Insights

A. Introduction

There have been strong calls from various industry sectors for Malta to roll-out concrete financial aid to assist undertakings based in Malta to cope with the devastating economic effects of the global COVID-19 pandemic.

Malta has already implemented two aid measures over the past few days and on 18 March 2020 it announced a set of other aid measures which are yet to be introduced.
The European Commission (‘Commission’) was quick to act over the course of these last few days to provide clear parameters within which EU Member States, including Malta, are able to provide State aid to undertakings. Whilst EU State aid control restricts State subsidies to preserve the internal market, the State aid rules are sufficiently flexible to allow Member States to assist their industries and strengthen their economies given certain circumstances.
In this note, we will have a look at the approach taken by the Commission and determine whether the measures implemented and proposed by the Maltese Government fit within the Commission’s approach.

B. The European Commission’s stance

As part of its response to the economic impact resulting from the COVID-19 outbreak, the Commission is again resorting to the State aid rules to support the economy, just as it had done during the financial crisis. For this purpose, the Commission adopted a Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (‘the Temporary Framework’) facilitating the possibility for Member States to aid businesses. The Temporary Framework is applicable as from 19 March 2020 to 31 December 2020. It complements the earlier Commission Communication on a Coordinated economic response to the COVID-19 outbreak published on 13 March 2020.

The Commission considers that the shock on the global and EU economies follows from the disruption of supply chains, lower consumer demand, uncertainty on investment plans and liquidity constraints for undertakings. The Commission underlines the immediate impact that the outbreak has had particularly in the health, tourism, culture, retail and transport sectors, as well as the increasing impact generally on all undertakings and their employees in all sectors, with SMEs being at greater risk.

The Commission is alerting Member States that, “[t]he COVID-19 outbreak poses the risk of a serious downturn affecting the whole economy of the EU, hitting businesses, jobs and households.” For this reason, it is directing Member States that:

Well-targeted public support is needed to ensure that sufficient liquidity remains available in the markets, to counter the damage inflicted on healthy undertakings and to preserve the continuity of economic activity during and after the COVID-19 outbreak. Given the limited size of the EU budget, the main response will come from Member States’ national budgets. EU State aid rules enable Member States to take swift and effective action to support citizens and undertakings, in particular SMEs, facing economic difficulties due to the COVID-19 outbreak.

The Temporary Framework

Under Article 107(3)(b) TFEU, the Commission may declare compatible with the internal market aid “to remedy a serious disturbance in the economy of a Member State”. The Commission explains that, “[c]onsidering that the COVID-19 outbreak affects all Member States and that the containment measures taken by Member States impact undertakings, the Commission considers that State aid is justified and can be declared compatible with the internal market on the basis of Article 107(3)(b) TFEU, for a limited period, to remedy the liquidity shortage faced by undertakings and ensure that the disruptions caused by the COVID-19 outbreak do not undermine their viability, especially of SMEs”.

The Temporary Framework thus sets out temporary State aid measures that the Commission considers compatible under Article 107 (3)(b) TFEU. The Commission promises to approve the measures swiftly upon their clear and complete notification by the Member State concerned, so long as the Member State shows that the State aid measures notified to the Commission are necessary, appropriate and proportionate to remedy a serious disturbance in the economy of the Member State concerned and that all the conditions in the Temporary Framework are adhered to.

The Temporary Framework provides for the following types of aid:

(a) Direct grants, repayable advances and tax and payments advantages up to EUR 800, 000 gross (i.e. before any deduction of tax or other charge) per undertaking.

In the case of undertakings active in the fishery and aquaculture sector, the aid must not exceed EUR 120,000 gross per undertaking and, in the case of undertakings active in the primary production of agricultural products, the aid must not exceed EUR 100,000 gross per undertaking.

Member States must set up a scheme with an estimated budget to grant this aid.

This aid is aimed at addressing a company’s urgent liquidity needs.

(b) State guarantees on loans taken by companies from banks.

The guarantee applies for a limited period and loan amount and may relate to both investment and working capital loans.

The amount of the loan is determined by reference to the undertaking’s wage bill or total turnover or liquidity needs.

The aim of this aid is to ensure that banks continue to provide loans to customers which need them.

(c) Subsidised interest rates for public loans to companies.

The loan contract must be for a limited period and loan amount and may relate to both investment and working capital needs.

Again, the amount of the loan is determined by reference to the undertaking’s wage bill or total turnover or liquidity needs.

These loans can assist businesses to cover immediate working capital and investment needs.

(d) Short-term export credit insurance where Member States demonstrate that no cover is available in the private insurance market for marketable risks.

The Temporary Framework clarifies that where Member States use banks to provide the aid mentioned in paragraphs (b) and (c), such aid will be considered as aid to the bank’s customers not to the banks themselves. In such cases, the banks should:

• pass on to the largest extent possible the advantages of the public guarantee or subsidised interest rates on loans to the final beneficiaries;

• be able to demonstrate that they operate a mechanism that ensures that the advantages are passed on to the largest extent possible to the final beneficiaries in the form of higher volumes of financing, riskier portfolios, lower collateral requirements, lower guarantee premiums or lower interest rates;

• not charge a guarantee fee in the case of a legal obligation to extend the maturity of existing loans for SMEs.

The temporary aid measures provided under the Temporary Framework can be cumulated with de minimis aid, so that undertakings which have benefitted from de minimis aid may still benefit from the measures under the Temporary Framework. Further, the aid mentioned under paragraph (a) can be cumulated with the aid mentioned under paragraph (b) or (c) and with that under paragraph (d). However, the aid mentioned under paragraph (b) cannot be cumulated with that under paragraph (c) and vice-versa.

The measures under paragraphs (a) to (c) are directed to those undertakings that were not in difficulty on 31 December 2019, but have faced or are facing difficulties since then as a result of the COVID-19 outbreak.

Alternative Options

Apart from the measures in the Temporary Framework, Member States may avail themselves of other possibilities to mitigate the economic effects of the outbreak under the EU state aid rules. The Commission gave an account of these possibilities in its Communication published on 13 March 2020. In this Communication, the Commission, firstly, pointed out the following options which do not constitute, in its view, State aid:

• wage subsidies applicable to all companies;

• suspension of payments of corporate and value added taxes or social contributions applicable to all companies;

• financial support directly to consumers, for example for cancelled services or tickets that are not reimbursed by the operators concerned.

The Commission further explained that it considers the COVID-19 outbreak as an exceptional occurrence in the EU so that Member States could resort to Article 107(2)(b) TFEU to compensate companies for the damage resulting from the outbreak, particularly in the hard hit sectors, such as aviation, tourism and hospitality. In the Temporary Framework, the Commission clarified that undertakings that have previously received aid under the Rescue and Restructuring Guidelines may still receive aid under Article 107(2)(b) TFEU for damages directly caused by the COVID-19 outbreak given that the ‘one time, last time’ principle under the Rescue and Restructuring Guidelines does not apply to this type of aid.

Under Article 107(2)(b) TFEU, Member States may also provide aid to organisers of cancelled events for damages suffered as a result of the outbreak. An example of this is the Commission’s approval of a compensation scheme for cancellation of events related to COVID-19 notified by Denmark. 

The Commission has vowed that it will review any notifications under Article 107(2)(b) TFEU associated with COVID-19 efficiently. To this end, it has set up a dedicated e-mail address (COMP-COVID@ec.europa.eu) and telephone number. It has also provided a skeleton draft for any notifications of aid under Article 107(2)(b) TFEU.

The Commission also explained that Member States may have recourse to the Rescue and Restructuring Guidelines and can notify to the Commission aid measures to meet acute liquidity needs and support undertakings facing financial difficulties due to or aggravated by the COVID-19 outbreak.

Further, Member States remain free to provide support measures in line with de minimis aid and the General Block Exemption Regulation. Measures compliant with these may be put in place by Member States immediately without the Commission’s involvement.

Malta must be careful to grant measures allowed within the parameters of the State aid rules and to abide by the notification and standstill procedure where this applies. Undertakings which receive aid from Malta must apply for such measures with caution as any aid which is illegal or incompatible with the internal market is liable to be returned to Malta with interest.

C. Malta’s Aid Measures

The first two aid measures which were announced, and already implemented by Malta, are the following:

The first aid measure is a deferral on the payment of provisional income tax, value added tax and social security contributions owed for March and April 2020. Eligible taxes (excluding VAT) are to be settled in four equal monthly instalments in the four month period between May and August 2020, whilst VAT dues are to be settled in two equal instalments with the two quarterly returns immediately following the quarter in respect of which the dues would have been deferred. No interest will be charged on deferred payments.

The second aid measure is the Call for the Facilitation of Teleworking Activities (‘the Call’). The Call is open to all undertakings irrespective of size and sector. It allows undertakings to claim back costs and expenses incurred to see that its employees work remotely away from the office pursuant to a teleworking agreement implemented after 1 March 2020. The aid takes the form of a cash grant. There are specific conditions attached to the Call:

• Undertakings can claim back 45% of the eligible costs incurred to introduce the teleworking arrangements. The eligible costs consist of the purchasing and/or leasing of portable computer hardware (included operating systems) together with installation and setting up of connectivity software, and communication solutions that allow different users to connect to their place of work.

• Each undertaking can claim an amount of €500 for each teleworking agreement, capped at an amount of €4,000 per undertaking.

• The total funds available for the Call are €2 million.

The Call is not part of a scheme which is exempted by the General Block Exemption Regulations or which was notified to and approved by the Commission under Article 107(2)(b) TFEU. Rather, it is provided as de minimis aid. Therefore, undertakings, which are already benefitting from de minimis aid, should seek advice on the application of the cumulation rules.

On 18 March 2020, the Prime Minister of Malta announced a further set of aid measures, including:

• €900 million in State guarantees on bank loans;

• €350 for every undertaking in respect of each employee on quarantine leave – the application for this will be available online on the Malta Enterprise site from 25 March 2020;

• Payment of part of the wage bill calculated approximately on the minimum wage covering two to three days per week in those sectors which had to shut down operations due to the outbreak;

• Payment of part of the wage bill calculated approximately on the minimum wage covering one to two days per week for undertakings suffering 25% reduction in their operations.

No legislation or guidelines have yet been published outlining the details and application of these measures.

It is not yet known, at the time of publication, whether Malta will attempt to structure the State guarantees on bank loans in line with the Temporary Framework. You may also wish to refer to our earlier note, which, lists the financing schemes being offered by banks in Malta to undertakings impacted by COVID-19 and which are, so far, unsupported by Malta’s government.

It is apparent that Malta is yet to offer schemes to undertakings based in Malta which capitalise on the flexibility offered by EU State aid rules, particularly the Temporary Framework. The industry is still calling out for swift and urgent measures by the Government of Malta to address in an effective manner the severe impact suffered by businesses and avoid business closures and layoffs.

We are following closely the implementation of these aid measures and this note will be updated accordingly. You may track aid measures being implemented by Malta on the dedicated COVID-19 Business Assistance page of Malta Enterprise.

D. Conclusion

The Commission’s efforts aim for a coordinated response by Member States and EU institutions to mitigate the negative effects on the EU economy whilst protecting the EU internal market. Malta too must respond adequately and timely to this call so as not to fall behind in this EU effort. Given the small size of the Maltese economy and the strong presence of SMEs, Malta has all the more reason to avail itself of the flexibility of the State aid rules to help businesses in the most effective manner, thereby mitigating the negative repercussions resulting from the COVID-19 pandemic.

Should you require further information, please contact Sylvann Aquilina Zahra or Clement Mifsud-Bonnici.

Disclaimer: The contents in this paper are intended for information purposes and do not constitute legal or any other advice. Any views expressed are those of the authors. For a full account of the measures under the Temporary Framework and the applicable conditions please refer to the ‘Communication from the Commission – Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak’ published on 19 March 2020. For more detail on the measures applicable in Malta and for the relevant application to be used by prospective beneficiaries, please refer to the Malta Enterprise COVID-19 page mentioned above.