EU state aid law prohibits Member States from granting state aid – i.e. subsidies – in a manner that distorts competition in the European internal market (think of the recent controversies about Ireland’s relationship with Apple), although they can seek authorisation from the European Commission (which, if forthcoming, will have conditions). The rationale is to prevent companies from gaining an unfair competitive advantage through government support.

Brexit could have a significant impact on state aid law in the UK. In the event of a “hard Brexit”, the UK would only be bound by WTO rules on subsidies. The UK government might want to take advantage of the reduced constraints on granting subsidies, perhaps if there were a sustained decline in foreign direct investment. If, on the other hand, the eventual outcome of Brexit is a trade agreement between the EU and the UK, rules regarding state aid might change very little. The European Council made it clear that any future trade agreement with the UK “must ensure a level playing field, notably in terms of competition and state aid”.

The irony is that the UK was essentially the author of the EU state aid regime and makes less use of state aid than its peers: in 2014, for example, state aid amounted to 0.33% of GDP in the UK compared with a weighted average of 0.62% across the EU. EU insistence on including state aid rules would be relatively easy for the UK to accommodate.

Existing EU trade agreements offer two models for state aid control:

• Supranational system: the EEA system mirrors the EU state aid system, with the EFTA Surveillance Authority playing the same role as the European Commission. Although the UK government stated that it does not intend to join the EEA, another supranational UK/EU mechanism could in principle be established. Alternatively, the EEA system could be “borrowed” for the purposes of state aid.
• Domestic system: The EU has also been willing to accommodate a domestic system. The most recent example can be found in the Ukraine-EU Association Agreement, which requires Ukraine to implement a domestic system of state aid control with “an operationally independent authority”. However, the Ukrainian domestic system must apply the substance of EU law as interpreted by the jurisprudence of the Court of Justice of the European Union, and in light of EU secondary legislation and guidance.

On 28 March 2018, the UK government appeared to opt for the domestic option. In a letter to the House of Lords EU Internal Market Sub-Committee, it confirmed that it plans to establish a full UK-wide subsidy control framework based on transposing existing EU state aid rules. The Competition and Markets Authority (“CMA”) would take the role of state aid regulator. However, given the acknowledged need for the government to plan for “all scenarios” (read: no deal), it really had little choice. It has stated that its position is without prejudice to future negotiations. If a domestic model remains after negotiations have been completed, it may be because the CMA has established its credibility in the eyes of the EU as a regulator of the state – including as an effective regulator of a sovereign Parliament on matters including taxation.

Written by Dr Zvenyslava Opeida, Visiting Scholar at the University of Pittsburgh School of Law.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.