State Aid - Beware Compound Interest!
A recent case from the European Court of Justice serves as a useful reminder of the risks of getting state aid wrong and the consequences of a recovery order.
Background
In 2002, the European Commission found that a three-year exemption from corporation tax provided by Italian law for joint stock companies with majority public shareholdings amounted to unlawful state aid. The Commission also found that advantages resulting from loans to joint stock companies with majority public shareholdings also constituted unlawful state aid. The Commission required Italy to recover the unlawful state aid. The Commission required Italy to recover the aid.
By 2006, Italy had still failed to recover the aid from the beneficiaries. In 2008, Italy took the measures necessary to recover the aid in question and announced that the amount to be recovered would be subject to compound interest. That decision was challenged by the recipients and the Italian Courts referred the matter to the CJEU on the issue as to whether Italian legislation could provide for compound interest by reference to a regulation which was not yet applicable on the date recovery of the aid was ordered by the Commission.
In a communication dated 8 May 2003 on the interest rates to be applied when aid granted unlawfully is being recovered, the Commission stated that it would apply a compound interest rate in any decision ordering the recovery of unlawful aid that it might adopt in the future, and that it expected member states to apply compound interest during the execution of recovery decisions.
As a result, the joint stock company was required to repay €170 million in capital together with €120 million in compound interest.
(Case C-89/14 - A2A SpA v Agenzia delle Entrate)
Comment
This case is a reminder of the impact of state claw back on recipients over a ten year period from the date of the aid.