How State aid rules are being applied to European football: Part 2 – the availability of exemptions

Published 07 July 2014 | Authored by: Richard Craven
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
Part one of the article looked at the Commission’s assessment of the aid under the article 107(1) TFEU State aid prohibition, concluding that, due its to catch-all nature, the grant of the aid would hinge, not on existence, but on whether or not aid was justifiable and exempt.

Part two considers the availability of exemptions, and, in addition, discusses the potential consequences of the football investigations (an accompanying PowerPoint presentation can be found here).

Exemption   

Introduction

The “discretionary” (article 107(3)(a)-(e) TFEU) exemptions are most relevant to the 2013 investigations, in particular article 107(3)(c). This enables the Commission to permit aid assessed to pursue “objectives of common interest”, and provides scope for the law to cater for football’s societal role.3 The provision corresponds with FFP exceptions for spending on infrastructure, training facilities and youth and community development activities from the “break-even” requirement.4

Objectives of common interest

The approval in Supporting the Hungarian sport sector via tax benefit scheme,5 designed to encourage investment in sport, provides a sports specific example of the Commission's approach to the availability of the article 107(3)(c) TFEU exemption.

The pursuit of public policy goals via football aid is arguably always plausible; however, any positive impact (i.e. objectives of common interest) must outweigh negative side effects (i.e. competition and trade distortions). The greater the public need, the increased likelihood of objectives overriding negative effects. The clearance decision for the Hungarian tax scheme was centred upon a substantial need, specific to Hungary, due to years of underinvestment and the dilapidated state of existing facilities, and an acceptance that the market alone would not meet the need (i.e. there was a market failure).

The Hungarian tax scheme pursued a well-defined common objective, with social, educational and economic benefits flowing from the sorely needed investment. The effectiveness of the design of the aid measure was considered: the appropriateness of the particular State aid policy instrument, any behaviour incentivised, and proportionality. The safeguards in place to ensure necessity and proportionality appear crucial to the clearance. A number of monitoring precautions, along with sanctions, sought to minimise the risk of overcompensation and cross-subsidisation of sports clubs’ economic activities. The Hungarian tax benefit worked to incentivise sports investment, e.g. donations could be deducted from investors’ taxable income, encouraging business involvement in local sport, and private sector choice in the distribution of aid.

There are few suggestions of legitimate justifications in relation to the 2013 football aid. The failure to notify, possibly due to a perceived low risk of enforcement, suggests exemptions would not have been meaningfully thought through. Thus, regardless of any pursuit of common objectives, justificatory arguments can be expected to fall down when necessity and proportionality, and effect on competition and trade are brought into the analysis.

Football clubs in financial difficulty

The Spanish and Dutch have proffered little suggestion of justifications for the State aid; however, the Commission refers to varying degrees of financial difficulties experienced by Spanish clubs, Valencia CF km, Hercules CF and Elche CF, and Dutch clubs, NEC, Willem II, MVV, PSV and FC Den Bosch. In these cases, regardless of the sports backdrop, according to the Commission and UEFA,6 keen to ensure government is not looked upon as a safety net and route around FFP constraints, clubs are treated as typical businesses and strict guidelines are in place for the article 107(3)(c) TFEU assessment: see the Community Guidelines on State aid for Rescuing and Restructuring Firms in Difficulty.7 There are no signs of these restrictive rules being followed in any of the football cases.

To qualify for assistance a club must meet the definition of “a firm in difficulty”. This is a relatively flexible concept in which a club’s short/medium term survival must be dependent on government help (s.2.1, paragraph 9), and for which all of the above mentioned clubs have an arguable case. At present, however, Member States arguments appear to have focused on the commercial rationality of government behaviour and the article 107(1) definition not being satisfied. Even so, in all cases there are evident failures in relation to fundamental rules, which should mean aid is not covered under the guidelines; for example, the support received by Valencia CF was not a one-off, breaching the “one time, last time” principle (s.3.3): the 2009 €75m bank guarantee was increased in 2010 (€6m) and then again in 2013 (€5m).8

The guidelines distinguish between rescue aid and restructuring aid.  Rescue aid, which is temporary and reversible, could only be used to prop a club up in the short-term. None of the 2013 football aid, even those meeting the required form, the Hercules and Elche loan guarantees, show sufficient sign of necessary compliance with a multitude of stipulations (s.3.1.1.(a)-(d)).

A tight reign is kept on restructuring aid, which is more long-term assistance and could help a failing football club rebuild and strengthen. This aid can only be granted if demonstrated not to run counter to the Community interest (s.3.2.1, paragraph 31). The strict requirements centre on the development of a realistic and Commission endorsed restructuring plan (s.3.2.2, paragraph 34-37), which must restore the long-term viability of the club within a reasonable time-scale. The Commission only appears to be vaguely aware of the existence of financial plans for Dutch football clubs;9 thus, as it stands, such restructuring aid is not available for any of the football cases.

Much could depend on the adequacy of “compensatory measures”. These are commitments in favour of competitors, serving to help offset adverse effects of aid (s.3.2.2, paragraph 38-42). The meaning of this important feature, in the football context, lacks explanation, a point the Commission and UEFA acknowledge.10 The following examples are set out in relation to the Dutch aid: points reductions, squad limitations, wage bill limits, transfer fee bans, and commitments to increase "pro bono" community and training activities.11

Outcome

The time taken to deliver a final outcome, positive, conditional or negative, will itself be interesting, as presumably extensive negotiations and analysis have already taken place during the slow build up to the launch of the investigations.

The financial consequences of a negative finding would be painful for individual clubs: the Commission must order Member State recovery of incompatible aid with interest (subject to a ten year limitation period). A recovery decision is binding on Member States and, if not acted upon (an aspect of the law in which there have been issues), may be enforced before the Court of Justice. There is also scope for third parties to seek compliance before national courts.

Block exemption

A Commission excuse for slow enforcement was the need to consider, in general terms, how State aid rules should be applied to football. The Commission may block exempt certain categories of aid, a key part of State aid modernisation. Amendments to the Enabling Regulation12 now allow for a future sports block exemption, which would mean reduced formalities for qualifying measures. Having passed under the Commission microscope on a number of occasions, e.g. approvals for Belgium aid for football stadiums in Flanders13 and French aid for construction and renovation of stadiums for the UEFA EURO 2016 Championship,14 growing clarity over the application of State aid law in the context of sports infrastructure means the 2014 version of the General Block Exemption Regulation, set to come in in July, now caters for aid for sport and multifunctional recreational infrastructure.15 The block exemption only applies at a low level where the investment amount does not exceed €15 million or the total costs per project do not exceed €50 million (article 4). In addition, any operating aid must not exceed €2 million per infrastructure per year (article 4). 


The extent to which a more general sport block exemption is justifiable and needed is debateable. There already exists flexibility around which government and sport may structure dealings to minimise risk. For instance, in the same way as other businesses, clubs can utilise the block exemption for certain training aid, up to €2m.16 Also, the De Minimis Regulation17  means ex ante notification and approval is not required for aid below €200,000 (over a three year period).

Conclusion

Regardless of the eventual outcome, the football investigations themselves may have served an essential function, dispelling any notion that “sport” provides blanket cover for government assistance in this financially significant and international sector. The publicity generated has clearly put the application of State aid law in football on the map, and, thus, the investigations may well represent a tipping point, acting as the necessary trigger for further funding reform in football. Sports organisations, particularly football clubs, should be reviewing the legitimacy of dealings with government. If business continues as usual, the Commission must be expected to take the necessary enforcement steps.


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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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