No state aid in local situations: When the prohibition of state aid under Art. 107 TFEU does not apply

Not every state subsidy is also aid that requires approval. If the situation is purely local, the authority can dispense with the time-consuming notification procedure with the EU Commission. However, the prerequisite is that the company clearly proves and delineates the local character.

When does state support constitute aid?

Anyone applying for funding usually wants to avoid a notification procedure. This is because it can take several months and significantly delay projects with an uncertain outcome. However, notification, i.e. approval by the EU Commission, is required if the funding constitutes aid within the meaning of Art. 107 (1) TFEU.

Several requirements must be met cumulatively:

• The company must receive an advantage,
• which comes from public funds,
• benefits specific companies and
• is likely to distort competition and
• influence trade between EU countries.

Issues in rural areas in particular cannot have an impact on competition in the European internal market. According to case law, it is sufficient if the measure is fundamentally capable of influencing trade between EU member states. Nevertheless, the Court has already recognized subsidies as not requiring approval where a measure only has a practical effect locally and therefore plays no role in trade between EU member states.

Local or cross-border? The correct classification

Anyone planning state support should carefully examine and document how far the impact of the measure actually extends. Companies should clearly describe the catchment area, the user structure and the purpose. The funding notices and contracts should also clearly state the local purpose of the measure and limit the use of the funds to this.

Local measures

A measure remains purely local if it actually only affects a clearly defined area and has no noticeable impact on companies in other EU countries. This is the case, for example, if a service is used almost exclusively by people from a specific city or region, the proportion of foreign users is very low and there is no international advertising. A typical example is a municipal bus line that only runs within a city or a small local heating network that supplies a residential area. A vocational school that is aimed at trainees from the district and is not advertised internationally also has a local impact.

In such cases, it is unlikely that the measure will affect competition in other EU countries.

Non-local issues

The situation is different if a measure is deliberately aimed at users from abroad or takes place in a market that extends beyond national borders. The benefit from state funds must not have more than a marginal impact on cross-border investments or the establishment of companies from other member states. This would be the case, for example, if a university advertises an English-language study program throughout Europe or a wind farm feeds electricity into the European grid. Large international events that attract visitors and artists from other EU member states can also influence competition in the internal market. The decisive factor is therefore not which sector is involved, but how the measure actually works.

The Commission assumes that a local catchment area exists if it generally covers no more than around 50 km and there is no national border within a radius of 150 to 200 km. In such cases, it is assumed that there is no supra-regional attraction for users, customers and investors.

The EU Commission’s decision-making practice

Until the Commission’s package of decisions from 2015 (“The Seven Dwarfs”), the examination of the characteristics of distortion of competition and effect on trade had been characterized by a largely formulaic presumption rule since the Philip Morris ruling (see, for example, ECJ, Case C-730/79, Philip Morris, para. 11 et seq.; ECJ, Case C-280/00, Altmark Trans, para. 82 et seq.). An effect on trade between Member States was generally assumed if state financial aid strengthened the position of a company in intra-Community competition. However, the Commission made a methodological change with the 2015 decision package. It moved away from the previous presumption logic and has since been subjecting local situations in particular to an independent, in-depth case-by-case examination with regard to the effect on trade. It expressly anchored this reorientation in its announcement on the concept of state aid dated July 19, 2016 (Commission, Communication, para. 196 et seq.).

Not least with the Commission’s decision of 28 April 2020 on the Kongresshotel Ingolstadt (Commission, SA.48582, Alleged state aid measures for the Maritim Group and KHI Immobilien GmbH, Ingolstadt, para. 75), the Commission maintained its approach that state measures with exclusively local effects do not affect trade between EU Member States. In this case, the specific examination of the effect on trade was also based on three assessment criteria: Firstly, it must be established whether the aid recipient offers its goods or services exclusively in a clearly defined geographical area within a Member State. Secondly, it must be examined whether this offer is likely to attract customers from other Member States. Finally, it must be assessed whether the measure is likely to have more than merely marginal effects on cross-border investments or on the establishment of companies in other Member States (Commission, SA.48582, Alleged State aid measures for the Maritim Group and KHI Immobilien GmbH, Ingolstadt, para. 75).

Conclusion

Not every subsidy automatically constitutes state aid. If a measure remains local and does not affect trade between EU member states, a key criterion for state aid law is missing. The combination of clearly proven local character and earmarked funding creates legal certainty for public investments.

At the same time, a local situation remains the exception and always requires a careful case-by-case assessment. Blanket assessments are inadmissible, as locally oriented projects can also have cross-border implications.