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The agreement on the withdrawal of the UK from the EU requires compliance with EU State aid rules.

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Book your seat for the Autumn Conference on European State Aid Law 2018 on 29-30 November in Brussels with the special Keynote speech about "Impact of Brexit on the application of State aid rules and on EU-UK Trade" by Nicola Pesaresi, Deputy Chief Negotiator, Article 50 Task Force from the European Commission.

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Introduction

On 14 November 2018, EU and UK negotiators finalised the text of the Agreement on the withdrawal of the UK from the EU.[1] The Agreement has to be ratified by the UK and the other 27 Member States. Given immediate political storm that broke out in the UK, its ratification there is by no means certain.

The first media reaction to the Agreement was about its length. It runs to 585 pages. Although the number of pages is indeed impressive, in reality most pages are half empty. But even with half empty pages, the document is not an easy read. Although its language is mostly straight forward, its structure is complex, with many articles referring to other articles, protocols and annexes. Rules on State aid are laid down in the main body of the agreement, in a protocol and in an annex to that protocol. What follows here is a summary review of the main provisions on State aid. (For ease of reference, the relevant rules on State aid are gathered together in the Annex to this article.)

The most notable aspect of the State aid provisions in the withdrawal agreement is the extent of cooperation they establish between the EU and the UK. They leave untouched the substance of State aid rules and do not attempt to modify their future application in the UK. Instead they seek to ensure that both sides will stick to a consistent interpretation of those rules and that differences in their enforcement can be ironed out amicably and quickly.

 

The responsibilities and powers of the European Commission

Article 92 of the agreement requires the Commission to treat the UK as if it were a Member State and to be bound in this respect by EU case law and best practices.

According to Article 93, the powers of the Commission will extend for four years after the end of the transitional period [i.e. 31 December 2020] for any measure that will have been implemented before the end of that period. In addition, the Commission will retain responsibility for procedures initiated before the end of the four-year period.

It follows that the Commission will have competence to initiate investigation of any measure until 2024 and will be able to oversee them to their conclusion, i.e. until legal options for appeal are exhausted, which could drag on for several years more.

 

 

Substantial rules

Article 12 of the Protocol on Ireland / Northern Ireland stipulates that EU State aid law will apply to the UK and to trade between the EU and the UK [Annex 8 of the Protocol provides a comprehensive list of all the relevant State aid regulations, guidelines and communications]. Specific provisions concerning agriculture are also cited in Article 12.

The responsibility for enforcing State aid rules and procedures in the UK will rest, according to Article 14, with UK authorities. Nonetheless, the interpretation and enforcement of State aid law will be subject to the jurisdiction of the Court of Justice.

Part 4 of Annex 4 of the Protocol is devoted exclusively to State aid and cooperation in enforcing State aid rules.

Article 7 of Annex 4, provides that EU State aid law will apply to the UK for any measure that affects the EU’s single customs territory. It clarifies that enforcement responsibility in the UK will rest with an “independent authority”.

 

Independent authority and enforcement

For the purposes of Article 7, Article 9 of the Annex requires the creation of an authority in the UK that will be independent from political or other external influence. That authority will be vested with powers and functions equivalent to those of the Commission. The decisions of the authority will have the same legal effects as those of the Commission.

Article 10 of the Annex imposes an obligation on the Commission and the independent UK authority to cooperate in order to ensure “consistent surveillance” of State aid throughout the single customs territory. This cooperation will consist of exchange of information on the application and interpretation of EU State aid law, on individual cases and on the opening of investigations. In addition, the UK authority will have to consult the Commission before adopting a decision and will have to take “utmost account” of the Commission’s opinion.

Article 11 of the Annex refers to the role of courts and requires the UK to ensure that UK courts have the same powers of review of State aid decisions as those of the Court of Justice. In particular, UK courts will have competence to check whether aid is notified before implemented, check whether decisions of the UK State aid authority conform with EU law, enforce compliance with the decisions of the UK authority, consider whether the UK authority fails to act, and decide on actions for damages. In those situations, the Commission and interested parties will have legal standing before UK courts.

Under Article 12 of the Annex, the UK will maintain the present system of transparency of aid by publishing individual grants above EUR 500 000.

 

Dispute resolution

The withdrawal agreement establishes a Joint Committee (in Article 169 of the agreement) to oversee the application of the agreement and resolve disputes. Article 13 of the Annex allows the EU to bring matters before the Joint Committee in case the implementation of State aid rules by the UK undermines “equal conditions” of competition. Strangely, this option appears not to be symmetric, as there is no similar provision for the UK.

It is worth noting that if no agreement is possible in the Joint Committee, an arbitration panel will have to be set up (Article 171 of the agreement). Interestingly, if there is question of interpretation of EU law, the arbitration panel will have to ask the Court of Justice whose ruling will be binding on the panel (Article 174). EU law will continue to prevail, but the decisions of the panel will be binding on both the EU and UK (Article 175).

A non-symmetric arrangement is also laid down in Article 14 of the Annex which allows the Commission to take interim measures when the UK fails to comply with its obligations. It does not appear that the UK is given a similar option.

Article 15 of the Annex clarifies that decisions by the UK authority will not create legitimate expectations under EU law as regards the application of Article 12 of the Protocol. It also confers to the Commission a kind of precedence over the UK authority. Where the Commission and the UK authority take decisions concerning the same UK measure, the decision of the UK authority will be without prejudice to the legal effects in the UK of the Commission decision. So, there is a significant asymmetry here too. Decisions of the UK authority will not create legitimate expectations for undertakings in the EU, but decisions of the Commission will be affect undertakings in the UK.

Lastly, mention should also be made of Part 6 of the Annex which refers to state-owned undertakings, undertakings granted special rights and privileges, and designated monopolies. UK regulators will have to act independently of those undertakings and enforce regulations in a consistent and non-discriminatory manner.

 

Conclusions

The overall conclusion is that although the UK will soon leave the EU, it will remain firmly within the EU system of State aid control. The UK State aid authority will have little discretion, if any, to deviate from EU rules. Its capacity to innovate on the design and application of State aid policy will be very limited.

 

 

 

Annex

The provisions on State aid in the draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community

(As agreed at negotiators’ level on 14 November 2018)[2]

 

Chapter 2 of the agreement: Administrative procedures

Article 92: Ongoing administrative procedures

  1. For the purposes of this Chapter:

(a) an administrative procedure on State aid governed by Council Regulation (EU) 2015/1589 shall be considered as having been initiated at the moment at which the procedure has been allocated a case number;

  1. In an administrative procedure on State aid governed by Regulation (EU) 2015/1589, the European Commission shall be bound in relation to the United Kingdom by the applicable case law and best practices, as if the United Kingdom were still a Member State. In particular, the European Commission shall, within a reasonable period of time, adopt one of the following decisions:

(a) a decision finding that the measure does not constitute aid pursuant to Article 4(2) of Regulation (EU) 2015/1589;

(b) a decision not to raise objections pursuant to Article 4(3) of Regulation (EU) 2015/1589;

(c) a decision to initiate formal investigation proceedings pursuant to Article 4(4) of Regulation (EU) 2015/1589.

 

Article 93: New State aid and European Anti-Fraud Office procedures

  1. In respect of aid granted before the end of the transition period, for a period of 4 years after the end of the transition period, the European Commission shall be competent to initiate new administrative procedures on State aid governed by Regulation (EU) 2015/1589 concerning the United Kingdom. The European Commission shall continue to be competent after the end of the 4-year period for procedures initiated before the end of that period. Article 92(5) of this Agreement shall apply mutatis mutandis. The European Commission shall inform the United Kingdom of any new administrative proceedings on State aid initiated under the first subparagraph of this paragraph within 3 months of initiating it.

 

Protocol on Ireland / Northern Ireland

Article 12: State aid

  1. The provisions of Union law listed in Annex 8 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 that affect that trade between the part of the territory of the United Kingdom to which Regulation (EU) No 952/2013 applies by virtue of Article 6(2) of this Protocol and the Union which is subject to this Protocol.
  2. Notwithstanding paragraph 1, the provisions of Union law referred to in that paragraph shall not apply with respect to measures taken by the United Kingdom authorities supporting the production of and trade in agricultural products in Northern Ireland up to a determined maximum overall annual level of support, and provided that a determined minimum percentage of that exempted support complies with the provisions of Annex 2 to the WTO Agreement on Agriculture. The determination of the maximum exempted overall annual level of support and the minimum percentage shall be governed by the procedures set out in Annex 9.
  3. Where the European Commission examines information regarding a measure by the United Kingdom authorities that may constitute unlawful aid subject to paragraph 1, it shall ensure that the United Kingdom is kept fully and regularly informed of the progress and outcome of the examination of that measure.

The European Commission and the independent authority referred to in Article 9 of Annex 4 shall establish the administrative arrangements necessary to the proper implementation of this Article and Part Four of Annex 4 respectively, and keep those arrangements under review.

 

Article 14: Implementation, application, supervision and enforcement

  1. Without prejudice to paragraph 4, the authorities of the United Kingdom shall be responsible for implementing and applying the provisions of Union law made applicable by this Protocol to and in the United Kingdom in respect of Northern Ireland.
  2. As regards Article 6(2), and Articles 8 to 12 of this Protocol, as well as Article 7(1) of Annex 4 to this Protocol in respect of measures of the Member States, the institutions, bodies, offices, and agencies of the Union shall in relation to the United Kingdom, and natural and legal persons residing or established in the territory of the United Kingdom, have the powers conferred upon them by Union law. In particular, the Court of Justice of the European Union shall have jurisdiction as provided for in the Treaties in this respect. The second and third subparagraphs of Article 267 TFEU shall apply to and in the United Kingdom in this respect.

 

 

 

Protocol on Ireland / Northern Ireland

Annex 4
Part 4: State aid

Article 7: State aid

  1. With a view to preserving a robust and comprehensive framework for State aid control that prevents undue distortions of trade and competition, the Union State aid law provisions listed in Annex 8 to this Protocol shall apply to the United Kingdom, in respect of measures which affect that trade between the parts of the single customs territory which is subject to Annex 2. However, in respect of such measures of the United Kingdom authorities, references to the European Commission in those Union law provisions shall be read as referring to the independent authority referred to in Article 9.
  2. Notwithstanding paragraph 1, the provisions of Union law referred to in that paragraph shall not apply with respect to measures of the United Kingdom authorities supporting the production of and trade in agricultural products in the United Kingdom customs territory up to a determined maximum overall annual level of support, and provided that a determined minimum percentage of that exempted support complies with the provisions of Annex 2 to the WTO Agreement on Agriculture. The determination of the maximum exempted overall annual level of support and the minimum percentage shall be set by the Joint Committee and governed by the procedures set out in Article 8.
  3. This Article is without prejudice to Article 12 of the Protocol and to Article 14(4) and (5) of the Protocol as regards Article 12 of the Protocol.

 

Article 8: Procedures referred to in Article 7(2)

The Joint Committee shall determine the initial maximum exempted overall annual level of support and the initial minimum percentage referred to in Article 7(2), taking into account the most recent information available. The initial maximum exempted overall annual level of support shall be informed by the design of the United Kingdom's future agricultural support scheme as well as by the annual average of the total amount of expenditure incurred in the United Kingdom customs territory under the Common Agricultural Policy under the current MFF 2014-2020. The initial minimum percentage shall be informed by the design of the United Kingdom's agricultural support scheme as well as by the percentage to which the overall expenditure under the Common Agricultural Policy in the Union complied with the provisions of Annex 2 to the WTO Agreement on Agriculture as notified for the period concerned.

The Joint Committee shall adjust the level of support and percentage referred to in the first subparagraph informed by the design of the United Kingdom's agricultural support scheme to any variation in the overall amount of support available under the Common Agricultural Policy in the Union in each future Multiannual Financial Framework.

If the Joint Committee fails to determine the initial level of support and percentage in accordance with the first subparagraph, or fails to adjust the level of support and percentage in accordance with the second subparagraph, by the end of the transition period or within one year of the entry into force of a future Multiannual Financial Framework, as the case may be, application of Article 7(2) shall be suspended until the Joint Committee has determined or adjusted the level of support and percentage.

 

Article 9: Independent authority

  1. The United Kingdom shall establish or maintain an operationally independent authority ("the independent authority"). In performing its duties and exercising its powers, the independent authority shall have the necessary guarantees of independence from political or other external influence and shall act impartially.
  2. In respect of measures of the United Kingdom authorities that are subject to Article 7(1), the independent authority shall have powers and functions equivalent to those of the European Commission acting under the Union State aid law provisions listed in Annex 8 to this Protocol. The independent authority shall be appropriately equipped with the resources necessary for the full application and the effective enforcement, in accordance with Article 7(1), of the Union State aid law provisions listed in Annex 8 to this Protocol. These resources include human, technical and financial resources, premises and infrastructure.
  3. Decisions of the independent authority shall produce in respect of and in the United Kingdom the same legal effects as those which comparable decisions of the European Commission acting under the Union State aid law provisions listed in Annex 8 to this Protocol produce within the Union and its Member States.

 

Article 10: Cooperation

  1. With a view to ensuring consistent surveillance in the field of State aid throughout the single customs territory, the European Commission and the independent authority shall cooperate.
  2. The European Commission and the independent authority shall:

(a) exchange information and views on the implementation, application and interpretation of the Union State aid law provisions listed in Annex 8, and

(b) provide on a case-by-case basis information and exchange views on individual State aid cases which affect that trade between the parts of the single customs territory which is subject to Annex 2. The European Commission and the independent authority shall exchange this information taking into account the limitations imposed by the requirements of professional and business secrecy.

  1. If the independent authority decides to open the procedure referred to in the first and second subparagraphs of Article 108(2) of the TFEU in respect of measures of the United Kingdom authorities that are subject to Article 7(1), the independent authority shall communicate that decision to the European Commission and give it the opportunity to submit its comments in accordance with the applicable time limits in Regulation (EU) 2015/1589.
  2. The independent authority shall consult the European Commission on all draft decisions it intends to adopt in accordance with Articles 7(1) and 9. The European Commission shall have up to 3 months to communicate its opinion, and the independent authority shall take utmost account of that opinion before adopting the decision. In cases of urgency, the independent authority may invite the Commission to communicate its opinion as soon as possible.

Where the European Commission considers, during the period referred to in the first subparagraph, that it requires further information before it can formulate its opinion, it may address a request for additional information to the independent authority. That period shall be suspended from the date of the European Commission's request, and shall start afresh from the date of receipt of the independent authority's response.

The independent authority shall not adopt the draft decision until the European Commission has communicated its opinion in accordance with the first subparagraph.

 

Article 11: Courts and tribunals of the United Kingdom

  1. Noting that the Court of Justice of the European Union has jurisdiction under the Treaties in respect of acts of the European Commission in the area of State aid, in respect of measures of the United Kingdom authorities that are subject to Article 7(1), the United Kingdom shall ensure that courts or tribunals in the United Kingdom are competent to:

(a) review and enforce compliance by the United Kingdom's authorities with the obligation under Article 108(3) of the TFEU to notify and not to put a proposed measure in effect until the independent authority has authorised it;

(b) review the compliance of the decisions taken by the independent authority with the Union State aid law provisions listed in Annex 8;

(c) review and enforce compliance with a decision of the independent authority by the United Kingdom's authorities, and impose penalties in case of non-compliance;

(d) decide on actions for a failure of the independent authority to act, and order the independent authority to act; and

(e) decide on actions for private damages and award such damages.

  1. The European Commission and interested parties shall have legal standing before courts or tribunals in the United Kingdom to bring such cases.

The term "interested parties" in the first subparagraph shall have the same meaning as it does under Union State aid law provisions listed in Annex 8.

  1. The European Commission shall have the right to intervene in cases referred to in paragraph 1 brought before courts or tribunals in the United Kingdom by the independent authority or any interested party.

 

 

Article 12: Transparency

Without prejudice to the Union State aid law provisions listed in Annex 8, the United Kingdom shall maintain a system of transparency of aid granted for individual State aid grants above EUR 500 000.

 

Article 13: Consultations

  1. If the Union considers that the application or implementation by the United Kingdom of Article 7 and Articles 9 to 12 threatens to seriously undermine the equal conditions of competition between the parts of the single customs territory, it may request a consultation within the Joint Committee with a view to finding a commonly acceptable solution.
  2. The consultation shall take place on the basis of a written request that includes an explanation of the Union's reasons for requesting the consultation. A meeting of the Joint Committee shall be held within 30 days of the request.
  3. If a commonly agreed solution has not been found in the Joint Committee within 30 days of the meeting of the Joint Committee referred to in paragraph 2, the Union may adopt interim measures in accordance with Article 14.

 

Article 14: Interim measures

  1. The Union shall be entitled, after giving notice to the United Kingdom, to take appropriate remedial measures:

(a) in accordance with Article 13(3); or

(b) where the Union considers that the United Kingdom has failed to comply with its obligations under Article 7 and Articles 9 to 12 and the Union has commenced consultation in the Joint Committee in accordance with Article 169 of the Withdrawal Agreement, provided that the Union considers that the United Kingdom's failure to comply threatens to undermine the equal conditions of competition between the parts of the single customs territory;

  1. In the case referred to in point (b) of paragraph 1, the appropriate remedial measures taken by the Union may take effect at the earliest 30 days after the Union has given the United Kingdom notice.
  2. The appropriate remedial measures taken by the Union shall cease to apply when:

(a) the Union is satisfied that the risk to the equal conditions of competition between the parts of the single customs territory has been remedied;

(b) in cases submitted to arbitration in accordance with Article 170 of the Withdrawal Agreement, the arbitration panel has decided that the United Kingdom has not failed to comply with its obligations under Article 7 and Articles 9 to 12.

 

Article 15: Coordination

  1. The exercise of its powers under Article 9 by the independent authority in respect of measures of the United Kingdom authorities that are subject to Article 7(1) is without prejudice to the European Commission's powers under Article 14(4) of the Protocol as regards Article 12 of the Protocol.

In particular:

(a) a decision by the independent authority shall not give rise to legitimate expectations under Union law as regards the application of Article 12 of the Protocol;

(b) where the European Commission, acting under Article 12 of the Protocol, and the independent authority, acting under Articles 7(1) and 9, take decisions concerning the same measure of the United Kingdom authorities, the decision of the independent authority is without prejudice to the legal effects in the United Kingdom of the decision of the European Commission pursuant to Article 14(5) of the Protocol.

  1. Where the independent authority learns, by any means, of a measure by the United Kingdom authorities that may be subject to both Article 12(1) of the Protocol and Article 7(1), it may informally consult the European Commission on whether the latter considers the measure in question to be subject to Article 12(1).

 

Part 6: State-owned undertakings, undertakings granted special rights and privileges, and designated monopolies

Article 25: Neutral regulation

  1. The Union and the United Kingdom shall respect and make best use of relevant international standards including, inter alia, the OECD Guidelines on Corporate Governance of State-Owned Undertakings.
  2. Any regulatory body or function that is established or maintained in the Union or the United Kingdom shall:

(a) be independent from and not accountable to any of the undertakings that it regulates in order to ensure the effectiveness of the regulatory function, and

(b) act impartially in like circumstances with respect to all undertakings that it regulates.

  1. The Union and the United Kingdom shall ensure the enforcement of laws and regulations in a consistent and non-discriminatory manner.

 

Annex 8

It lists exhaustively the provisions of EU law referred to in Article 12(1) of the Protocol and Article 7(1) of Annex 4 of the Protocol.

 

 

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1 The full text of the draft agreement can be accessed at: https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf.

2 The full text of the draft agreement can be accessed at: https://ec.europa.eu/commission/sites/beta-political/files/draft_withdrawal_agreement_0.pdf.



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