Case C-277/00

Federal Republic of Germany

v

Commission of the European Communities

(Action for annulment – State aid – Decision 2000/567/EC – Aid implemented by the Federal Republic of Germany for System Microelectronic Innovation GmbH, Frankfurt an der Oder (Brandenburg) – Article 88(2) EC – Rights of the defence – Compatibility with the common market – Article 87(1) EC – Recovery of unlawful aid – Recovery from undertakings other than the initial beneficiary)

Summary of the Judgment

1. State aid – Prohibition – Derogations – Scope of the derogation – Strict interpretation – Activities of the Treuhandanstalt – Concept of privatisation

(Art. 87(1) and (2)(c) EC)

2. State aid – Examination by the Commission – Legality to be assessed in the light of the information available when the decision was adopted

(Art. 88 EC)

3. State aid – Prohibition – Derogations – Aid granted to certain areas affected by the division of Germany – Scope of the derogation – Strict interpretation – Economic disadvantages resulting from the isolation created by the frontier established between the two zones

(Art. 87(1) and (2)(c) EC)

4. State aid – Recovery of unlawful aid – Obligation resulting from the unlawfulness – Subject-matter – Restitution of the earlier situation

(Art. 88(2) EC)

5. State aid – Recovery of unlawful aid – Determination of debtor where the plant has been leased – Beneficiary of a competitive advantage

(Art. 88(2) EC)

1. Derogations from the general principle, laid down in Article 87(1) EC, that State aid is incompatible with the common market must be construed narrowly. In interpreting a provision of Community law it is necessary to consider not only its wording but also the context in which it occurs and the objects of the rules of which it forms part.

The regulatory framework for the Treuhandanstalt’s activities, as adopted by the Commission, constitutes a series of derogations from the general principle, laid down in Article 87(1) EC, that State aid is incompatible with the common market. By adopting those derogations, the Commission intended to simplify the task of the Treuhandanstalt, a unique body in its field, which was to restructure the undertakings of the former German Democratic Republic and to ensure their transition from a planned economy to a market economy.

As a condition for the application of a scheme derogating from the general principle, laid down in Article 87(1) EC, that State aid is incompatible with the common market, the term ‘privatisation’ must be construed narrowly in the context of the Treuhandanstalt aid schemes. If such an interpretation is adopted, a privatisation can be taken to exist, for the purpose of these schemes, only where a private investor acquires a proportion of the shares capable of affording him control of the undertaking in question.

It cannot therefore be ruled out that the acquisition of a minority interest in a public undertaking, combined with a transfer of the effective control of that undertaking, may be regarded as a ‘privatisation’ for the purposes of the Treuhandanstalt aid schemes.

(see paras 20-22, 24-25)

2. The legality of a decision concerning State aid is to be assessed in the light of the information available to the Commission when the decision was adopted. A Member State therefore cannot rely on information which it failed to bring to the attention of the Commission in the course of the administrative procedure.

(see para. 39)

3. Article 87(2)(c) EC, under which ‘aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, insofar as such aid is required in order to compensate for the economic disadvantages caused by that division’ is compatible with the common market, was not repealed after the reunification of Germany either by the Treaty on European Union or by the Treaty of Amsterdam.

However, derogations from the general principle laid down in Article 87(1) EC that State aid is incompatible with the common market must be construed narrowly. Furthermore, in interpreting such a provision it is necessary to consider not only its wording but also the context in which it occurs and the objects of the rules of which it forms part.

In addition, although, following the reunification of Germany, Article 87(2)(c) EC falls to be applied to the new Länder, such application can only be on the same conditions as those applicable in the old Länder during the period preceding the date of that reunification.

In this case, since the phrase ‘division of Germany’ refers historically to the establishment of the dividing line between the two occupied zones in 1948, the ‘economic disadvantages caused by that division’ can only mean the economic disadvantages caused in certain areas of Germany by the isolation which the establishment of that physical frontier entailed, such as the breaking of communication links or the loss of markets as a result of the breaking off of commercial relations between the two parts of German territory.

By contrast, the idea that Article 87(2)(c) EC permits full compensation for the undeniable economic lack of development suffered by the new Länder disregards both the nature of that provision as a derogation and its context and aims. The economic disadvantages suffered by the new Länder as a whole were not directly caused by the geographical division of Germany within the meaning of Article 87(2)(c) EC. It follows that the differences in development between the original and the new Länder are explained by causes other than the geographical rift caused by the division of Germany and in particular by the different politico-economic systems set up in each part of Germany.

(see paras 45-53)

4. Removing unlawful aid by means of recovery is the logical consequence of a finding that it is unlawful and seeks to re-establish the previous situation. That purpose is achieved once the aid in question, together where appropriate with default interest, has been repaid by the recipient or, in other words, by the undertakings which actually benefited from it. By repaying the aid, the recipient forfeits the advantage which it had enjoyed over its competitors on the market, and the situation prior to payment of the aid is restored.

Consequently, the main purpose of the repayment of unlawfully paid State aid is to eliminate the distortion of competition caused by the competitive advantage afforded by the unlawful aid.

(see paras 74-76)

5. Where an undertaking that has benefited from unlawful State aid is bought at the market price, that is to say at the highest price which a private investor acting under normal competitive conditions was ready to pay for that company in the situation it is in, in particular after having enjoyed State aid, the aid element was assessed at the market price and included in the purchase price. In such circumstances, the buyer cannot be regarded as having benefited from an advantage in relation to other market operators.

Where the undertaking to which unlawful aid was granted retains its legal personality and continues to carry out, for its own account, the activities thus subsidised, it normally retains the competitive advantage connected with that aid and therefore must be required to repay an amount equal to that aid. The buyer cannot therefore be asked to repay such aid.

However, where the beneficiary undertaking goes bankrupt, the re-establishment of the previous situation and the elimination of the distortion of competition resulting from the unlawfully paid aid may, in principle, be achieved by registration of the liability relating to the repayment of the aid in question in the schedule of liabilities.

It is certainly possible that, in the event that hive-off companies are created in order to continue some of the activities of the undertaking that received the aid, where that undertaking has gone bankrupt, those companies may also, if necessary, be required to repay the aid in question, where it is established that they actually continue to benefit from the competitive advantage linked with the receipt of the aid. This could be the case, inter alia, where those hive-off companies acquire the assets of the company in liquidation without paying the market price in return or where it is established that the creation of such companies evades the obligation to repay that aid.

However, the mere fact that the beneficiary undertaking’s plant was leased for a certain period by such a company does not necessarily mean that the latter enjoyed the competitive advantage linked with the aid granted to the lessor almost three years before the creation of the lessee.

(see paras 80-81, 85-86, 88)