> Competition Law

What if a State aid to a (foreign) competitor causes damage to your business?

These days, we have been following this heated discussion on the pharmaceutical activity regulation in Slovenia triggered by the new Pharmacy Act, and the European Commission (the Commission) interfered because of the alleged State aid to public pharmacy institutions.

The Commission requested the State for clarification of the current regulation of pharmaceutical activity which results in a de facto unequal taxation of public institutions and private pharmacists-concessionaires, although both carry out an identical activity. Public institutions are taxed under the Corporate Tax Law at 17 percent tax rate, and it only applies to the income from a profitable activity (e.g. health care agents and other health protecting means, but not the drugs). Meanwhile, the private pharmacists-concessionaires are taxed under the Law on Income Tax at its progressive rates up to 50%, that is for the income from all of their activities. The original reason for this distinction is not a tax legislative, but the Pharmacy Act. It allows a concession for the pharmaceutical activity to be granted (only) to the individual who meets the conditions of the Pharmacy Act, and it applies to natural persons and not to legal entities of any legal form. Since the pharmacist-concessionaire is necessarily a natural person, he / she is according to the Pharmacy Act a natural person being a subject to the Personal Income Tax as a system of taxation of a personal income. The constitutional assessment due to (among other things) the more favourable taxation of public institutions has already been proposed, but in 2008 the Constitutional Court avoided it because the law allegedly doesn’t regulate taxation of the pharmaceutical activity.

It will be interesting to observe further development of the proceedings before the Commission, since I’m convinced that the described arrangement has at least some elements of the State aid within the Article 107 of Treaty on the Functioning of the EU (TFEU) in favour of public pharmacy institutions.

In Slovenia, the State aid is a popular topic due to a large number of the State owned companies and due to emphasizing the “national interest”, particularly in case of saving certain companies in trouble. Similar tendencies are not unknown to other EU member states, so the companies in Slovenia may be adversely affected as a result of State aid given to their competitors from abroad. In this context, the particularly meaningful is the question on the legal options available to the company affected by the distortion of competition caused by the State through a State aid.

One of the competitor’s options is a complaint to the Commission. In case of the pharmaceutical activity, the Commission requested the State for an explanation (also) on the basis of the pharmacist-concessionaire’s complaint.

Some potentially effective legal remedies are offered to the affected businesses by the law also before the national courts. These resources were not used by the companies in Slovenia so far, therefore two potentially most useful should be introduced. They can help the companies – independently from the Commission’s actions – to prevent distortion of the competition on the market in case when the State carries out an illegal aid. The aid is granted illegally, if the State does not previously notify the Commission (although it should) and the action, resp. the payment of the State aid is not delayed until the Commission’s decision on the compatibility of this aid and the internal market. Until the positive Commission’s decision, the so called standstill obligation applies, resp. delaying the execution of the aid (Article 108 (3) TFEU).

If the aid is announced but not yet carried out, and there is a danger for the State to grant the aid before the Commission’s decision on the compatibility (which is often the case particularly when saving the companies in trouble), a potentially affected company can fully prevent this premature granting of the aid by submitting a request before the National Court. In such case, the affected company must submit a complaint based on the Article 108(3) TFEU against the State proving that the questionable action is the State aid that must be declared and require not be carried out until the Commission approves it as a compatible aid.

But more often it happens that the State already carries out the aid although obliged to declare it to the Commission before the execution. In this scenario, too the affected company can achieve (at least temporarily) the elimination of distortions of competition before the National Court. The company can require the court to impose (temporary) recovery of unlawful aid from the beneficiary. The stand point of the Court of Justice of the EU is that the National Court must impose (temporary) recovery of the aid already paid once the Commission has initiated the formal investigation procedure, although the Commission may decide after its completion that the aid is compatible with the internal market.

The company that had suffered damage as a result of illegal and / or incompatible State aid to a competitor also has another option: it can demand compensation from the State that had acted unlawfully by granting the State aid. Of course, the company would face a variety of problems, primarily by proving a causal link between the State aid granted to a competitor and the damage it claims to be caused, as well as proving the extent of the damage caused. However, so called private enforcement of the Competition Law is getting an increasingly important role in the EU law by lodging an application for damages against infringers (and in case of illegal State aid the violator is the State). If the pharmacists-concessionaires succeed in proving that the system of concessions existing in Slovenia due to differences in taxation represent an illegal incompatible State aid to public pharmacy institutions, this at least theoretically opens up channels for applications for damages.

In cases of alleged distortions of competition by the State, the solution therefore also lies in examining the compliance of the State’s actions with the rules on the State aid and exercising legal remedies available to affected competitors. Pharmacists-concessionaires are encouraged – will anyone else follow them?