Article 107 TFEU Explained: State Aid and the Internal Market

State aid is one of the few EU competences where the Commission decides alone, and Article 107 TFEU is where that power starts. It is also a favourite of the EPSO EU Knowledge test and of the field-related MCQs in the competition policy and economics profiles, because the article is built out of exactly the material multiple choice feeds on: a list of cumulative conditions, and two lists that look alike and are not.

Part of our TFEU series with Articles 101 and 102 (competition rules), Article 288 (legal acts) and Article 267 (preliminary rulings).

The four conditions, and why they are cumulative

Article 107(1) begins "save as otherwise provided in the Treaties" — a signal, before anything else, that this is a rule with exceptions written into it.

It then makes incompatible with the internal market any aid that satisfies all of the following:

1. granted by a Member State or through State resources, in any form whatsoever;
2. favouring certain undertakings or the production of certain goods — the selectivity requirement;
3. which distorts or threatens to distort competition; and
4. in so far as it affects trade between Member States.

All four, together. A general tax cut available to every business in the economy fails the selectivity test and is not State aid. A subsidy financed privately, with no State resources involved, fails the first. The article does not catch generosity; it catches selective generosity paid for by the State that bites on the internal market.

Note also the reach of "in any form whatsoever". Direct grants are the obvious case, but tax exemptions, guarantees on favourable terms, sales of public land below market value and capital injections a private investor would not have made all count. Form is irrelevant; effect is not.

Shall be compatible, versus may be

This is the distinction the article is tested on.

Article 107(2) — aid that shall be compatible. Three categories, and the Commission has no discretion once the category is established:

• aid having a social character, granted to individual consumers, provided it is granted without discrimination related to the origin of the products concerned;
• aid to make good damage caused by natural disasters or exceptional occurrences;
• aid to certain areas of the Federal Republic of Germany affected by the former division of Germany, in so far as it is required to compensate for the economic disadvantages caused by that division.

Article 107(3) — aid that may be considered compatible. Five categories, each one an invitation to the Commission to assess:

• aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;
• aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;
• aid to facilitate the development of certain economic activities or of certain economic areas, where it does not adversely affect trading conditions to an extent contrary to the common interest;
• aid to promote culture and heritage conservation, on the same proviso;
• such other categories as may be specified by decision of the Council on a proposal from the Commission.

If an item asks you to sort a category into one paragraph or the other, ask whether the Treaty is granting compatibility or permitting an assessment of it. Natural disasters: granted. Regional development: assessed.

Article 108 is the other half

Article 107 says what aid is and when it is compatible. It does not say who checks, or when a Member State may pay.

That is Article 108: the Commission keeps existing aid systems under constant review, Member States must notify plans to grant or alter aid in sufficient time, and — the part that decides real cases — the Member State shall not put its proposed measures into effect until the procedure has resulted in a final decision. That is the standstill obligation. Aid paid before clearance is unlawful aid, and recovery follows.

Article 108 also holds the exception people forget: the Council, acting unanimously on application by a Member State, may decide that aid shall be considered compatible in derogation from Article 107, if exceptional circumstances justify it.

So: substance in 107, procedure in 108, and a question about authorisation is always the second one.

How this is tested

Four recurring shapes. A cumulative-conditions item that offers "any one of the following". A shall/may sort between paragraphs 2 and 3. A form-of-aid item testing whether you know that a tax exemption or a State guarantee is aid. And a procedure item that hides the standstill obligation — the Member State that "notified and then paid" has broken Article 108, not Article 107.

Drill the pattern in free EU Knowledge practice, or start from what the EU Knowledge test actually covers.