Investors and state aid: Is there any risk of restitution?
Spotting state aid A company may easily identify any advantage granted by a public authority when a particular measure is clearly state aid, such as, for example a direct subsidy granted by a public authority. A company may, however, not be aware that it has been the recipient of state aid because state aid is a broad concept that may take several forms. For example, a preferential interest rate, a state guarantee, the acquisition of real estate on favorable terms, certain tax exemptions or reductions in the rate of social security contributions, preferential rates for power supply or state participation in the capital of a private company on unusually favorable terms may all constitute state aid. A recent case published in the last issue of the Competition Policy Newsletter prepared by the Competition Directorate General of the European Commission illustrates the difficulty for companies in identifying a particular measure as state aid, in particular in the context of tax incentives provided by domestic tax law. Italy adopted a tax law reducing the rate of corporate income tax applicable to banks that decide to merge. This law was enacted to modernize the Italian banking sector and in particular to increase the average dimension of Italian banks by encouraging consolidation. The European Commission decided that this tax measure was incompatible with the state aid rules of the EC Treaty because it provides a discriminatory advantage to banks participating in mergers. As a consequence, it ordered Italy to recover the aid granted to the banks that merged.
When can state aid be recovered? Poland's State Aid Act was adopted on April 30, 2000, and entered into force on Jan. 1, 2001. It provides for three situations where the recovery of state aid may be required from the beneficiary: " When the granting of the state aid was executed pursuant to a law declared by the Constitutional Court to be not in accordance with the Constitution, the State Aid Act or an international agreement regulating the granting of state aid, such as, for example, the European Agreement signed in 1991 between Poland and the EC;
" When the granting of the state aid does not comply with the State Aid Act or an international agreement; or
" When the granting authority decides that the aid has not been used in accordance with the granting conditions.
It is too early to assess how the granting authorities will proceed in practice to recover illegal state aid. The technique of recovery and the applicable rules will depend, in principle, on the legal basis on which the aid was granted; for example, whether the aid was granted by an administrative decision or by an agreement governed by civil law. If, for example, the Constitutional Court decides that a decision to grant a particular aid is based on a law that violates the European Agreement, the granting authority will have - immediately after the issuance of the Constitutional Court's decision - to recognize the invalidity of the decision and declare it void. In case of failure of the granting authority to do so, the president of the Office for Competition and Consumer Protection, who is the supervisory authority under the State Aid Act, will have to file a complaint with the Supreme Administrative Court against the inertia of the granting authority. If the aid has been granted through an agreement instead of an administrative decision, a court will have to decide whether the agreement is fully or partially void and issue a restitution order. Once the court decision is final, the beneficiary will have three months to return the aid. In particularly justified cases, the granting authority may, at the request of the beneficiary, authorize the reimbursement of the principal, including interest, in installments. The act forbids the granting of any aid to a beneficiary who has not returned any illegal aid previously granted.
Vested rights Once Poland becomes an EU member state, any decision of the commission regarding the restitution of state aid granted in Poland in violation of the EC Treaty will have to be implemented by Poland. According to the EC Treaty, a decision addressed by the commission to a particular member state is binding on that member state. Poland is already subject to some obligations in the field of state aid under the European Agreement. The granting of a public aid favoring certain undertakings or the production of certain goods may violate the European Agreement if it affects trade between the EU and Poland. However, the State Aid Act, which provides for the restitution of illegal aid, may not be applied retroactively to previously granted aids. It can therefore not be a legal basis for requiring the restitution of aid granted in violation of the European Agreement before Jan. 1, 2001 (the date of entry into force of the act). The issue of incentives granted to companies established in Special Economic Zones (SSEs) after the entry into force of the European Agreement (on Feb. 1, 1994) is currently the subject of political negotiations between Poland and the commission. Poland has expressed its wish to respect the rights acquired by entrepreneurs who started business activities in the SSEs. It appears that negotiations will be held with main investors to try to reach an acceptable solution. It is too early to assess how this matter will be finally resolved.
Under European law, member states often try to argue before the commission (and similarly investors before national courts) that the recovery would be contrary to the so-called principle of legitimate expectations. This principle implies that if someone acted in good faith on the basis of the law as it is or as it seems to be, it should not be placed in a situation of uncertainty as to its rights and obligations. It follows from the decisions of the European Court of Justice, as well as from national courts, that this principle is rarely accepted in cases involving the recovery of state aid. In the Italian case referred to earlier in this article, Italy argued that the relevant banks had carried out the mergers in reliance on the tax incentive provided by Italian law. The commission decided nevertheless that the beneficiaries of the aid could not have had a legitimate expectation that the measures were compatible because a diligent operator should have taken into account the possibility for the aid to be declared illegal. This principle is strict and the consequences are clear: a company must at all times investigate whether a measure is compatible with the state aid rules and in particular whether the granting authority went through the correct procedure prior to the granting of the aid.
It is worth noting that the principle of vested rights, which is an aspect of the principle of legitimate expectations, is a known principle under Polish law. Certain Polish legal scholars as well as the Constitutional Court have recognized it in various matters. We can therefore anticipate that certain investors may seek to use this defense and argue that they have vested rights in the granted incentives because they have invested in reliance on the regulations applicable to the SSEs at the time they made their investments.
Michele Fajtmann, a member of the Brussels and New York bars, is responsible for European law practice at White & Case.
