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The General Court comes to Miculas’ aid

 

01 July 2019

In a decision rendered on 18 June 2019 (joint Cases T 624/15, T 694/15 and T 704/15), the General Court of the European Union (the Court) annulled the European Commission’s (the EC) decision 2015/1570 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) (the EC Decision) that precluded Romania from complying with an award rendered by the International Centre for Settlement of Investment Disputes (ICSID) in favour of Swedish investors Ioan Micula and Viorel Micula and a number of corporate entities they control (the Court's Decision).  In particular, the Court held that compensation awarded for damage suffered as a result of a premature withdrawal of an incentive scheme prior to Romania’s accession to the European Union (the EU) did not constitute State aid.  If confirmed by the European Court of Justice (the ECJ), this will be a positive development for claimant investors as it means that compensation awarded for damage suffered as a result of a breach of international law cannot be regarded as State aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid.

Background

 

The dispute originates from a piece of Romanian legislation enacted in 1998, which granted certain tax incentives to investors in unfavoured regions for a period of ten years.  The Micula brothers were – through their entities – beneficiaries of these incentives. As part of the process of preparing for accession to the EU in 2007, Romania terminated the incentive scheme in 2005, ie three years earlier than envisaged by the legislation. 
 
The Miculas commenced proceedings before ICSID, in 2005, under the Sweden-Romania bilateral investment treaty (the BIT).  In 2013, the arbitral tribunal found that Romania breached the BIT’s fair and equitable treatment standard, and awarded the Miculas approximately EUR180 million in damages and interest.  The ICSID annulment committee rejected Romania’s application for annulment in 2016. In 2014, the Miculas initiated enforcement proceedings in Romania and succeeded in recovering approximately EUR80 million.  In 2015, the EC issued a decision stating that payment of the award would constitute State aid and asked Romania to recover the amounts already paid and to refrain from making any further payments. The Miculas challenged this decision before the Court.  The Kingdom of Spain and Hungary both intervened, in support of the EC’s decision.

The Court’s Decision

 

The Court annulled the EC Decision, holding that: (1) the EC retroactively applied the powers which it holds under Article 108 TFEU and Regulation No 659/1999 to events pre-dating Romania’s accession to the EU, and the EC thus lacked competence to classify the measure at issue as State aid within the meaning of Article 107(1) TFEU (which provides that “save as otherwise provided in the Treaties, 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”); and (2) the EC Decision is unlawful in so far as it classified as an advantage and aid, within the meaning of Article 107(1) of the TFEU, the award or compensation intended to compensate for the damage resulting from the withdrawal of the tax incentives, at least in respect of the period pre-dating the entry into force of EU law in Romania.
 
In respect of (1), the Court reasoned that:
 
(a) EU law became applicable in Romania from its accession to the EU on 1 January 2007, and it was only then that the EC acquired the competence of review under Article 108 TFEU;
 
(b) State aid is considered to be granted at the time when the right to receive it is conferred on the beneficiary;
 
(c) in the present case, all events, including the introduction and the repeal of the incentives, occurred prior to accession  the arbitral tribunal confined itself to determining the damage suffered in 2005 when the incentive scheme was repealed, which is when the right to receive compensation arises and the question of State aid would be assessed;
 
(d) while the arbitral award was issued in 2013, it is merely an ancillary element of the compensation at issue; it is not, as such, severable from the earlier tax incentives and cannot, therefore, be classified as new aid and serve as a basis for the competence of the EC and the applicability of EU law for all the past events;
 
(e) the amounts granted as compensation for the period pre-dating Romania’s accession (ie 22 February 2005 to 31 December 2006) cannot constitute State aid under EU law; and
 
(f) with respect to the amounts granted as compensation for the period subsequent to Romania’s accession to the EU (ie 1 January 2007 to 1 April 2009), the EC has, in any event, exceeded its powers as it did not seek to distinguish the damage suffered in different periods, even assuming that the payment of compensation relating to that period could be classified as incompatible State aid.

In respect of (2), the Court reasoned that compensation for the damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid and, since the EC lacked the competence to classify the incentive scheme as State aid prohibited by EU law, the arbitral award could not have the effect of compensating the applicant for the revocation of an incompatible State- aid measure.  Given that the EC did not distinguish between compensation paid for the pre- and post-accession period, the EC Decision is unlawful in its entirety.  The Court also stated that the BIT at issue was not invalid.

Comment

 

The Court’s Decision, which may be appealed to the Court of Justice of the EU, clarifies that an arbitral award compensating for the damage suffered as a result of the withdrawal of an incentive scheme cannot be regarded as State aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid.  In other words, an award is inseparable from the compensation at issue and cannot be classified as aid in its own right.
 
The Court’s Decision is also encouraging in that it draws a temporal distinction with Achmea which arose out of events that occurred post-accession.  Although the comments are obiter, the Court considered that the BIT was valid and the ICSID award that dealt with events which all arose pre-accession when EU law was inapplicable in Romania was executable (even though part of the compensation related to a post-accession period which the EC failed to treat differently). 
 
 

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