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State aid rules

The section below provides the background to the State aid rules and explains how the rules apply while the UK remains a member of the EU. However, following the UKs withdrawal from the EU in a no deal scenario, some changes will be made to the rules to reflect this. This is explained in detail below. 

The State aid rules are a fundamental part of the laws which facilitate the creation and development of the EU’s internal ('single') market. Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) provides as follows:

"Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market."

The State aid rules are intended to regulate subsidies and to stop public authorities from distorting the markets, by selectively favouring particular businesses, or particular sectors or areas. Although there is a basic prohibition on the provision of State aid by public authorities, the European Commission does consider that certain types of aid is permissible because it is compatible with the common market. The Commission also has a wide discretion (under Article 107(3) TFEU) to approve State aid in certain circumstances (for example to promote the economic development of certain areas or to facilitate the development of certain economic activities or certain economic areas, where the effect on intra EU trade is limited). The State aid rules do not prohibit public authorities from investing public money on terms that would be acceptable to a market investor (the so-called Market Economy Operator Principle). Extensive information about the State aid rules is available on the European Commission’s website .

In practical terms, State aid can be granted for a wide range of activities, for example:

  • aid for job creation and capital investment;
  • aid to SMEs;
  • aid for research, development and innovation;
  • training aid; and
  • aid for environmental protection.

Should the Commission consider that any State aid granted has been unlawful, it can order the recovery of funding with compound interest. 

The State aid rules following the UK’s withdrawal from the EU

While the UK remains a member of the EU, the Welsh Ministers remain bound by the State aid rules by virtue of section 80 of the Government of Wales Act 2006. 

In the event of a “no deal Brexit”, the European Union (Withdrawal) Act 2018  saves the existing European State aid rules, and makes them part of domestic legislation. In addition, the State aid (EU Exit) Regulations 2019  (which will come into force on Exit Day) correct deficiencies arising from bringing the EU regime into domestic law. In short this means that while the regime’s substantive rules will not change, the regulations make corrections to the rules to ensure that provisions continue to be effective after Exit Day. The biggest change effected by the Regulations is the transfer of functions from the European Commission as regulator of the State aid rules to the Competition and Markets Authority (the CMA). They will take over the functions of the European Commission, including receiving, examining and approving notifications of aid, investigating potential unlawful aid and monitoring aid granted by public authorities in the UK. 

Should a deal be reached between the UK and the EU, it is assumed there will be an implementation period, and that during this time, the State aid rules as they currently operate, with the European Commission as the regulator, will continue. Following this implementation period, while it is likely that there will be a domestic State aid regime in place, it is currently uncertain what form it will take. 

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