State Aid Recovery and Litigation

State aid recovery and litigation: the short answer

When state aid is granted without the European Commission's approval and outside a block exemption, it is unlawful. If the Commission then finds it incompatible with the internal market, it orders the Member State to recover the aid with interest from the beneficiary. State aid recovery is governed by Article 16 of the Procedural Regulation (EU) 2015/1589, must be effected without delay under national procedures and is subject to a ten-year limitation period. Beneficiaries can challenge recovery decisions before the EU courts, but an action does not suspend recovery unless the court orders interim relief. Competitors, for their part, can sue in German courts to stop the implementation of unlawful aid and to have it recovered.

For German companies, state aid recovery is a real financial risk: it can affect subsidised loans, tax benefits, below-market land sales, infrastructure deals and energy price reductions. This article explains how recovery works, how beneficiaries can defend themselves, how competitors use national courts, and what appeals to the EU courts can achieve.

Unlawful aid and incompatible aid

Two concepts must be distinguished. Aid is unlawful if it was put into effect in breach of the standstill obligation in Article 108(3) TFEU, that is, without notification and approval and outside the GBER or another exemption. Aid is incompatible if the Commission concludes, after its assessment, that it cannot be justified under Article 107(2) or (3) TFEU.

Only the Commission decides on compatibility. National courts, however, must enforce the standstill obligation, because Article 108(3) TFEU has direct effect. A national court can therefore order measures against unlawful aid even before the Commission has ruled on compatibility. If the Commission later approves the aid, the beneficiary may still have to pay interest for the period of unlawfulness, as the Court of Justice has held in its case law on the standstill obligation.

Commission recovery decisions

Under Article 16 of Regulation (EU) 2015/1589, where the Commission adopts a negative decision on unlawful aid, it orders the Member State to take all necessary measures to recover the aid from the beneficiary. The key rules are:

The defence that recovery would breach legitimate expectations rarely succeeds. A diligent business operator is expected to check whether aid was notified and approved. Only in exceptional circumstances, for example where the Commission itself created precise assurances, can legitimate expectations prevent recovery. The fact that a German authority assured the beneficiary that the aid was lawful does not suffice.

The Commission's 2019 Recovery Notice explains the procedure, including how Member States identify beneficiaries, quantify amounts and handle insolvency. Absolute impossibility of recovery is accepted only in extreme cases, for example where the beneficiary has been liquidated without assets.

State aid recovery in Germany

In Germany, the authority that granted the aid implements the Commission's decision. The legal route depends on how the aid was granted. Aid granted by administrative act is revoked under the Administrative Procedure Act (Verwaltungsverfahrensgesetz, VwVfG) and reclaimed by administrative decision. Aid granted by private-law contract, for example a subsidised loan or a below-value land sale, is reclaimed by civil-law means, typically by invoking the invalidity of the contract or contractual repayment clauses. Tax advantages are recovered through amended tax assessments.

EU law shapes the application of national rules. Time limits for revocation in § 48 VwVfG and the protection of legitimate expectations must be applied in a way that does not make state aid recovery practically impossible, and German courts follow this approach. Appeals by the beneficiary against national recovery measures do not prevent the authority from enforcing the Commission decision if national suspensive effect would undermine immediate execution.

Validity of contracts

German civil courts have treated contracts that implement aid in breach of the standstill obligation as void under § 134 of the Civil Code (Bürgerliches Gesetzbuch, BGB), which renders legal transactions contrary to a statutory prohibition void. The consequences are severe for property deals, loans and service contracts with public bodies. Recent case law has looked at whether less drastic consequences are possible, for example where the parties adjust the price to market terms, but contracts with public bodies should contain state aid clauses that allow adjustment rather than relying on nullity.

Competitor actions before German courts

Competitors play a significant role in state aid recovery. In a 2011 judgment concerning payments by Lübeck airport to a low-cost airline, the Federal Court of Justice (BGH) held that competitors can sue the public body that granted aid in breach of the standstill obligation, seeking injunctions and recovery. The Court of Justice later confirmed, in a reference from a German court on Frankfurt-Hahn airport, that national courts must take all necessary measures to draw the consequences of a possible infringement of the standstill obligation once the Commission has opened a formal investigation.

Competitors therefore have several tools:

• Injunction against further payments of unlawful aid;
• Recovery claim against the grantor, requiring it to reclaim the aid with interest;
• Damages against the grantor for losses caused by the unlawful aid, subject to proof of causation;
• Complaint to the Commission, which may open an investigation and adopt a recovery decision;
• Interim relief in urgent cases, including in public procurement proceedings where aid affects tenders.

National courts may ask the Commission for information or an opinion, and the Commission may submit observations of its own motion (Article 29 of Regulation 2015/1589).

Appeals to the EU courts

Commission decisions can be challenged by an action for annulment under Article 263 TFEU. The Member State can always sue. Beneficiaries of individual aid are directly and individually concerned and can bring actions before the General Court; beneficiaries of aid schemes and competitors must show that they are individually concerned, which is often difficult. The time limit is two months from publication or notification, plus a ten-day extension on account of distance.

An action does not suspend the obligation to recover. Interim relief under Articles 278 and 279 TFEU requires a prima facie case, urgency and a balance of interests in the applicant's favour, and is rarely granted. Proceedings before the General Court and, on appeal, the Court of Justice can take several years. During that time, the recovered amounts are often held in blocked accounts or secured by guarantees, depending on what the national authority accepts as immediate and effective execution.

Competitors whose complaint the Commission rejects may also bring actions, particularly where the Commission refused to open a formal investigation despite serious doubts, because that deprives them of their procedural rights.

Defending against state aid recovery: practical steps

Beneficiaries have more room for manoeuvre than the strict rules suggest, but only if they act early. Useful steps include:

1. Engage in the formal investigation. Interested parties can submit comments after the Commission publishes its opening decision. Arguments on the absence of aid (for example, the market economy operator test), on compatibility or on the correct quantification should be made at this stage, because later court review is limited to the Commission's file.
2. Challenge the quantification. The amount to be recovered is the advantage actually received. Valuation reports, comparable transactions and evidence of market terms can reduce the amount significantly.
3. Check the limitation period. Aid awarded more than ten years before the first Commission action may qualify as existing aid under Article 17 of Regulation 2015/1589.
4. Agree on modalities. German authorities have some discretion on how recovery is executed, for example by payment into an escrow account pending an EU court action, provided execution is immediate and effective.
5. Consider the group. The Commission may extend recovery to other group companies that benefited economically. Group structures and intra-group transfers should be reviewed.

Where recovery threatens the beneficiary's viability, restructuring aid rules and insolvency law become relevant. Recovery claims cannot simply be written off in an insolvency plan if this would frustrate the Commission's decision, and the Commission will scrutinise any new aid granted to rescue the beneficiary.

State aid recovery in M&A and financing

State aid recovery liabilities follow the economic activity that benefited from the aid. In share deals, the liability remains with the target company. In asset deals, the Commission may require recovery from the acquirer if the sale was designed to circumvent recovery, for example where assets are transferred below market price to a related company. Due diligence should therefore cover public funding, tax rulings, land purchases from municipalities, guarantees and energy cost reductions, with specific warranties and indemnities.

Lenders and investors should also consider that unlawful aid may be repaid with interest calculated over many years, and that recovery claims in insolvency are treated as ordinary claims but may block a restructuring plan if not addressed.

Illustration: a hypothetical municipal company sold a commercial site in 2020 to a manufacturer at a price well below market value, without an independent valuation or tender. A competitor complains to the Commission in 2025. The Commission opens a formal investigation and later orders recovery of the difference with interest. The manufacturer challenges the decision before the General Court but must provide security in the meantime, and the sale contract's validity under § 134 BGB becomes a separate dispute in the German courts.

How TRW & Co helps with state aid recovery

We advise beneficiaries, competitors and public bodies on state aid recovery and litigation. For beneficiaries, we assess exposure, respond to Commission investigations, negotiate the quantification of recovery and interest with German authorities and coordinate actions before the EU courts. For competitors, we prepare complaints and bring actions in German courts for injunctions and recovery. For public bodies, we design transactions and contracts that avoid aid or include appropriate adjustment clauses. Our work connects with our state aid and FSR and commercial litigation practices. See also state aid for climate and energy projects and preliminary references to the CJEU. To discuss a recovery or a complaint, contact us.