidy under the TCA discussed below) (Article 3.4);
• establish or maintain an operationally independent authority or body with “an appropriate role” in subsidy control (Article 3.9);
• ensure that its courts or tribunals are competent to review subsidy decisions taken by a granting authority or, where relevant the independent authority or body for compliance with the principles set out under Article 3.4 (as implemented into UK and EU law respectively) (Article 3.10);
• have in place an effective mechanism of recovery for successful applications brought by interested parties alleging that there has been a material error of law by the grantor with such determinations to be made by a court of tribunal (Article 3.11); and
• maintain publicly available records of all State subsidies granted (Article 3.7). To this end, the UK Department for Business, Energy and Industrial Strategy intends to launch in early 2021 a new publicly accessible transparency database for public authorities to record subsidies.

The TCA rules - substance

As to substance, at first blush, the TCA rules on subsidy control appear to align with the WTO regime - provisions in Chapter 3 of the TCA borrow certain key terms and language from the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). However, a review of the defined terms as well as the principles set out in Article 3.4 of the TCA, highlight that, to a large extent, the substance of the subsidy control provisions goes further than the ACSM and is in fact closely aligned with the principles of EU State aid rules. 

Article 3.4 of the TCA sets out certain principles which the parties commit to have in place and maintain to ensure an effective subsidy control system. In particular, subsidies granted should:

• pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale (e.g. social difficulties or distributional concerns);
• be proportionate and limited to what is necessary to achieve the objective;
• be designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
• not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
• be an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
• make positive contributions to achieving the objective that outweigh any negative effects, in particular the negative effects on trade or investment between the UK and EU.

These principles are all borrowed from existing EU State aid jurisprudence and go significantly further than the principles provided for under the relatively permissive ACSM. That said, the TCA notably departs from the EU State aid rules on a number of key principles.

• One of such principles is in relation to the de minimis aid threshold which is set at 325,000 special drawing rights (c. £350,000) over a three-year period; this means that beneficiaries can benefit from a larger amount of state support before being caught by the TCA rules when compared to the €200,000 de minimis threshold over the same duration under EU State aid rules.
• Another point of departure is in relation to the effect of the subsidy: the TCA rules apply to subsidies which impact trade and investment between the UK and EU, in contrast to the requirement for aid to have an effect on competition and trade between Member States which pertains under EU State aid rules; this means that the beneficiaries likely to be subject to TCA rules on subsidy control may be mainly large enterprises with cross-border business activities.³

A more drastic change to the status quo is the application of the TCA obligations to funds disbursed by the EU itself.  Given that the EU State aid rules were designed to control the risk of a subsidy race between Member State governments, the intra-EU position has always been that EU funds are not subject to the EU State aid rules. While “Party” is not explicitly defined anywhere in the TCA and seems to be left deliberately vague, the EU is clearly a party to the TCA and therefore any subsidies given at this supranational level are subject to the obligations regarding subsidy control in Part 2, Title XI, Chapter 3. On the face of it, therefore, the EU funds which, for example, are being made available under the EU Green Deal, as well as in response to the COVID-19 crisis will now need to be compliant with the TCA rules.

The continuing relevance of EU State aid rules to UK subsidies?

While the TCA allows for the UK to set up its own subsidy control regime distinct from the EU State aid regime, the use of certain key concepts may suggest a degree of continued alignment with EU State aid rules in substance even if not in form. The scope for informal alignment is facilitated by Article 3.9(2) TCA, which provides that the parties will encourage their respective independent authorities to cooperate with one another on issues which are of common interest including on the application of the definitions, principle, prohibited subsidies and transparency provisions in the TCA. In addition, the EU State aid regime continues to apply to UK financial support granted (or the legal right for such support conferred) prior to 1 January 2021 which remains subject to the jurisdiction of the European Commission and CJEU until 31 December 2024.⁴ 

Equally importantly, Article 10 of the Northern Ireland Protocol of the Withdrawal Agreement imposes the pre-existing State aid rules to certain subsidies within the UK. Any UK subsidies “which affect that trade between the EU and Northern Ireland” still need to be notified to the European Commission and is subject to the jurisdiction of the CJEU. Precisely how broadly Article 10 will be interpreted remains to be seen and is already a matter of dispute. The wording used could – in line with EU jurisprudence and decisional practice - be interpreted very broadly. The European Commission has already adopted such a broad interpretation and issued a separate Notice (Notice) on the matter to stakeholders on Brexit and State aid on 18 January 2021.  There may, however, be political reasons for adopting a narrow reading of the provision in practice (as the Unilateral Declarations by the EU and the UK in the Withdrawal Agreement Joint Committee on Article 10(1) of the Protocol suggests the Commission will do).⁵ Ultimately, however, the correct interpretation of Article 10 remains at the discretion of the CJEU.

It follows that it may be possible for subsidies granted in Great Britain to nevertheless be subject to EU State aid rules if the beneficiary is involved in trade or activities deemed capable of having an effect on trade between Northern Ireland and the EU. Notably, the Commission suggests in section 2 of its Notice that the following measures would likely be considered to affect trade between Northern Ireland and the EU:

• tax schemes granting a direct or indirect benefit to any firm trading with Northern Ireland;
• incentives to the financial services industry that would allow manufacturers or electricity companies engaged in trade between Northern Ireland and the Union to access cheaper credit; and
• aid to a manufacturer in difficulty if its goods are available for sale in Northern Ireland.

This provision is likely to cause considerable uncertainty and possibly disputes in the months ahead, particularly given the wide interpretation apparently being given to it by the European Commission.

Enforcement mechanism

While the EU’s existing State aid regime and the roles played by the European Commission and CJEU within that regime already satisfy the reciprocal commitments listed under Chapter 3 TCA insofar as Member State subsidies are concerned, the UK will at the very least need to establish an entirely new subsidy control regime and appoint an independent body to perform “an appropriate role”.

To this end, the Government has on 3 February 2021 launched a consultation on how best to design a bespoke approach to subsidy control that works for the UK economy and ensures effective implementation of its international obligations, including under the TCA⁶. As evident from the proposals and 43 questions the Government puts forward in the consultation, various options are being considered in order to achieve this objective, and for the new regime be shaped differently from the EU State aid regime. As part of this consultation, the Government seeks the views of stakeholders, inter alia, on whether in addition to the above TCA principles, new principles (including a principle on assessing the competitive impact of subsidies) should be introduced. Also, on the criteria for designing and determining high-risk subsidies which may have the most distortive effects on competition. It is proposed that, in addition to designing and awarding subsidies, public authorities should bear the responsibility for conducting the competitive assessment with regards to the subsidy. In addition, the consultation seeks views on the role and functions the independent body⁷ might play in advising public authorities and reviewing subsidies prior to or following the award of the subsidy. The role proposed for the relevant body appears to be limited and for most part it is proposed to be advisory only. It remains to be seen whether the UK will adopt an ex-ante subsidy review regime or an ex-post regime.

For the time being, however, the above commitments should, so far as possible, be read into UK domestic law by virtue of section 29(1) of the European Union (Future Relationship) Act 2020 (EU(FR) Act 2020).^₈ In theory, therefore, the UK courts may already be able to hear challenges to UK subsidy awards made by reference to the Article 3.4 TCA principles. However, a number of questions remain unanswered here too, such as which courts will be responsible for hearing these challenges and the legal test and standard of review to be applied when considering whether there has been a material error of law. Recognising this, the Government has indicated that it will consider legislating in due course to give clarity on the role of the courts in subsidy cases, including with regard to the recovery of subsidies.  In the meantime, there again remains considerable uncertainty for business and the risk of challenge.

Dispute resolution under the TCA

As a corollary to the staunch protection of both parties’ sovereignty, the role of EU and UK courts are protected including in the determination of the legality of a measure and appropriate remedies, and there is no clear path for interested parties to directly challenge this enforcement mechanism. While court challenges are possible, there is no alternative remedy if a court reaches an inaccurate conclusion.

The Dispute Resolution mechanism (see Part 6 and Annex INST) provides for “state-to-state” arbitration only, with no standing for natural or legal persons (other than amicus curiae submissions). Only a state party may initiate the arbitration procedure and the TCA explicitly provides that the courts of each party have no jurisdiction in resolution of disputes between the parties on the enforcement of the TCA. As a result, interested parties who, even after judicial review in the relevant jurisdiction, still consider themselves disadvantaged by a state subsidy as a result of its effect on trade or investment between the UK and EU will need to lobby the EU or UK (as relevant) to challenge the other party’s enforcement of its obligations under the TCA.

Article 3.12 TCA sets out the procedure where either the EU or UK considers a subsidy of the other party causes, or there is a serious risk it will cause, a negative effect on trade or investment between the UK and EU.  This provides for a consultation to take place and the right of the complaining state party to take remedial action (i.e., unilateral action). That remedial action must be strictly necessary and proportionate. Following any such remedial action, it is open to the other party to initiate arbitration proceedings to challenge the legality of the remedial action according to the TCA rules.

Crucially, however, even if the arbitration panel ultimately finds that a state party breached the TCA by failing to enforce the subsidy control rules, interested parties will not receive any direct relief.  It is explicit in the TCA that no finding by the arbitration tribunal shall create any rights or obligations with respect to natural or legal persons (i.e., it cannot require the beneficiary company to repay the subsidy), nor will it bind the domestic courts or tribunals of either party (i.e., it cannot require a recovery order to be made by the EU or UK courts).

Concluding Remarks and Practical implications

• Pending the outcome of the abovementioned consultation on the future UK subsidy control regime, some guidance has been issued by the UK Government to assist public authorities with their assessment of compatibility of subsidies with the UK’s international obligations. However, the guidance provides no real assistance on interpreting the principles under Article 3.4 TCA. While EU State aid case law is no longer binding on UK courts, given the substantive overlaps between the TCA and the EU State aid rules, as well as the lack of UK case law, it seems possible that the UK courts will – at least in the short term - continue to look to EU jurisprudence for guidance. It follows that when assessing the compatibility of a subsidy with the Article 3.4 TCA principles, public authorities and beneficiaries should consider how these principles have been considered previously under EU case law.
• In addition, consideration should always be given to whether a subsidy granted by the UK could have a direct or indirect impact on trade between Northern Ireland and the EU (noting that the precise parameters of this concept are uncertain, but potentially wide reaching).
• While the precise legal route remains uncertain, it is clear that subsidies granted by the UK from 1 January 2021 onwards can be challenged in the UK courts if they fail to comply with the terms of the TCA. Clearly, an ex ante clearance regime and the creation of block exemptions would significantly improve certainty for granting authorities and their beneficiaries (even if grants falling within the block exemption could still be challenged).
• Parties wishing to verify a subsidy’s compatibility with the TCA (as implemented into domestic law) will be able to obtain details of the subsidy (including the name of the beneficiary, the amount granted, the date it was granted and the legal basis for the subsidy) from publicly available records that both the UK and EU are required to maintain. In addition, interested parties can request any additional information that may be required to assess whether the Article 3.4 TCA principles have been complied with from the granting authority or independent authority. Granting authorities and the independent authority must provide all relevant information requested by an interested party (subject to certain limitations)⁹ promptly, within 28 days.
• However, where an interested party has exhausted its rights to seek enforcement and judicial review within the relevant jurisdiction, it must rely on lobbying for inter-state arbitration and - even then – the only relief available is that of unilateral remedial action by a state party.

Footnotes:

1: https://questions-statements.parliament.uk/written-statements/detail/2020-02-03/HCWS86

2: The parties to the TCA are the EU and the European Atomic Energy Community on the one hand and the UK on the other (although as noted below, the term “Party” is left undefined under the TCA.

3: Certain subsidies are notably excluded from the purview of the TCA, including subsidies granted to the audio-visual and agricultural and fisheries sectors or granted to other sectors on a temporary basis to respond to national or global economic emergency, provided such subsidies are targeted, proportionate and effective.

4: See Art. 93 Withdrawal Agreement.

5: https://ec.europa.eu/info/sites/info/files/brexit_files/info_site/5._art_10_declaration_to_publish.pdf

6: https://www.gov.uk/government/consultations/subsidy-control-designing-a-new-approach-for-the-uk . The consultation is open until 31 March 2021

7: The Competition and Markets Authority had previously been designated as the relevant independent body under the Theresa May Government’s UK State aid regime proposal given its expertise on competition law matters.  It is, however, unclear whether the current Government will revert to this position.

8: Section 29(1) provides that: “Existing domestic law has effect on and after the relevant day with such modifications as are required for the purposes of implementing in that law the Trade and Cooperation Agreement … so far as the agreement concerned is not otherwise so implemented and so far as such implementation is necessary for the purposes of complying with the international obligations of the United Kingdom under the agreement.”

9: E.g. where the information is legally privileged.