Subsidy control under the EU/UK Trade and Cooperation Agreement

Background

The control of state aid was a very contentious topic in the EU/UK Trade and Cooperation Agreement ("TCA") negotiations and the exact scope and features of a possible control regime in the UK remained controversial until the end.  Eventually, the EU and the UK agreed on a state aid control regime on both sides.  Since the EU already has a well-developed system of state aid control, the new rules essentially concern the UK which now has to roll out a domestic subsidy control regime (note that the TCA avoids the term state aid and refers to subsidies, a term also used in the WTO context).  Below, we discuss the main features of this new regime.

Pre-Brexit discussions, state aid was not a controversial topic for the UK. It was generally considered to be one of the best in class in terms of state aid compliance.  However, in the context of the Brexit campaign, state aid quickly emerged as one of the key areas in which Brexit supporters wanted their country to regain control.  For its part, the EU regarded a proper UK state aid (or subsidy) control regime as a critical component of its level playing field concept.  It wanted to avoid a potential subsidy race between the UK and the EU and was keen to ensure that post-Brexit the UK would not use subsidies to poach business from across the Channel.

Main features

The subsidy control provisions can be found in the level playing field chapter of the Trade part of the TCA (Title XI, Chapter 3).  The specific and detailed nature of the provisions are unprecedented in the context of a trade agreement. 

The UK will put in place its own subsidy control regime with a government body enforcing the new regime.  At first glance, the new UK regime resembles a light touch version of the EU regime, with room for the UK to diverge from the EU model.  However,  the two regimes essentially share the same objectives and are based on a set of agreed principles.  Contrary to initial appearances, the UK regime may therefore end up being very close to the EU regime.

The new rules entered into force on 1 January 2021 (provisionally on the EU side, pending EU Parliament consent) and the UK now urgently has to adopt implementing legislation, especially since EU state aid law is no longer applicable in the UK.  It is already known that the Competition and Markets Authority ("CMA") will be of the oversight body for subsidy control in the UK.

The new rules apply in parallel to the provisions of the Northern Ireland Protocol that is attached to the Withdrawal Agreement.  Under this Protocol, EU state aid law, including the European Commission's jurisdiction, continues to apply to state aid related to Northern Ireland.  The parallel existence of the two regimes inevitably adds a layer of complexity.

Scope of the new regime

The new regime applies to subsidies which are defined on the basis of the same criteria as those defining state aid in EU law.  This includes, for instance, the advantage criterion and the related market economic operator principle.  As under EU law, there is no materiality criterion in terms of effect: under the TCA effects test, any actual or potential effect on trade and investment (in the EU-UK relationship), however limited it may be, is sufficient to bring a subsidy within scope.  The concept applies to goods and services.

There are a number of exclusions some of which are broadly in line with EU law and others which are not.  As an example of the latter category, aid to the audio-visual industry is excluded from the scope.  As under EU law, a relatively low de minimis threshold applies.  There is also a special regime for businesses with public interest activities.

Enforcement

Under the TCA, the UK is committed to establishing an effective system of control of subsidies with a material actual or potential effect on trade and investment between the EU and the UK (note that when it comes to control, the TCA contains a materiality threshold).  In principle, the UK has some leeway in how it sets up its control system.  For instance, it has already announced that it will not introduce an ex ante control regime based on prior notifications. 

However, the specificity of the provisions of the TCA significantly limit the UK's powers.  For instance, the assessment and approval criteria, such as proportionality and necessity are very similar to the criteria applied by the European Commission.  The TCA also lists a number of prohibited subsidies (e.g. unlimited state guarantees or export subsidies) whilst other types of subsidies (such as rescue and restructuring aid or environmental aid) are subject to conditions which sound very familiar to any EU state aid practitioner.  A Joint Declaration on subsidy control policies contains further guidance.

The body entrusted with subsidy control must be operationally independent and its decisions must be subject to judicial review.  This is the case for the CMA.

The TCA further contains a transparency obligation in accordance with which certain details on each subsidy as defined in the TCA must be published within six months of the subsidy being granted.  This provision, combined with the rights of any interested party to challenge subsidies in court, creates a powerful enforcement incentive.  It also makes the absence of ex ante control rather theoretical.  As a result of these features, subsidy beneficiaries may be well advised to seek legal certainty in the form of prior clearance.

The TCA also requires the UK to put in place an effective mechanism to recover subsidies that are not compliant with the TCA provisions.  However, no recovery can be required where the subsidy is granted on the basis of an act of UK Parliament.  This exception does not apply to acts adopted by the devolved parliaments or assemblies in the UK.

Finally, the TCA contains consultation and cooperation obligations, the possibility for each side to take remedial measures and a dispute settlement mechanism.

Relationship with the WTO

The UK's starting position in the negotiations was the WTO subsidy regime.  As is clear from the above, the TCA provisions are much broader in scope, more ambitious in terms of enforcement and set the standard at a notably higher level.  However, this does not make the WTO rules totally irrelevant.  They continue to apply to the relationship between the EU and the UK and of course to the relationship between the EU or the UK and other WTO parties. 

Specifically in respect of the relationship between the EU and the UK, in case of dispute each side can choose between the TCA and WTO procedures.  However, this option is only available where the relevant obligations are substantially equivalent.  Since the scope of the WTO regime is much narrower than the TCA regime, this option therefore only applies to a limited category of subsidies.  In addition, if the requesting party opts to take measures in accordance with the TCA, the other party cannot invoke the WTO regime as a defence.  The WTO regime therefore applies to the EU-UK relationship but only to the extent it does not prevent the full application of TCA.

Conclusion

For a long time, the UK resisted strict state aid/subsidy control rules post-Brexit but it eventually ended up with a framework that at least in substance is likely to closely resemble the EU regime.

In the UK, the new rules entered into force on 1 January 2021.  However, the UK still has to put in place the necessary implementing legislation to make the system work.  The CMA will be the regulator but at this stage it remains unclear how it will regulate or what regulatory powers it will have.

To be continued.