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19.07.2022 | KPMG Law Insights

Research & Development – The R&D Framework and its 20% Clause

The article provides an introduction on the design and main features of the 20% clause of the R&D framework as an exception to the prohibition of state aid in Art. 107 TFEU. It may be particularly worthwhile for universities and research institutions to address the requirements of the 20% clause.

Background:

In the 20% clause, there is an exception to the prohibition of state aid in Art. 107 TFEU. It is part of the R&D Framework (the current Union framework for state aid to research, development and innovation) and, with its design for research institutions, creates a further exemption constellation within which the Commission does not assume aid within the meaning of Article 107 TFEU. The requirements that must be met by research institutions in order to be able to legitimately invoke the 20% clause, and the challenges and as yet unresolved questions of a legal and factual nature associated with the application of the 20% clause, are the subject of this article, which provides a brief overview and outlook on the topic.

 

The scope and design of the 20% clause:

The 20% clause applies to state research institutions that, in addition to their non-economic activities (primarily teaching and research), also engage in economic activities to a certain extent. In this regard, economic activities are those activities through which the entity regenerates financial resources and profits. Only if these economic activities are to be classified as ancillary activities does the 20% clause apply and they are not subject to state aid law. The requirements for the application of the 20% clause and the classification of the economic activity as purely ancillary are defined by the Commission in legally binding criteria. The economic activities must be ancillary activities of the research institution. The nature of the economic activities can vary; various fields of activity are conceivable: for example, offering continuing education events, contract research work by private individuals, lending laboratory equipment or, for example, preparing expert reports.

An economic activity may constitute an ancillary activity if it does not exceed a share of 20% with respect to the total capacity of all activities of the entity and the nature of the economic activity is inseparable from and necessary for the non-economic activity. In addition, no new infrastructural resources may be required for the execution of the economic activities. This means that the same materials, personnel and premises must be used for both economic and non-economic activities. Accordingly, purchases intended solely to carry out economic activities are not permitted and are subject to the law on state aid.

In order for the economic activity to be classified as a secondary activity, some documentation is required by the research institution relying on it. Within a separation statement, it must be shown which activities are of an economic nature and which activities are of a non-economic nature. The separation calculation is then also considered as proof that the limit of 20% of the total capacity of the facility has not been exceeded. The same applies to the use of the infrastructure: it must be evident from the documentation that there has been a predominant use for non-economic activities.

Despite the EU Commission’s statements in the R&D framework on the 20% clause, there are still some legal uncertainties concerning the provisions of the circumstances and framework conditions. In particular, the requirement with respect to the overall capacity of the facility is unclear and has not yet been clarified by either decisions or the judiciary. The determination of the 20% of the total capacity can refer either to the research institution as a single unit or to different thematically structured subunits, for example individual faculties or research groups. A clear interpretation of the concept of unity has yet to be made, and thus uncertainty remains with regard to the reference value.

 

Outlook and reality check:

So far, the 20% clause of the R&D framework has proven to be more of a “paper tiger” whose concrete application still entails uncertainties. Although basic requirements and criteria are defined by the R&D framework, there is a lack of clarification of other requirements that would increase the likelihood of success of an invocation of the clause. It therefore remains to be seen whether last year’s announcement that the EU Commission would comment on the issues and come up with resolutions to remedy the legal uncertainties will be fulfilled. Once these uncertainties have been finally clarified, however, the exception offers research institutions another practical way of using public funds in a way that complies with state aid rules.

This article is part of the newsletter “Querschnitt Wissenschaft”, which you can subscribe to here.

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