News Update State Aid

On 25 January 2022, the Grand Chamber of the Court of Justice of the European Union ("CJEU") ruled in favour of the European Commission's ("Commission") appeal in the Micula case (C-638/19 P). The CJEU set aside the General Court's ("GC") ruling, finding that the reference date for the Commission's competence was the arbitral award of 11 December 2013 ordering Romania to compensate the damages the Micula brothers suffered following Romania's withdrawal of the tax incentives in violation of the Bilateral Investment Treaty with Sweden ("BIT"). Moreover, the CJEU confirms that as of Romania's accession, the BIT's arbitral system became inapplicable, applying the Achmea case law.

Background

Two Swedish investors, established in Romania, referred to as the Micula brothers, had received several tax incentives on the basis of a Romanian scheme to promote investment in disadvantaged regions. Romania terminated this scheme in the context of its accession to the EU. Hereafter, the Micula brothers initiated arbitration proceedings against Romania to obtain compensation for the early revocation of the national scheme in violation of the BIT. The Micula brothers argued that Romania had created legitimate expectations that the tax advantages for their investments would be available until 1 April 2009. Subsequently, the arbitral tribunal in 2013 ordered Romania to pay EUR 180 million in compensation for the early termination of the tax incentives. The Commission informed Romania that in its view, payment would constitute an aid measure which would have to be notified under the State aid rules. Nevertheless, Romania paid the compensation in part by offsetting the award to taxes owed by its beneficiaries. This prompted the Commission to start the State investigation.

The Commission found the payment of the compensation award was constitutive of State aid in violation of Article 108 Treaty on the Functioning of the European Union ("TFEU") in its March 2015 Decision ("Decision") and ordered Romania to recover the unlawful State aid. The Micula brothers appealed, and the GC annulled the Decision in June 2019, solely on the ground that the Commission was not competent to take the Decision. According to the GC, the State aid was granted prior to the accession of Romania to the EU, namely the withdrawal of the tax incentives scheme in 2005. The Commission appealed the GC judgment, which led to the CJEU's judgment.

The judgment in Case C-638/19 P

The CJEU upheld the Commission's appeal and confirmed the Commission's competence to investigate the aid granted by Romania. According to the CJEU, the GC made three errors of law.

1. Determining the date of reference
Firstly, the CJEU found that the GC wrongly considered the date of repeal of the tax incentives by Romania to be the date on which the aid was granted. In the view of the GC, that event gave rise to the right of compensation and not the arbitral award because the arbitral tribunal only served to give effect to an already existing right of compensation by determining the exact amount of compensation. The CJEU held that the date of the award of the aid is the decisive factor in determining whether the Commission had competence under Article 108 TFEU. In line with the Opinion of Advocate General ("AG") Szpunar, the CJEU considers that the right to compensation in this case stems exclusively from the arbitral award, since on that date (i) the Micula brothers obtained the definitive right to compensation (i.e., the State aid), and (ii) the State entered into the corresponding commitment to grant the compensation. According to the CJEU, the actual right itself did not exist prior to the arbitration award in violation of the BIT, although the repeal of the tax incentives may have given cause for the right of compensation in this case.

2. The Commission's competence under Article 108 TFEU
Secondly, following the finding that the State aid was granted after the accession of Romania to the EU, the Court logically concluded that the GC also erred in law in holding that the Commission lacked competence to investigate the aid and adopt the Decision under Article 108 TFEU.

3. The relevance of the Achmea judgment
Thirdly, the CJEU believed that the GC erred in law in holding that the Achmea judgment was irrelevant for this case. In the Achmea judgment, the CJEU established that the TFEU precludes parties from relying on an arbitration clause in an intra-EU BIT to remove the resolution of a dispute from the EU judicial system. This brings the case before an investor-state tribunal with exclusive jurisdiction. By removing such disputes from the jurisdiction of their own courts and the EU system of judicial remedies, the effective legal remedies, including references to the CJEU prescribed by Article 19 of the TEU, cannot be guaranteed.

The arbitral tribunal, set up on the basis of the BIT, cannot be regarded as part of the EU judicial system, nor a 'court or tribunal of a Member State' or subject to any review of a Member State court to comply with EU law. Therefore, the Micula brothers could not have relied on the BIT's arbitration clause, since Romania’s consent to the arbitration system laid down in the BIT became inapplicable following its accession to the European Union.

Follow up

The CJEU's judgment only gave a final ruling on the Commission's competence. The CJEU referred the case back to the GC to rule on the Micula brothers' arguments that the compensation did not fulfil the conditions of Article 107(1) TFEU, and therefore, did not qualify as State aid. Since (i) the GC has not yet ruled on this matter and (ii) the Commission's appeal was limited to the GC finding that the Commission lacks competence, the question of whether the compensation qualifies as State aid fell outside the CJEU's jurisdiction in the present ruling.

Key takeaways

• The CJEU's finding that the Achmea judgment applied is in line with that judgment and the CJEU judgment of 2 September 2021 in case C-741/19 ('Komstroy'), in which the CJEU confirmed that resolution of intra-EU disputes by Investor-State Dispute Settlement ("ISDS") on the basis of exclusive arbitration clauses of bilateral or multilateral investment treaties (such as the Energy Charter Treaty) are incompatible with EU law. Such disputes must be resolved by a judicial body which forms part of the EU judicial system, which is subject to EU law and under the obligation to refer questions on interpretation or validity of EU law to the CJEU.
• The CJEU's reasoning that the entitlement to the compensation followed from the arbitral award is consistent with its case law on the basis of which the entitlement to aid follows directly from a scheme and does not require a separate decision if there is no margin of discretion in applying the scheme, including the amount of the aid (see Case C-337/19 P, Belgian excess profit rulings). In the Micula case, the CJEU considered the GC erred in law in holding the revocation of the tax incentives to be the decisive moment for the creation of the entitlement. According to the CJEU, the arbitral award cannot be considered a mere implementing measure of a declaratory nature. The arbitral tribunal granted the compensation on its finding that Romania had failed to ensure "fair and equitable treatment of the investments" under the BIT. This ruling inherently involved a margin of appreciation, even more so because the tribunal also had to determine the actual amount of the compensation for Romania's infringement.
• Although the CJEU's ruling is not the end of the Micula saga, it seems unlikely that the GC will follow the Micula brother's argument that the compensation does not constitute State aid. The settled case law that compensation national authorities may be ordered to pay for damage they have caused cannot be considered State aid (see Cases 106/87 to 120/87, Asteris and Others) is not applicable to damages that are to indemnify for the recovery or withdrawal of unlawful State aid (see Case T-565/08, Corsica Ferries, paras. 23, 114 and 120 to 131). As from Romania's accession to the EU, the EU State aid rules oppose the implementation of arbitral awards granting investors protection against the withdrawal of unlawful State aid measures.
• The Commission, upon notification by the responsible Member State, could conclude that the State aid following from the implementation of an arbitral award is compatible with the internal market. However, this conclusion seems very unlikely in the Micula case. In the Decision, the Commission assessed the compatibility of the compensation under the conditions for aid to promote regional development in remote areas. Although Romania did not submit any information to justify the compatibility of the aid, the Commission considered it highly unlikely that the conditions for compatibility could be met.
• The risks for investors associated with enforcement of arbitral awards in violation of the State aid rules are considerable. They are obliged to repay the compensation that was to replace the advantages that were granted through the national schemes that are withdrawn in violation of the BIT or investment treaty and plus the 'State aid interest' from the moment the compensation was put at their disposal until the actual recovery to restore the distortion of competition.
• Therefore, investors involved in disputes under bilateral or multilateral investment treaties would do well to assess the State aid risks of their claims for compensation. The State aid rules are relevant if the claim relates (i) to an intra-EU dispute to which the Achmea case law applies and (ii) to a dispute with an EU Member State and an investor of a third country. In the latter situation, the compensation by the Member State could still be caught by the State aid rules in cases where the compensation would strengthen that investor's position in the EU market.