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Relief from a penalty imposed by EU rules is State aid that is incompatible with the internal market.

 

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Introduction

EU rules contain a standard exclusion: State aid cannot be declared compatible with the internal market when it is non-severable [i.e. cannot be separated] from a violation of EU law. Yet, cases involving non-severable violations of EU law are rare.

The measure that is reviewed in this article illustrates how the European Commission treats aid in such rare cases when an EU rule in another policy area is contravened.

After a formal investigation, the Commission concluded in decision 2017/1441 that a Polish scheme for aiding milk producers was incompatible with the internal market.[1]

Background

Milk production is part of the Common Agricultural Policy and receives EU assistance. However, unlike other agricultural products, it was subject to a system of output quotas to prevent over-production [sugar was another product subject to quotas].

When national quotas were exceeded, Member States had to pay a levy back to the European Agricultural Guarantee Fund [EAGF]. Member States divided the cost of the payment among the producers who generated the surplus.

In the year 2014/2015, the national Polish quota was exceeded by 580.3 million kg, resulting in a levy of PLN 659.8 million [approximately EUR 152.7 million] that had to be paid into the EU budget [the EAGF].

Poland, with the consent of the Commission, permitted milk producers to pay the levy for exceeding the milk quota in three instalments. But, after payment of only the first instalment of the levy, in May 2016, Poland notified to the Commission a measure that would write-off the remaining two thirds of the levy.

 

Existence of State aid

There was no doubt that the aid was granted from state resources. The levy had already been paid by Poland to the EAGF and, therefore, by writing-off the remaining part of the levy, Poland forwent revenues. “Waiving revenue which would otherwise have been paid to the State constitutes a transfer of State resources.” [Paragraph 25 of the decision]

With respect to the granting of a selective advantage, the Commission observed the following:

“(28) Recent case law, namely the judgment of the General Court in case T-538/11 Kingdom of Belgium v European Commission has reiterated that ‘the concept of a charge which is normally borne by the budget of an undertaking covers, in particular, the additional costs which undertakings must bear by virtue of obligations imposed by law, regulation or agreement which apply to an economic activity’. (29) Costs, such as the milk levy in the present case, are expenses which a milk producer has to bear from its own budget in the framework of its normal business activity. The obligation to pay milk levy stems from the Single CMO Regulation and the national rules on the organisation of the market in milk and milk products. If certain undertakings are fully or partially relieved from such expenses, then they benefit from an advantage. (30) The Commission therefore considers that the aid scheme confers a selective advantage on milk producers.”

There was also little doubt that the measure distorted competition and effected intra-EU trade. Milk is widely produced and freely traded in substantive quantities across the EU. Poland was the fifth largest producer of milk in the EU.

Compatibility of the aid with the internal market

The Commission first noted that “(37) it is settled case-law that the burden of proof for demonstrating that a measure is compatible with the internal market lays on the Member State.”

It then pointed out that “(37) the Polish authorities have not presented any information on why the aid scheme could be considered compatible with the internal market on the basis of any of the Commission's State aid instruments”.

The Commission observed that the write-off of the milk levy did not fit into:

  • the Agricultural Block Exemption Regulation,
  • the Guidelines on State Aid to Agriculture, or
  • the Agricultural De minimis Regulation.

“(38) The assessed aid scheme does not correspond to any of the aid categories provided for in the Agricultural Guidelines or in Regulation (EU) No 702/2014.”

“(39) Furthermore, […], aid under the assessed scheme does not fulfil the criteria of aid for undertakings in difficulty in the sense of the Rescue and Restructuring Guidelines.”

“(40) In the absence of any relevant comments from Poland concerning de minimis aid, the Commission further notes that its doubts on the applicability of Regulation (EU) No 1408/2013 are confirmed.”

Direct assessment on the Treaty

When a State aid measure does not fit into any of the Commission instruments, Member States have the option to ask for its assessment directly on the basis of the Treaty. In this case, the Commission concluded that the aid was incompatible with the internal market because (a) it did not contribute to the achievement of an objective of common interest and (b) it violated other principles of EU law, in particular, the requirements laid down in the common market organisation of milk products.

The Commission first explained that “(41) in its notification, Poland referred to point 30 of the Agricultural Guidelines. According to point 30 of the Agricultural Guidelines, the Commission assesses aid schemes not covered by the Agricultural Guidelines or by any other relevant State aid rules on a case by case basis directly on the basis of Article 107(3) TFEU, taking into account the rules laid down in Articles 107, 108 and 109 TFEU, the Common Agriculture Policy and by analogy the Agricultural Guidelines, where possible. Member States notifying State aid not covered by the scope of the Agricultural Guidelines have to demonstrate that the State aid in question meets the common assessment principles as laid down in Chapter 3 of Part I of the Agricultural Guidelines. The Commission only approves such measures if the positive contribution to the development of the sector clearly outweighs the risks of distorting competition in the internal market and affecting trade between Member States.”

“(42) In aid cases falling under Article 107(3) TFEU the Commission has wide discretion [SFEI, C-39/94, paragraph 36; Vlaamse Gewest v Commission, T-214/95, paragraph 86].”

“(43) Article 107(3) TFEU specifies four types of cases in which State aid can be considered compatible with the common market. The Commission considers that the derogations provided for in Article 107(3)(a), (b) and (d) TFEU are not applicable in the present case because the aid scheme in question is not intended for the promotion of the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, nor is it intended for projects of common European interest or to remedy a serious disturbance in the economy or for the promotion of culture and heritage conservation.”

 

“(44) Under Article 107(3)(c) TFEU, aid to facilitate the development of certain economic activities or of certain economic areas may be considered to be compatible with the common market, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.”

“(45) In order to be compatible with Article 107(3)(c) TFEU, aid must pursue an objective of common interest. In this regard, aid in the agricultural sector should in particular be in line with the rules on the common organisation of the markets in agricultural products. Where there is a regulation on the common organisation of the market in a given area, the Member States are under an obligation to refrain from taking any measures which might undermine or create exceptions to it [France v Commission, C-456/00, paragraphs 30-33].”

“(46) In the milk and milk products sector, the rules concerned are established in the Single CMO Regulation and Regulation (EC) No 595/2004. Regulation (EC) No 595/2004 lays down detailed rules for applying a levy in the milk and milk products sector as regards, among others, the payment of the levy. A modification introduced by Implementing Regulation (EU) 2015/517 permitted Member States to decide that the amount of the levy due related to the 12-month period beginning on 1 April 2014 is paid by 30 September 2017 in three yearly instalments without interest. The Single CMO Regulation does not provide for further exceptions with regard to the payment of the levy. Poland made use of the said permission through the use of de minimis aid. In addition, the present aid scheme provides for cancellation of the levy (second and third instalments) for farmers who overran their available quantity and thus, under the rules on the common organisation of the markets in agricultural products, are liable vis-à-vis the Polish State for payment of the levy. Exempting certain Polish milk producers from the obligation to pay the levy would undermine the quota system and distort competition with those producers who respected their quotas and those who have taken steps to pay their individual levy bills.”

“(47) On that basis, the Commission considers that the write-off of milk levy is not compatible with the Single CMO Regulation and Regulation (EC) No 595/2004 and thus with the rules on the common organisation of the markets in agricultural products as regards the milk quota system.”

“(48) The write-off of milk levy is a mere instrument intended to improve the financial situation of undertakings but which in no way contributes to the development of the sector or pursue an objective of common interest and which is not compatible with the CMO rules.”

“(49) Moreover, if a State aid measure entails a non-severable violation of Union law, the aid cannot be declared compatible with the internal market [Germany v Commission, C-156/98, paragraph 78; Régie Networks v Rhone Alpes Bourgogne, C-333/07, paragraphs 94 to 116].”

For the reasons explained above, the Commission concluded that the aid was not compatible with the internal market.

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[1] The full text of the decision is published in OJ L 206, 9/8/2017, and can be accessed at:

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017D1441&from=EN.

[Photo credit: RichardBH from flickr.com]



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