In this series, “Critical Thinking in the Time of COVID-19,” our European tax practice examines the next stage of analysis for corporates that have begun digesting the economic and legal impact of COVID-19 on their businesses. This edition covers the area of European fiscal state aid.
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EU State Aid Issues
Any fiscal measure adopted by a European Union member state supporting its economy can constitute unlawful state aid in violation of EU law. State aid rules do not disappear during times of crisis. The European Commission (the Commission) classified the German tax response to the 2008 financial crisis as unlawful state aid in violation of Art. 107 of the TFEU and requested that Germany collect the relevant taxes. Concerns over this past action by the Commission could have hindered member states’ implementation of emergency tax measures in response to COVID-19.
However on 13 March 2020 the Commission made clear that public support measures available to all companies, including suspension of payments of corporate and value-added taxes or social contributions, do not fall under state aid control.
The following measures quickly followed from Germany, France and the UK (which remains subject to EU state aid rules during the Brexit implementation period):
- Germany stated it will facilitate the granting of payment suspensions for taxes already due or becoming due up to 31 December 2020 (without any interest charges). In addition, negotiating and adjusting prepayments for income and corporate income taxes, as well as trade taxes, will be simplified and expedited. Enforcement measures, including penalties on late payments, will be deferred until 31 December 2020. The measures apply only to taxpayers directly and significantly affected by COVID-19. The German government expects a €33.5 billion decrease in federal tax revenues as a result of the outbreak.
- France introduced a €45 billion package1 allowing businesses to defer payments of direct taxes and social contributions by up to three months without penalty and providing further tax relief, on a case-by-case basis, for ailing companies. To give further breathing room to taxpayers, the tax administration has been instructed to speed up the refund of tax credits (in particular VAT and R&D tax credits). French Budget Minister Gérald Darmanin also stated that the administration would suspend tax audits directed against companies operating in the industries most impacted by the crisis.
- The UK unveiled rolling measures costing in excess of £350 billion, including income tax and VAT deferrals.
The Commission also consented to the member states’ granting of compensation to companies for damages caused by the COVID-19 outbreak.
State Aid Considerations Remain
Although the Commission stated publicly that generally applicable suspensions of tax payments were outside its control, governments still faced the possibility that state aid rules2 would apply to certain measures, in particular those involving selective advantages to one or more companies.
The Commission went on to announce on 19 March 2020 a relaxed aid approval regime called the Temporary Framework, which will be in place until the end of December 2020 but can be extended. The framework provides for swift Commission clearance of five types of aid:
- Direct grants, selective tax advantages and advance payments: Member states will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs.
- State guarantees for loans taken by companies from banks: Member states will be able to provide state guarantees to ensure banks keep providing loans.
- Subsidised public loans to companies: Member states will be able to grant loans with favourable interest rates to companies.
- Safeguards for banks that channel state aid to the real economy.
- Short-term export credit insurance.
On 27 March 2020 the Commission announced its intention to extend the Temporary Framework to cover additional forms of aid, most notably in the form of deferral of tax payments, suspensions of employers’ social security contributions or grants of wage subsidies. The extended rules aim to give member states more flexibility to intervene selectively on the basis of need, which is intended to complement the measures available under the original Temporary Framework, as well as the general measures available to all companies, which fall outside the scope of state aid and can be implemented without prior Commission approval. The Commission plans to adopt the extended rules this coming week.
As part of its first wave of economic support for business, on 25 March 2020 the UK notified the Commission of its emergency measures for medium-sized enterprises (SME) under the Temporary Framework. One scheme offers guarantees covering 80% of loan facilities for companies with a turnover of up to £45 million, while a second involves direct grants to SMEs from an overall budget of £600 million. The UK said the schemes would initially run until 30 September 2020, with the possibility of extending until 31 December 2020. The UK also notified the Commission of measures relating to selective business rates relief for the retail, hospitality and leisure industries.
So far, neither France nor Germany has notified the Commission of any tax-related schemes under the Temporary Framework; however the French received approval of a €300 billion liquidity scheme. For Germany, the Commission approved two loan programmes as well as a guarantee scheme and a direct grant scheme.
Some technical and practical issues remain for the aid that has been granted, and corporates should consider lobbying for options in relation to various details of the announced schemes. Corporates should also prepare for the aid’s unwinding, either at the end dates established by the relevant governments or in the event that the Commission rejects any of the notified arrangements.
Technical Issues for Consideration
Brexit
The Brexit transition period ends on 31 December 2020, and no applicable state aid rules governing the UK under its arrangements with the EU subsequent to that date have been announced. An extension to the transition period is possible and the subject of frequent debate by former civil servants and the media. If negotiations do extend past years’ end, and assuming the transition period does not end without agreement, there will be pressure to maintain some control over state aid given the immediate proximity of the UK and European economies as they both seek to ameliorate the economic situation caused by COVID-19.
Assuming an agreement is struck, any approvals given by the Commission will need refreshing in order for the measures to continue past 31 December 2020.
UK-Specific Issues
The employee retention scheme announced by the UK (guaranteeing up to 80% of salaries and self-employed remuneration, with certain limits) has not been notified to the Commission under the Temporary Framework, presumably on the grounds either that the scheme is not selective (it applies to all employers) or that it is aid to workers rather than enterprises.
The UK’s extension of TTP (Time to Pay) presumably does not constitute state aid, on the grounds that it applies to all companies. The extension seems to apply to existing and previous tax liabilities that were otherwise falling due this year. However, as of yet, there has been no read-across to enforcement actions relating to unpaid sums that the UK revenue authorities were already pursuing. We expect pressure to build on the administration regarding liabilities for previous years.
Similarly, neither the UK nor the Commission has indicated any pause would be permitted in recovery of prior state aid, for example as recently mandated by the Commission in relation to the UK Controlled Foreign Companies Rules. The UK government is currently appealing to the General Court the Commission’s decision that the rules constitute unlawful state aid. In the UK, corporates have launched domestic appeals of recovery actions taken by HMRC, causing many cases to be stayed pending resolution of the appeals. Should the UK government agree as a policy matter to pause state aid recovery due to COVID-19, that decision in itself could be considered state aid and would in theory need the Commission’s agreement.
The UK government has also indicated that no interest or penalties will arise on deferred tax payments (e.g., self-employed persons will not have to make a 31 July 2020 tax payment on account). Although deferral of taxes has been blessed by the Commission as outside the scope of state aid rules, the Commission has been silent on nonaccrual of interest. It is unlikely to challenge the measure, given its non-selectiveness.
France-Specific Issues
While the French government submitted its above-mentioned liquidity scheme for approval by the Commission, it has so far not notified the Commission of the tax measures it has adopted. In the same manner as discussed above in respect to the UK’s response, it is likely that across-the-board payment deferrals or the accelerated processing of tax refunds should be seen as non-selective in nature and therefore covered by the Commission’s 13 March 2020 communication.
What could potentially become more problematic is the way the French government will implement its tax relief program for businesses facing significant hardship. Such businesses are eligible for further tax and social security contribution deferrals by applying for a suspension with the Commission des Chefs de Services Financiers (CCSF). Such businesses could also benefit, in the most serious situations, from an outright reduction in or cancellation of their outstanding tax liabilities, as determined on a case-by-case basis. At this stage, the criteria under which these tax advantages will be granted appear vague and leave extensive discretion to the tax authorities to decide how to administer them. The same holds true for the government’s stated intention to relax control and enforcement measures in certain economic sectors. Consequently, there is no guarantee yet that these measures will pass muster under the Temporary Framework. It would not be surprising, however, if the French government tightened up its tax package in the next few weeks to bring it in line with state aid regulations.
German-Specific Issues
Germany has also not notified the Commission of its announced tax measures, presumably on the same grounds as certain of the UK and French tax measures.
German companies may be forced to pursue restructurings in the course of the COVID-19 crisis. The government enacted provisions on “privileged” restructurings in 2017, requiring (amongst other things) that the respective company is in need of a business restructuring and has a valid restructuring plan. The legislative changes included provisions for tax-neutral cancellations of debt, which the Commission specifically approved. However, it is possible that a German fiscal court could refer a specific case to the Court of Justice of the European Union (CJEU) to consider the compliance of such provisions with EU law, particularly if there are likely to be several such examples arising.
Practical Issues for Consideration
The Commission has not announced any pause in fiscal state aid investigations currently running, and there are no indications as yet that the General Court or CJEU will slow down or cease hearing state aid cases.
However, practically speaking, current limitations on access to personnel and offices may impact timetables and deadlines may be relaxed in relation to information response requests to governments and corporates.
Lobbying Options for Corporates
Corporates could consider pushing for delays in relation to either existing state aid recovery processes or responses required by the Commission in regard to ongoing investigations. Any joint lobbying by companies must occur within the limits of antitrust rules.
In addition, companies have an opportunity to lobby governments with regard to specific tax measures that could assist with the economic recovery. Some, but not all, of those measures might have ramifications for the OECD or EU, such as the limitation of using interest costs up to a percentage (e.g., 30%) of tax EBITDA, and the implementation of digital services taxes, which both have their origins in the BEPS project. Additionally, some states have introduced limitations on carried forward income and capital losses to be used against future profits. These could be the subject of lobbying given the likely reduction in business profits, absorption of losses by the equity and likely need to use the value of currently generated losses in future periods as business recovers. Such lobbying must take into account EU fiscal state aid considerations.
In addition, lobby group BusinessEurope has called for more flexibility and clarity around EU state aid rules in relation to larger companies that might require bailouts of more than €800,000, the limit set in the Temporary Framework on grants and loans. BusinessEurope also called for “nonessential” EU public consultations and proposals to be temporarily suspended, to allow all efforts to be focused on tackling the pandemic.
Efforts must start now on working with the Commission to build the long-term framework for state aid, which will inevitably be needed beyond 31 December 2020. This will require patient and sophisticated lobbying by businesses to build a sustainable and legally defensible framework to allow for the European recovery. As EU Commissioner for Competition Margrethe Vestager has said, “When the health crisis is over, we will have an economic crisis to deal with. And if we were to do that, it’s very, very important that we still have a single market because the single market will allow businesses to bounce back with the volume that comes with the single market.”
In a related statement, Commissioner Vestager also urged merging companies to delay filing their deals for approval, citing the impact of the Commission’s remote working measures and difficulties experienced in collecting information from third parties during formal market investigations. At the same time, the Commission significantly ramped up its state aid teams to deal with COVID-19-related state aid issues and is approving member states’ support measures at unprecedented speed.
Conclusion
Tax, legal and compliance teams should work urgently with business colleagues to create their short- to mid-term tax strategy, including lobbying their respective governments, whilst recognising at the same time that European state aid rules continue to apply in a crisis. While non-compliant aid may be an important lifeline, later clawback proceedings can be expensive and can create substantial liabilities for the company.
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1 See Skadden’s March 20, 2020, client alert, “France’s Emergency Package in Response to the COVID-19 Pandemic.”
2 See Skadden’s March 27, 2020, client alert, “Europe and the UK Race To Protect Businesses Impacted by the Coronavirus Pandemic: Foreign Investment, State Aid and Antitrust Rules Adjusted” and March 16, 2020, client alert, “European Commission Delays Merger Notifications Until Further Notice, Develops Emergency State Aid Response to COVID-19 Outbreak.”
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