What is State aid?

State aid is a European Commission term which refers to forms of assistance from a public body or publicly-funded body, given to undertakings engaged in economic commercial activity on a selective basis, with the potential to distort competition and affect trade between member states of the European Union.

Preferential public assistance - State aid - can distort the market, which in turn can result in lower competitiveness for business, less innovation and ultimately higher prices for consumers. There is therefore a need for effective State aid control in order to maintain a level playing field for free and fair competition in the single market and to guard against subsidy races and national protectionism.

The State aid rules are designed to regulate subsidies and to stop public authorities from distorting the markets. They also provide a framework and discipline to assist public authorities to ensure that scare public resources are targeted where they are most required in an efficient and effective manner. 

State aid - the definition

The definition of State aid stems form Article 87(1) of the EC Treaty which states that:

"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, in so far as it affects trade between Member States, be incompatible with the common market"

This definition translates into 5 tests or criteria, all 5 of which must be met for State aid to be present:

• aid is granted by a member state or through state resources (including e.g. lottery distributions and European funds);
• aid confers an advantage on the recipient;
• it favours certain commercial undertakings or the production of certain goods (i.e. it must be selective in its nature);
• it distorts or has the potential to distort competition;
• the activity is tradable between Member States and the aid has the potential to effect trade.

All five conditions must be met for State aid to be present.

In practice, State aid will need to be considered when public authorities provide support to any organisation engaged in economic activities regardless of the legal status of that organisation.

More information on the interpretation of the 5 tests and the process of identifying State aid can be found on the right.

When is State aid allowed?

The Commission generally prohibits State aid unless it is justified for reasons of economic development. The circumstances where State aid is allowed are set out in the European Commission State aid rules - a series of frameworks, guidelines and regulations which set out what aid can be given. These rules enable public authorities to target support to address market failures in order to achieve desirable policy outcomes, for example to facilitate competitiveness through research spending, improve access to venture capital for small firms, support the environment, encourage regional development or help provide access to training.

Further information on the State aid rules can be found on the right.

The European Commission governs member states' compliance with these rules and must be notified of all schemes involving State aid. State aid must have the necessary European Commission approval before aid can be granted. 

More information on securing the relevant approval can be found on the right.

What are the implications of ignoring the State aid rules?

Unauthorised State aid is illegal aid and if public authorities get it wrong, the European Commission has the power to require repayment with interest from the aid beneficiary.  Aid beneficiaries can also take the granting authority to court for damages against illegal aid recovered.

Aggrieved competitors may take their complaint about illegal State aid directly to the Commission for investigation.

There is also potential to damage the public funder's reputation as a consequence of schemes being stopped and policies having to be altered.