State aid is regulated by the Treaty on the Functioning of the European Union ("TFEU") and by other regulations, communications, notices and guidelines adopted by the European Commission. It refers to measures involving a transfer of resources granted (directly or indirectly) by the State to an undertaking engaged in an economic activity and operating in a market in which there is trade between EU Member States. The general principle is laid down in Article 107 of the TFEU. There is State aid when the financial support in question meets all the following conditions:
(i) it is granted by the State or involves State resources;
(ii) it favours certain undertakings or the production of certain goods;
(iii) it distorts competition, and
(iv) it affects trade between Member States.
EU Member States cannot grant any State aid unless (i) it has been notified to and authorised by the European Commission or (ii) it falls within the application of authorised exemptions.
As far as SGs are concerned, the basic EU law provisions on State aid apply to all guarantees under which a transfer of risk takes place. An SG will not constitute State aid if it does not bring any advantage to a commercial undertaking. The main test applied in this respect is the "market economy investor principle": an SG is free of aid when the State obtains remuneration equivalent to the premium a market economy operator would charge an equivalent company for an equivalent guarantee. Where an SG does not comply with the "market economy investor principle", it is deemed to entail State aid. The State aid element will then need to be quantified in order to check whether the aid may be found to be compatible with the internal market rules.
Certain individual SGs and SG schemes may be exempt from notification requirements.
For individual SGs, the European Commission considers that the fulfilment of all the following conditions will be sufficient to rule out the presence of State aid (although failure to comply with them does not mean that the SG is automatically regarded as State aid):
(i) the borrower is not in financial difficulty;
(ii) the SG must be linked to a specific financial transaction, for a fixed maximum amount and be limited in time;
(iii) the SG does not cover more than 80% of the outstanding loan or other financial obligation. Losses and recoveries resulting from performance of the relevant secured obligation have to be shared proportionally between the lender and the guarantor;
(iv) a market-oriented price is paid for the SG.
For SG schemes, the European Commission considers that the fulfilment of all the following conditions will rule out the presence of State aid (although failure to comply with them does not mean that the SG is automatically regarded as State aid):
(i) the scheme is closed to borrowers in financial difficulty;
(ii) the SGs must be linked to specific financial transactions, for a fixed maximum amount and be limited in time;
(iii) the SGs do not cover more than 80% of each outstanding loan or other financial obligation;
(iv) the terms of the scheme are based on a realistic assessment of the risk so that the premiums paid by the beneficiaries make it, in all probability, self-financing;
(v) the level of the fees has to be reviewed/adjusted at least once a year to ensure that the scheme is self-financing;
(vi) the fees charged have to cover the normal risks associated with granting the SG, the administrative costs of the scheme and a yearly capital remuneration;
(vii) the scheme must provide for the terms on which future SGs will be granted.
Guidance: State aid requires forethought in the early design stages of individual SGs or SG schemes. This will enable potential issues to be identified and addressed. Specialised advice should be sought in particular on matters related to the compliance of SGs with EU State aid rules and on financial matters to assess the compatibility of SG structures and pricing. Where doubts emerge, it is advisable to consult or notify the European Commission (Directorate-General for Competition).