By Anno Rainer

The European Court of Justice (ECJ) ruled on 12 February 2008 that the effects of unlawful state aid granted without prior notification to the European Commission have to be reversed even if the relevant aid is approved by the European Commission at a later stage. Under EC law, such reversal would require the payment of interest by the aid recipient for the period from receipt of the aid until the date of the approval decision of the Commission that becomes final and legally binding. National law might require repayment of the amounts received and compensation of damages to the competition. (See Centre d’exportation du livre français (CELF), Case C-199/06.)

The Case

The case submitted to the ECJ related to state aid received between 1980 and 2002 by CELF, a French cooperative society in public limited company form. CELF was formed to process orders of print and other communication media from abroad and the French overseas territories and departments to promote French culture throughout the world, without regard to the size or profitability of the orders. The operating subsidies were granted to offset the extra cost of handling small orders placed by booksellers established abroad.

Beginning in 1992, a competitor (SIDE) determined together with the European Commission that the aid in question had not been notified and approved and began a decade plus challenge to the subsidy, which included formal investigation procedures and two favorable (for CELF) Commission decisions declaring the aid unlawful because it had not been notified but compliant with the common market, both of which were, however, annulled by the European Court of First Instance (CFI). In April 2004, the Commission approved the aid for the third time. SIDE, however, brought again a case for annulment of the Commission decision, which is currently pending before the CFI.

Simultaneous to the proceedings at the EC level, SIDE made a request to the French Minister for Culture and Communication to stop further payments and to recover the aid already granted. This request was rejected by decision of 9 October 1996, but the decision was annulled by the Administrative Court of Paris in April 2001. That judgment was confirmed by the Paris Administrative Court of Appeal in October 2004. Upon appeal by CELF and the Minister for Culture and Communication, the case is now pending before France’s Conseil d’État. The Conseil d’État referred to the ECJ the question of whether EC law requires recovery of unnotified aid even where the Commission declared the aid compatible with the rules of the common market. If aid must be repaid, the Conseil d’État also sought guidance as to whether repayment must include the periods between a Commission decision declaring aid compatible and a subsequent judgment of the Court of First Instance annulling the Commission’s decision.

The ECJ Decision

The ECJ recalls that Member States must inform the Commission of any plans to grant or alter aid and must not implement such plans before a final Commission decision (Article 88 (3) of the EC Treaty) .

The prohibition against implementing unnotified and notified aid before a positive Commission decision is intended to protect the competition and the surveillance procedures. A final Commission decision does not have the effect of regularizing, retrospectively, implementing measures that were invalid because they had been taken in disregard of the prohibition laid down by Article 88 (3) .

In principle, aid granted before a final Commission decision must be recovered. Where, however, the Commission approves aid that was granted prematurely, the advantage of the aid recipient consists of saved interest (due to the fact that it did not have to obtain the aid amount on the capital market) and the improvement of its competitive position.

Therefore, under EC law, the aid recipient must pay interest in respect of the period of unlawfulness of the aid. The ECJ points out, however, that domestic law of the Member States might require repayment of aid with interest thereon (although the Member State has the right to re-implement such approved aid for periods following final approval by the Commission) and compensation for damages caused by the unlawful nature of the aid.

As regards the period for which interest must be paid in accordance with Community law, the ECJ recalls two basic principles: the presumption of lawfulness of Community acts until they have been found void by Community courts and, in contrast, the rule laid down by Article 231 (1) of the EC Treaty, according to which the Community courts must declare a contested act void with the consequence of the contested act disappearing retroactively where an action for annulment is well founded.

It follows from the case law of the ECJ that an aid recipient cannot rely on legitimate expectations where a Commission decision is challenged in due time before the ECJ or the CFI or before the period for bringing an action against such decision has expired. The same also applies for the duration of the proceedings before the Community courts. Therefore, the period for which interest on unlawful aid must be paid includes the period between a Commission decision declaring the aid to be compatible with the common market and the annulment of that decision by the competent Community court.

Preliminary Comments

In the case at hand, the requirement to pay interest for unnotified aid is likely to include at least the period from 1980 until April 2004. Whether subsequent periods must be included depends on whether the ECJ upholds the April 2004 Commission decision or declares it void.

The principles the ECJ developed and confirmed in CELF also apply to state aid granted in the form of tax advantages that are implemented without prior notification to, and approval by, the European Commission. Any tax advantages that are not generally available - i.e. irrespective of the industry or the activity or enterprises benefiting from them - are likely to qualify as state aid regardless of whether they are based on legislation or administrative practice, result from a reduction of the tax base or rate, or consist of an alleviation of normal payment modalities.

As a general principle, European state aid law precludes compensation claims against the Member States granting state aid without obtaining prior approval by the European Commission.

CELF highlights that state aid rules are not a static matter and are developing towards stricter surveillance. In case of doubt and as a precaution, relevant tax measures should be notified to the European Commission prior to their implementation to limit the potential impact of such measures being challenged as state aid at a later stage.

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