How State aid rules are being applied to European football: Part 1 – examples of the Commission’s approach

Published 07 July 2014 | Authored by: Richard Craven
In this three part series, Richard Craven explores the current status of State aid in European football.  In Part 1, he examines the rules governing State aid under the Treaty on the Functioning of the European Union, and examines relevant investigations that have recently been undertaken by the European Commission (the “Commission”) which illustrate how the rules are being applied to football.
In part 2, he considers the availability of exemptions, and, in addition, discusses the potential consequences of the football investigation, and in part 3 he looks specifically at State aid for the construction/renovation of football stadiums in France ahead of the UEFA Euro 2016 Championships.
 

Introduction

EU State aid law was thrust into the consciousness of the sporting world in late 2013 when the Commission announced the launch of State aid investigations into football clubs in Spain, including Real Madrid CF and Barcelona CF.1 The announcement followed the launch of a further investigation into Dutch football clubs.2

Prior to 2013, there had only been few complaints of State aid abuse in football. The 2013 investigations therefore signify a change in priority of the Commission’s stance on this matter.  Citizen complaints and criticism from the European Ombudsman3 have helped to make this issue more prominent.4 

The article will run through the issues involved in the football investigations (an accompanying PowerPoint presentation can be found here). This first part of the discussion will focus upon whether or not the arrangements subject of the football investigations may be characterised as State aid.

The Investigations into football clubs in Spain and the Netherlands

Background

The State aid rules work to facilitate the proper functioning of EU markets, prohibiting governments from financially helping particular businesses,5 i.e. from unduly giving the likes of Real Madrid and Barcelona a leg up over rivals.  

There are three separate investigations into Spanish football. The first concerns corporation tax privileges for La Liga’s four member owned clubs (Real Madrid CF, Athletic Club Bilbao, Club Atletico Osasuna (Navarra) and FC Barcelona).6 Another investigation concerns separate 2009, 2010 and 2013 bank loan guarantees given by the Instituto Valenciano de Finanzas (IVF), a public financing institution, ultimately used to finance Valencia CF, Hercules CF and Elche CF.7 The third investigation involves suspect real estate swaps between the City of Madrid and Real Madrid CF.8

The Dutch investigation will look into a variety of dealings between local government and professional football clubs: the municipality of Nijmegen’s 2010 acquisition of an alleged right of NEC (1st league) to buy municipality owned sports facilities; the municipality of Tilburg’s 2010 decision to reduce stadium rent for Willem II (1st league) (with retroactive effect) plus a 2009 decision to suspend rent payment; the municipality of Maastricht’s 2010 decision to waive an MVV (2nd league) debt and purchase of the MVV stadium; the municipality of Eindhoven’s 2011 purchase and lease back of PSV (1st league) land; and the municipality of Den Bosch’s 2011 decision to waive an FC Den Bosch (2nd league) debt and purchase youth and training facilities.9

The football investigations are highly sensitive, not least because the above football clubs are intrinsic to the culture of towns, cities and Member States, as is the case with clubs throughout Europe. This is clearly evident from Spain’s reaction to the investigations: "[t]he government will fight to the last to defend Spanish clubs because they are also part of the Spanish brand".10

Despite football’s non-commercial sporting origins, the commercial presence of football has evolved rapidly, with clubs listed on the stock market, multi-million Euro player transfers, and lucrative television rights, merchandising and advertising deals. The likes of Real Madrid and PSV, clubs at the centre of State aid allegations, are international businesses in competition with each other on a variety of football markets. EU interference is thus warranted and is it is well established that professional sports clubs may be “undertakings11 for the purposes of EU competition law (Case C-519/04 Meca-Medina).

Despite State aid rumours dogging club football throughout the past decade, the Commission delayed any real enforcement action until 2013, following calls for clarification over the application of the law12 and when internal market policy coincided with UEFA’s Financial Fair Play (FFP).13 The State aid fallout is very much a consequence of a period in club football characterised by profligate spending and debt.14 As football rebuilds and UEFA usher in a new climate under FFP, the time is considered ripe to take on State aid abuse. The Commission and UEFA have set out the intention to work collaboratively to ensure FFP is not undermined by lax State aid compliance.15

Football State aid

The 2013 investigations involve existing aid for which mandatory advance Commission notification and approval (Article 108(3) and (2) TFEU) have not taken place. The compatibility of this “unlawful” aid is nevertheless dependent on a Commission determination of compatibility with the internal market. As initial analysis has not resolved doubts over compatibility, an in-depth investigation has been commenced; although no conclusions can be drawn, such a contentious, resource intensive and public step is clearly not a good sign for the clubs involved.

Article 107(1) sets forth a broad prohibition:

… 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 internal market.

The provision entails cumulative conditions: (1) the aid must be granted by a Member State of through State resources; (2) it must confer an economic advantage on the professional football clubs; (3) the advantage must be selective and distorts or threaten to distort competition; and (4) it must affect trade between Member States.

The football aid, which together illustrate the range in type of arrangements subject to State aid law (e.g. land deals, rental valuations and preferential tax treatment), are mainly cases where an economic advantage flows directly from government budgets, central or local, and thus will be seen as granted “through state resources” (see Case T-358/94 Air France v Commission).16 Also, due to the broad way in which the condition has been interpreted, the guarantees provided by IVF, a public law financing institution, due to its lack of independence and the way in which it is controlled by regional government in Valencia, presents little problem, such assistance will be imputed to the state (see Case C-482/99 France v Commission (Stardust)).17

The analysis of conferral of an economic advantage is critical for most of the football aid measures. Government behaviour will be assessed in accordance with the market economy operator principle, which essentially involves a consideration of whether or not the clubs received any economic benefit, which would not have been obtained in normal market conditions.18

The City of Madrid and Real Madrid case, involved a 1998, council commitment to transfer land, “Las Tablas”, valued at EUR 595,194. The land was not transferred and 13 years later in 2011, based on a 2011 valuation of “Las Tablas” (EUR 22 million), the council transferred land worth just under EUR 20 million to Real Madrid to compensate for the failed transfer in 1998. Three months following this transaction in 2011, Real Madrid transferred some of the land back to the council, along with a shopping mall, in return for payment of EUR 6.6 million and an area of land in front of the Real Madrid stadium, upon which a bigger shopping mall and hotel will be constructed. The commerciality of decisions, such as whether or not the council was obliged to compensate Real Madrid for the non-fulfilled 1998 transfer obligation with the 2011 value of land, and valuations will need to be assessed.

In 2009, 2010 and 2013 the IVF gave 100% guarantees to cover bank loans, EUR 75 million, EUR 18 million and EUR 14 million, to non-economic organisations linked to football clubs, Valencia CF, Hercules CF and Elche CF, in order to acquire shares in the context of the capital increase of the respective clubs through capital injections. The investigation also involves 2010 and 2013 increases to the 2009 Valencia CF guarantee. Due to the poor financial situation of the ultimate beneficiaries, the football clubs, the IVF guarantees would not appear to be acceptable to a private investor (the “market economy investor principle”), for example because annual guarantee premiums fail to adequately reflect the risk of default, which would thus amount to an economic advantage (see Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (2008/C 155/02)).

The Dutch cases involve government owned football stadiums.19 This close relationship is recognised as potentially problematic, for example in relation to the valuation and collection of rent: “there will be … temptations, political and social pressure, to intervene … if the municipality owns the stadium or other facilities used by the football club” (paragraph 84).20

Although it is difficult to prejudge the complex analysis that must take place to assess economic advantage, the Commission’s decision to drop investigation of Arnhelm (municipality) and Vitesse (football club), a case being looked at concurrently with other Dutch measures, highlights grave concerns that exist over the legality of the Spanish and Dutch measures in which investigations have been pursued. In writing off a significant debt, the Arnhelm adhered to a formal suspension of payments process and thus acted in line with the behaviour expected of a private creditor.21

The 2013 investigations mostly involve measures which target individual clubs and so the “selectivity” requirement is not generally an issue. Also, provided there is a selective economic advantage, the requirement for a distortion/potential distortion of competition, i.e. an improved competitive position (Case 730/79 Philip Morris),22 will not, as is invariably the case, be a sticking point.

The selectivity of the tax preference for Spain’s member clubs is more complicated. Due to the clubs’ “not-for-profit” member-owned status, the four clubs pay corporation tax at 25%, instead of the 30% tax to which other football clubs are subject. This position arises due to a Spanish law in 1990 exempting these member clubs from a general requirement for sports clubs to convert to “sociedad anónima deportiva” (public limited sports companies). The Commission must assess whether or not the tax is a departure from general rules, and, if so, whether or not the different treatment is justified (external policy objectives, which are not inherent to the system, are not acceptable justifications) (see Commission Notice on the application of the State aid rules to measures relating to direct business taxation). The Commission appears unimpressed with the different treatment (paragraphs 21-26),23 as member clubs are effectively indistinguishable from other football clubs, e.g. member clubs can and do make a profit. Also, the single opportunity in 1990 to qualify as a member club was short-lived and restrictive.

The effect on intra-EU trade is not an issue, especially in relation to major businesses like Real Madrid and Barcelona, and, due to the relatively low threshold (see Case T-288/07 Friulia Vezia Giulia), this is even so for clubs not at present in top-flight leagues or European competitions.24

Conclusion

The Commission’s approach makes clear that there is no sports/football specific approach in applying article 107(1) TFEU. All indications suggest that the cases giving rise to the 2013 investigations are clear-cut instances of State aid in which, in any other sector, the need for advance notification and approval would be self-evident.
 
The catch-all nature of the State aid prohibition likely means that the grant of the Dutch and Spanish football aid measures hinge not on the existence of State aid but on the applicability of exemptions. This will be discussed in Part two. Nevertheless, much depends on information that emerges and assessments under the market economy operator principle.

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About the Author

Richard Craven

Richard Craven

Dr Richard Craven is a lecturer in law at Northumbria University, Newcastle upon Tyne. Richard’s research centres around EU public procurement law and local government. He also has an interest in the development of EU sports policy.
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