#stateaid #sportclubs #CJEU
Tuesday, 26 May 2020 - As early as 1974, the Court of Justice of the EU (“CJEU”) ruled in its famous Walrave and Koch judgment that sport does not escape the application of EU law as far as it is an economic activity. In 2006, the CJEU confirmed that sporting regulations that have economic effects are subject to competition law in its Meca-Medina case.
State aid rules have thus always applied to sport. However, for many years, as there were no European Commission decisions investigating state aid measures in this sector, most Member States took the risk of granting public support measures without any prior notification to the European Commission.
Some recent high-profile cases have changed this situation. Since 2011, there has been a significant increase in the number of State aid decisions in the sports sector. The most recent are mainly related to football.
There are several reasons for this increase. In the 2011 Leipzig/Halle case about airport infrastructure, the General Court clarified that State aid rules apply to the financing of all infrastructure that is commercially exploited. This judgment constituted a turning point in the European Commission’s approach towards the public financing of (sports) infrastructure.
Another reason was that the European Commission began to receive numerous complaints from EU citizens who were not satisfied about the enormous public spending going into the sports sector (and mostly in professional football) during an economic downturn.
Finally, it should be noted that the Commission decided at the end of 2012, in the aftermath of the joint Commission-UEFA statement on the UEFA Financial Fair Play Regulations, to send a request for information to all the Member States regarding the public financing of infrastructure used by professional football clubs. As a result, the Commission started investigations regarding six football clubs in the Netherlands and seven clubs in Spain.
In these last investigations, the European Ombudsman, Emily O'Reilly, told the European Commission in December 2013 to stop delaying a decision on whether to open infringement proceedings against Spain concerning alleged unfair tax advantages for certain Spanish football clubs. The case had been pending for more than four years after the complaint’s receipt.
The principle prohibiting the granting of State aid can be found in Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU) which provides that “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”.
Four cumulative conditions must be fulfilled before a measure can be qualified as State aid:
A Member State may in principle not grant aid measures until the European Commission has reached a final decision following a formal notification (Article 108 (3) TFEU). This is the so-called ‘standstill obligation’.
However since the start of 2000, the Commission has adopted exemption regulations and decisions allowing certain categories of aid to be automatically declared compatible with the internal market without the Commission’s formal authorisation (such as, for example, the General Block Exemption Regulation, which will be discussed below).
A non-notified public aid, which cannot benefit from such an exemption, will be considered as illegal aid and can be recovered by either the European Commission or the national courts.
State aid decisions in the sports sector can be broadly divided into financial support for (i) sports infrastructure and (ii) sports clubs.
Since 2011, the European Commission has adopted several decisions concerning the construction or refurbishment of sports infrastructure. A lot of these decisions have involved football stadiums (SA.36105, SA.37109, SA.35501, SA.46530, and SA.37342). Others have related to a swimming pool (SA.33045), multifunctional sports arenas (SA.33618, SA.35440 and SA.43575), sports and wellness facilities (SA.33045), an ice rink arena (SA.37373), a rugby stadium (SA.37342), climbing halls (SA.33952), a Gaelic games stadium (SA.37342), etc.
They all show a relatively consistent and favourable approach by the European Commission, which has emphasized the specific role played by sport by referring to Article 165 TFEU and the Amsterdam Declaration of Sport. In almost all the decisions, the Commission has recognized the problem of under-investment in sports infrastructure and has underlined that it is very important that the infrastructure is not exclusively used by a single professional sports user.
These principles have been adopted in the General Block Exemption Regulation N° 651/2014 (GBER), which is of particular significance for Member States wishing to grant aid in favour of sports infrastructure.
Article 55 of this Regulation allows investment aid for sports and multifunctional recreational infrastructure up to € 30 million per project (with total costs not exceeding € 100 million), and operating aid of up to € 2 million per infrastructure per year. No notification will be required if the investment aid amount does not exceed the funding gap (the difference between the eligible costs and the operating profit of the investment) and the other compatibility conditions (such as, for example, open, transparent and non-discriminatory access) are also met.
The Member State should only inform the Commission about the grant of the compatible aid via an electronic reporting system.
A very interesting case from 2013, was the European Commission’s approval of French State support for the renovation and construction of nine football stadiums (in Bordeaux, Marseille, Lille, Nice, Saint-Etienne, Toulouse, Paris, Lens and Lyon) for them to be able to host the UEFA EURO 2016 Championship.
The aid of around € 1,052 million was notified by the French State to the European Commission, which concluded that the public financing would provide an economic advantage at three levels:
The aid was considered to be compatible as:
The conditions for the further commercial exploitation and use of the stadiums were not yet fully defined and the decision was therefore limited to the infrastructure aid, but France committed to set up a system of permanent control of the prices paid by the clubs to ensure the use of the stadiums at market conditions.
The second category of cases relate to support in favour of sports clubs. These include, for example, the lease of land/infrastructure below market price, the provision of guarantees with low commissions or of low-interest loans, the introduction of favourable tax regimes, etc.
The European Commission has not yet adopted any sector specific rules for this category of aid measures and also seems to take a less favourable approach as several recent decisions impose the recovery of incompatible aid. As these measures cannot benefit from a block exemption, they should always be notified to and approved by the European Commission.
The most recent cases relate to various public support measures in the football sector and concern some of the EU’s top professional clubs in the Netherlands and Spain.
Dutch football clubs
In 2016, the European Commission concluded that the football clubs NEC Nijmegen, MVV Maastricht, Willem II and Den Bosch all had received compatible rescue and restructuring aid. The four clubs had financial difficulties that led to an assessment of the aid in the light of the 2004 Guidelines on State aid for rescuing and restructuring firms in difficulty.
Rescue and restructuring aid can only be accepted for companies having a realistic prospect of viability and taking the necessary measures to alleviate the distortions of competition caused by such aid. The Commission concluded that this was the case for all four clubs as a realistic restructuring plan had been implemented, the clubs significantly contributed to the cost of their restructuring and agreed to take measures limiting the distortions of competition created by the public funding, such as reducing the number of employees, the number of registered players and players' wages.
PSV Eindhoven was found to have received no aid at all as the ‘sale and lease back’ transaction with the municipality of Eindhoven took place on market terms acceptable to a private investor. In its assessment the Commission took account of an independent external valuation report that formed the basis of the transaction.
Spanish football clubs
The Spanish clubs were less lucky. In 2016, 7 clubs (Real Madrid, FC Barcelona, Atlético Bilbao, Atlético Osasuna, Valencia CF, Elche CF and Hercules CF) were forced to repay the aid they, according to the Commission, unlawfully received.
a. Tax privileges in favour of Real Madrid, FC Barcelona, Atlético Bilbao and Atlético Osasuna
The Commission’s first investigation concerned alleged tax privileges in favour of Real Madrid, FC Barcelona, Atlético Bilbao and Atlético Osasuna.
In 1990, all Spanish professional football clubs were required by law to convert to sports public limited companies (‘SPLCs’) in order to encourage more responsible management of their activities.
However, professional sports clubs that had achieved a positive result during the preceding 4-5 tax years, were permitted to continue to operate as sports clubs. Although no sport clubs were explicitly stated in the legislation, only the four investigated clubs benefited from this exemption.
As non-profit entities, their income was taxed at a rate that was, until 2016, 5% lower than the rate applicable to SPLCs and the Commission found that this difference led to an unjustified economic advantage. The Commission concluded that the tax regime led to illegal and incompatible aid and ordered the Spanish State to discontinue the scheme and to recover the aid from the clubs.
FC Barcelona and Atlético Bilbao both made an appeal to the General Court but only the first appeal was declared admissible.
In the FC Barcelona case of February 2019, the General Court considered that the Commission had not sufficiently demonstrated that the Spanish legislation conferred an economic advantage on the clubs. It established that the data on which the Commission relied on only covered four years, whereas the Commission found that the advantage existed for a much longer period (1999-2015) and that the data applied to all sectors of the economy and not only football clubs. According to the General Court, the Commission should have considered more the elements highlighting the specificity of the sector concerned such as the importance of fiscal deductions.
The General Court went quite far on the requirements it imposed on the European Commission for its analysis of a tax regime, but one could also say that this approach is consistent with earlier case law that has emphasized the specific nature of sport when applying EU law.
The European Commission appealed the decision before the CJEU (C-362/19 P), who can only decide on the points of law and not the facts of the case. The case is still pending.
b. Land transfer to Real Madrid
In a second investigation, the Commission examined a land swap between Real Madrid and the City of Madrid.
In 1998, the City of Madrid and Real Madrid agreed that Real Madrid would transfer several plots to the City of Madrid, which in exchange would transfer to the former some public land. This public land included plot B-32, known as ‘Las Tablas’, which was worth almost € 600,000 at that time. However, the transfer never happened as a ruling by the Spanish courts foresaw that land designated for basic sport use could only be owned by public authorities and not private entities such as Real Madrid.
To compensate Real Madrid for this loss of land, the City of Madrid concluded in July 2011 a settlement agreement in which the value of Las Tablas was estimated at € 22.6 million.
The European Commission had serious doubts about the enormous increase of € 22 million of the ‘Las Tablas’ land between 1998 and 2011 and obtained its own independent expert assessment. As it followed from this assessment that the Las Tablas land was overvalued by € 18.4 million, the Commission decided that Real Madrid had benefited from an unjustified advantage over other clubs and needed to pay this back.
Real Madrid made an appeal to the General Court, which, on 22 May 2019, again annulled a European Commission’s decision prohibiting aid in the football sector.
The General Court decided that the Commission did not take into account all the aspects and context of the transaction to estimate the amount of aid and even the existence of an advantage in favour of Real Madrid. As the transfer of the land took place in the framework of a global agreement in which several properties were exchanged, the Commission should have also assessed the value of the plots transferred to replace the Las Tablas land. Instead of doing so, the Commission simply used the estimations on which the 2011 settlement agreement had been based.
c. Bank guarantees to three Valencia football clubs
Finally, in a third case, the Commission investigated guarantees given by the State-owned Valencia Institute of Finance (IVF) for loans granted to three Valencian football clubs (Valencia, Hercules and Elche) that were all in financial difficulties at the time. The public guarantee allowed the clubs to obtain the loans on more favourable terms.
It is interesting to note in this case that the Commission initially accepted Spain’s assurance that no aid was involved, but later on decided to re-open the case following complaints from citizens and different press articles.
The Commission concluded that the clubs paid no adequate remuneration for the guarantees (covering 100% of the loan’s principal, plus interest and costs of the guaranteed transaction) and that this gave them an economic advantage over other clubs, who have to raise money without state backing.
As demonstrated in the Dutch Football cases, to grant rescuing or restructuring aid to firms in difficulty is permitted, but in this case, the Commission emphasized that the public financing was not linked to any restructuring plan to make the clubs viable and none of them implemented compensatory measures to offset the distortion of competition created by the aid.
The amounts that needed to be repaid to the State were not small: € 20.4 million for Valencia, € 6.1 million for Hercules and € 3.7 million for Elche.
Hercules made an appeal to the General Court, which, on 20 March 2019, for the third time in three months, decided to annul the European Commission’s decision on the (procedural) grounds of a lack of sufficient justification of the existence of an economic advantage. The General Court concluded that the European Commission had not sufficiently clarified how it had taken into consideration the counter-guarantee granted by Aligestion (the owner of Hercules’ stadium). The General Court also criticised the fact that the Commission only referred to the temporary nature of this counter-guarantee without any real assessment of the impact of this guarantee on the existence of the alleged economic advantage.
Also Valencia and Elche appealed the Commission’s decision and the General Court has very recently on 12 March 2020 again decided in favour of the clubs by concluding that the European Commission made several manifest errors in its assessment. For more details on these two judgment, we refer to our earlier blog.
In recent decades, professional sports clubs have grown into huge companies that operate in a sector where a lot of money is involved but also high levels of debt. It is therefore no real surprise that the number of State aid investigations has risen sharply in recent years and that the most recent decisions mainly concern professional football.
Member States and sports clubs or sports federations can no longer ignore the application of State aid rules in their sector. Where infrastructure support can be more easily approved and without notification (however provided the block exemption conditions are fulfilled), particular care should be taken when granting financial benefits to clubs in any form whatsoever. The European Commission’s recent decisions clearly show its stricter approach to this second category of aid. Although the General Court’s annulment judgments demonstrate the high burden of proof that lies on the Commission when dealing with sports cases, this does not remove the necessity for any support to sports clubs to be carefully assessed for its legality under State aid rules.
Therefore, it is advisable to always seek legal advice first and to proceed to a notification before the European Commission when necessary.
Although it is in principle up to the State granting the support measures to take the necessary precautions, the risk lies mainly with the clubs. They will have to repay the aid (with interest) if it turns out to be illegal.
Moreover, a State aid investigation does not only start after a notification, but can also be launched following a complaint from, for example, a rival club, or on the Commission's own initiative if it learns of a possible State aid problem in the media. Think for example of the tax and social security benefits for professional football clubs that have been strongly criticized in the media in various EU countries.
Finally, there is no doubt that the sports sector is also very much affected by the current Covid-19 crisis. Public support will be inevitable for the recovery of the sector, but such support will also have to comply with State aid rules. For more details on this subject, we refer to our other blog.
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