EU State Aid rules and WTO Subsidies Agreement

As a member of the European Union, the United Kingdom was part of the EU regime on restricting trade-distorting business subsidies (“state aid”). EU state aid rules continued to apply to the UK till the end of the transition period on 31 December 2020. New mutual commitments on subsidy control were agreed in the UK-EU Trade and Cooperation Agreement. In June 2021, the Government put forward the Subsidy Control Bill, which will establish an independent UK subsidy control regime. But in light of the government’s international commitments, both EU state aid rules and the WTO Agreement on Subsidies and Countervailing Measures remain relevant to UK public authorities.

This briefing explains what EU state aid rules mean. It also sets out the recent changes brought about in response to the coronavirus pandemic. A further section looks at the state aid rules which applied during the transition period, the settlement of ‘ongoing’ cases, and the provisions regarding trade between Northern Ireland and the EU. Finally, the briefing sets out the main principles of the WTO Agreement on Subsidies and Countervailing Measures.

For information on state aid in the UK-EU negotiations see Commons Library briefings CBP 8852, The UK-EU future relationship negotiations: Level playing field and CBP 9190, The UK-EU Trade and Cooperation Agreement: Level playing field.

What is state aid?

EU Member States sometimes use public resources to intervene in their national economies by assisting companies or industries. This can range from a government tax relief scheme for investors, to a local authority giving a subsidy to a property developer.

This type of assistance is called ‘state aid’ and is normally prohibited if it threatens to distort trade and competition between firms, through for example, discouraging investment and increasing costs to consumers. EU state aid rules aim to create a level playing field so that, for example, French firms can compete fairly with German ones.

The EU and its Member States also use state aid as a policy tool. Exemptions to the EU state aid rules allow for certain beneficial interventions. For example, state aid might be necessary and justified to address a market failure, as when small and medium enterprises (SMEs) have difficulties finding investment capital. It may also be necessary to achieve policy goals such as regional economic development or environmental protection. Governments can, for instance, use state aid to stimulate business investment in less developed areas or advance environmentally friendly technologies.

The European Commission (EC) has strong powers to assess cases of state aid, approve them and enforce stringent ‘claw-back’ mechanisms when state aid is deemed unlawful. As an EU Member State, the UK did not have specific legislation for state aid and EU state aid rules applied directly.

What does the EU state aid framework look like?

As a general rule, an EU Member State cannot pay out state aid unless a scheme or an aid measure is approved by the European Commission. Policymakers have to make sure that support is legal through making it compliant with guidelines set out at EU level.

However, there are many exemptions, such as the de minimis rule for assistance worth less than €200,000 over three years and the General Block Exemption Regulation. These exemptions generally allow smaller schemes to be set up without a prior notification in Brussels. In addition, EU state aid rules do not restrict policies open to all businesses, such as a general reduction of corporation tax or changes in employment law.

In 2020, the Commission finished an evaluation of the state aid rules. It concluded that overall, the rules were fit for purpose but would be amended in some areas, to reflect the objectives of the European Green Deal – the EU’s climate action plan, and its industrial and digital strategies.

In response to the coronavirus outbreak, the EU has temporarily relaxed the usual state aid restrictions to give Member States more flexibility to support their economies.

The EU state aid rules can be found on the European Commission’s website.

Has there been much state aid in the UK?

While an EU Member State, successive UK governments supported rigorous state aid controls and avoided subsidising particular industries or companies.

The UK public sector had spent less in business support than most other EU countries. In 2019, the UK spent 0.51% of GDP on state aid (excluding railways, agriculture and fisheries), while France spent 0.85% and Germany 1.54%.

Transition period

During the transition period, the UK continued to apply EU state aid rules and regulations and the EC carried on with the assessment and approvals of UK state aid measures. After the end of the transition period on 31 December 2020, the Commission can finish ongoing procedures and take follow-up action. For up to four years after that date, the Commission has power to initiate new examinations of UK aid, which authorities may have paid to businesses before the end of transition. This for example allows the Commission to investigate allegations of unlawful UK aid paid out in the past.

The Protocol on Ireland and Northern Ireland determines that EU state aid law continues to apply in the UK in respect of support measures which can affect trade between Northern Ireland and the EU. This is limited to trade in goods and electricity. The European Commission remains the enforcement authority for these measures.

The Government has proposed an independent UK subsidy control regime in the Subsidy Control Bill, which is currently going through Parliament.

World Trade Organisation Agreement on Subsidies and Countervailing Measures

The UK is party to the WTO Agreement on Subsidies and Countervailing Measures.

Under the Agreement, some subsidies are prohibited outright while the rest are ‘actionable’ – meaning that the subsidy is allowed, but other countries can take certain actions if the subsidy harms them. Countries can protect their industries by taxing imports of the subsidised good – this is known as imposing a ‘countervailing duty’.

Although the definition of a ‘subsidy’ under the WTO regime is broadly similar to ‘state aid’ in EU law, the EU rules are a lot more stringent than the WTO rules on subsidies. The key differences are:

• The default position in WTO rules is that subsidies are generally allowed, while EU rules consider subsidies to be generally illegal.
• WTO rules apply to goods, but EU rules include services too.
• EU rules are applied prospectively (i.e. legality must be proved before awarding any support), while WTO rules are only reactive, and are only triggered if a member country lodges a complaint.
• WTO rules rely on state-to-state enforcement while under EU rules there are remedies available to businesses and individuals.
• Under EU rules, a business has to repay illegal state aid. There is no such mechanism to remove anti-competitive effects under the WTO rules.

The WTO rules on subsidies apply alongside the UK commitments on subsidy control under the Trade and Cooperation Agreement with the EU and other international agreements.

The text of the WTO’s Agreement on Subsidies and Countervailing Measures is available on the WTO’s website.