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Continued Alignment with EU State Aid Rules post-Brexit and impact for Irish Businesses

AUTHORs: Kate McKenna DATE: 17/02/2020

This article authored by Kate McKenna and Simon Shinkwin considers for how long, post-Brexit, can Ireland expect Continued Alignment by the UK Government with EU State Aid Rules.

We focus on the special treatment of Northern Ireland in the Withdrawal Agreement. We consider the positive impact this has for Irish businesses facing competition from Northern Irish businesses, by enabling them to continue to invoke EU State aid rules for a longer period than that available to businesses in other Member States.

Impact for Irish Companies

The UK will continue to be governed by EU State aid rules  until 31 December 2020 and Northern Ireland until at least 31 December 2024 (compliance being monitored by the European Commission).  As a result Irish companies can still make State aid complaints to the European Commission up until 31 December 2024 in relation to potentially unfair advantages granted by the UK which affect Northern Ireland / EU trade (and impacting on Irish companies).

1. Withdrawal Agreement

Article 126 defines the Transition Period for the United Kingdom leaving the EU.   It States that “there shall be a transition or implementation period, which shall start on the date of entry into force of this Agreement and end on 31 December 2020”.  Upon leaving the EU after this date, the rules governing the future UK-EU relationship set out in the Agreement will apply.

The exception is Northern Ireland, for which Article 185 provides special treatment under the Agreement.  Article 185 States that the Protocol on Ireland / Northern Ireland (the “Protocol”) will apply from the end of the transition period,  31 December 2020 (the “Transition Period”).

2. State Aid Rules in the UK

The UK will be bound by EU rules on State aid until the end of the Transition Period .Under Article 87 of the Withdrawal Agreement, the European Commission (the “Commission”) can bring a case before the Court of Justice of the European Union (“CJEU”) alleging that the UK has breached State aid rules during the Transition Period.  Article 87 further States that the Commission can bring such case before the CJEU up to four years after the end of the Transition Period, i.e.  the UK will remain liable until 31 December 2024 for any infringement of State aid rules it commits within the Transition Period.

Article 92 States that the Commission will treat the UK as it would any other Member State for the purposes of regulating State aid law during the Transition Period.  Article 93 also States that the Commission’s competence in the administration of State aid procedures remains until 31 December 2024.  In other words, the Commission can launch a State aid procedure up to 31 December 2024 in relation to any aid the UK grants within the Transition Period.

3. State Aid Rules on Northern Ireland

Article 10 of the Protocol to the Agreement States that the rules that apply to the UK in relation to State aid will apply to Northern Ireland.  Article 185 of the Agreement States that the Protocol will apply from the end of the Transition Period.  Therefore, EU rules on State aid will continue to apply to Northern Ireland after the Transition Period.

3.1 Length of Application

The rules under the agreement will continue to apply to Northern Ireland for the “initial period”, and potentially into the “subsequent period”.  The initial period is the period of 4 years from the end of the Transition Period, ie from 1 January 2021 – 31 December 2024.  The “subsequent period” is the period of 4 years after the initial period, and which requires the democratic consent of Northern Ireland for it to continue.  Article 18 States that within two months before the end of any period subsequent to the Transition Period, Northern Ireland can consent to the continued application of the rules of Agreement, which includes the rules on State aid, i.e.  Northern Ireland’s ‘democratic consent’ to the subsequent period.

Therefore, the period of time for which EU rules on State aid will apply to Northern Ireland will depend on democratic consent.  However, at a minimum, State aid rules will continue to apply to Northern Ireland until 31 December 2024.  This may be extended by democratic consent to 31 December 2028, and can be extended by a further four years again.

4. Scope of State Aid Rules

It appears that under Annex 5 of the Protocol, the scope of State aid rules that apply to Northern Ireland will not be limited – Annex 5 replicates the existing EU rules on State aid.

One point on the scope of State rules in Northern Ireland is that the rules apply to trade “between Northern Ireland and the Union”, which is wider than State aid granted to undertakings in Northern Ireland.  This is notable because trade between Northern Ireland and EU can be indirectly affected by State aid granted to UK businesses with a presence in Northern Ireland.  It is a possibility that companies trading between Northern Ireland and the EU but established elsewhere in the UK may be subject to EU rules on State aid for the duration of the application of the Protocol because their activity will have an indirect effect on trade between Northern Ireland and the EU.

5. Court of Justice Jurisdiction

Article 12(4) of the Protocol establishes the CJEU’s jurisdiction over matters relating to EU law.  For the period for which the Protocol remains in force, the CJEU will continue to rule on cases involving State aid relating to or involving Northern Ireland.

The Protocol also States elsewhere that in the application of the Protocol, UK authorities must have regard to the case law of the CJEU.  In other words, the UK authorities cannot derogate from the rules and precedents of the CJEU in administrating on State aid in Northern Ireland.

6. Effect of the Protocol on State Aid in the Rest of the UK

The Protocol will clearly have wider impact on State aid rules in the rest of the UK after the end of the Transition Period – how those effects will manifest is still unclear.

The UK will have to conform to EU State aid rules in cases where it grants State aid to companies established and operating in Northern Ireland and trading across the border to the EU.  This will apply for the duration of application of the Protocol, which will end at the earliest on 31 December 2024.

It is less clear whether the UK will have to conform to EU State aid rules in granting aid to companies established and operating elsewhere in the UK.  However, there are two reasons why it may have to conform.  First, the scope of the Protocol on a wide interpretation can include indirect State aid to companies trading between Northern Ireland and the EU.  Therefore, the UK may have to comply with EU State aid rules in granting aid to a company with a branch in Northern Ireland from which trades with the EU, but where the company is established and headquartered elsewhere in the UK.  Secondly, the UK may seek to avoid a two-tier State aid system in which UK companies established in Northern Ireland are disadvantaged with respect to State aid compared to UK companies established outside Northern Ireland.  This is further supported by the Political Declaration, in which the EU and UK acknowledged the need to maintain a level playing field for open and fair competition.

7. Impact on Companies

Those most clearly affected by these development will be companies trading between the EU and UK, and especially those with operations in Northern Ireland.  The key points to note for companies operating between the UK and Northern Ireland are:

  • The UK will be governed EU State aid rules until 31 December 2020 (the Transition Period), and remain liable for any infringement of those rules up to that point until 31 December 2024;
  • Northern Ireland will be governed by EU State aid rules until 31 December 2024 (including any aid granted by the UK to companies with Northern Ireland operations) and Irish based companies can continue to make State aid complaints to the Commission in relation to potentially unfair subsidies until this date.  This may be extended for a further four years by ‘democratic mandate’;
  • The scope of the EU State aid rules may be interpreted widely such that aid given by the UK to companies with EU-UK trade activity in Northern Ireland may be governed by EU State aid rules up to 31 December 2024 (unless extended further by democratic consent);
  • The CJEU will have jurisdiction on issues of EU State aid involving Northern Ireland for the duration of application of the Protocol (up to 31 December 2024, unless extended further);
  • The UK government will likely follow EU State aid rules domestically after the end of the Transition Period to avoid distortion in its internal market and because a subsidy control regime is a core part of any EU trade agreement (and indeed the WTO rules) and needed so that the EU can ensure that the UK does benefit from Member States adhering to State aid rules whilst it does not. In It is noteworthy that the UK has already established Competition and Markets Authority resources and infrastructure to monitor State aid.

Therefore, the impact of Brexit on State aid rules between the UK and EU will not be felt immediately, and there is evidence that both parties are seeking to avoid any distortion or negative consequences that the UK’s departure may have.