EU State Aid Law: Article 107 TFEU and the Enforcement Framework

Introduction

EU State aid law, anchored in Articles 107–109 TFEU, prohibits Member States from conferring selective economic advantages on undertakings that distort or threaten to distort competition and affect trade between Member States. The prohibition is structural to the internal market: without discipline on national subsidies, Member States with greater fiscal capacity could outbid others, fragmenting the single market along national lines. The European Commission exercises exclusive competence to assess compatibility, subject to CJEU review, wielding powers of investigation, decision, and recovery that make State aid control one of the most centralised domains of EU law.

The Definition of State Aid — Article 107(1) TFEU

Article 107(1) prohibits “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, in so far as it affects trade between Member States.” The CJEU has elaborated five cumulative conditions: (a) there must be an undertaking; (b) the measure must be imputable to the State and financed through State resources; (c) it must confer an economic advantage on the recipient; (d) the advantage must be selective; and (e) the measure must distort or threaten to distort competition and affect intra-Union trade.

The concept of “undertaking” encompasses any entity engaged in economic activity, regardless of legal form or method of financing. Public hospitals, social housing providers, and public broadcasters may be undertakings in respect of their economic activities but not for purely social functions. The Altmark judgment (Case C-280/00) provided critical guidance on when public service compensation falls outside Article 107(1): (i) the recipient must have clearly defined public service obligations; (ii) the compensation parameters must be established in advance in an objective and transparent manner; (iii) compensation must not exceed what is necessary to cover costs plus a reasonable profit; and (iv) where the undertaking is not chosen through public procurement, the compensation must be determined by reference to a typical well-run undertaking.

State resources require that the advantage flows directly or indirectly from public funds, including tax foregone, guarantees, preferential loans, and in-kind contributions. The measure must be imputable to the State: where a public undertaking grants an advantage, the Commission must establish that public authorities were involved in the decision. Selectivity distinguishes State aid from general measures of economic policy: a measure is selective if it favours particular undertakings, sectors, or regions, applying the “reference system” test — does the measure derogate from the normal tax or regulatory regime in a way that advantages certain recipients?

Exemptions and Compatibility

Article 107(2) specifies categories of aid that are automatically compatible: (a) aid of a social character to individual consumers; (b) aid to make good damage caused by natural disasters or exceptional occurrences; and (c) aid to certain areas of Germany affected by division. Article 107(3) lists discretionary exemptions, including: (a) aid for economic development of areas with abnormally low living standards; (b) aid for important projects of common European interest (IPCEI); (c) aid to remedy a serious disturbance in the economy; (d) aid for culture and heritage conservation; and (e) other categories designated by the Council.

The Commission exercises broad discretion under Article 107(3), applying a balancing test that weighs the positive contribution to Union objectives against the distortion of competition. The Guidelines on State aid for climate, environmental protection and energy 2022 (CEEAG) exemplify modern compatibility analysis, requiring the aid to pursue a well-defined objective, be necessary and proportionate, and not cause undue negative effects.

The General Block Exemption Regulation

Regulation (EU) No 651/2014, the General Block Exemption Regulation (GBER) , exempts categories of aid from prior notification, streamlining administration for measures that are presumptively compatible. The GBER covers regional aid, SME aid, research and development aid, training aid, environmental protection aid, and risk finance aid, among others. To benefit from the GBER, the aid must comply with specific conditions: transparent aid (calculated in grant equivalent), ex ante incentive effect, maximum intensities and thresholds, and publicity requirements. The 2023 amendment extended coverage to NextGenerationEU projects, green and digital transitions, and simplified compliance for small-scale measures.

Recovery

Where the Commission finds unlawful or incompatible aid, Article 16 of Procedural Regulation 2015/1589 requires recovery of the aid plus compound interest from the recipient. Recovery is not a penalty but the restoration of the status quo ante. The obligation to recover applies regardless of the recipient’s good faith, subject only to the exceptional defences of absolute impossibility (not merely difficulty) and legitimate expectation, which the recipient must prove. Member States must execute recovery without delay under national law; failure to do so may lead to infringement proceedings under Article 258 TFEU and, since Commission v France (2019), the possibility of financial penalties for non-recovery.

Services of General Economic Interest

The Altmark criteria, complemented by the Commission’s SGEI Package (2012), establish the framework for compensating services of general economic interest. Where Altmark is satisfied, no aid exists. Where it is not, the compensation constitutes aid but may be compatible under Article 106(2) TFEU if the SGEI mission is clearly defined, the compensation parameters are established in advance, and no overcompensation occurs. The de minimis Regulation (Regulation 360/2012 for SGEI services) exempts small amounts of compensation (under €500,000 over three fiscal years) from notification, recognising that below this threshold, trade and competition are not meaningfully affected.

Enforcement and Private Litigation

Although State aid enforcement is primarily administrative, national courts play a complementary role: they may order recovery of unlawful aid, award damages to competitors harmed by illegal aid, and interpret Commission decisions. The Deutsche Lufthansa (2017) and Eventech (2018) judgments clarified that national courts must follow Commission decisions on the existence of aid and may not issue conflicting rulings. Private enforcement has expanded significantly since Residex Capital IV (2011), where the CJEU held that national courts must ensure recovery regardless of the recipient’s reliance on the aid’s legality.