# Article 107 TFEU Explained: State Aid and the Internal Market URL: https://eu-now.com/blog/article-107-tfeu-state-aid-explained Published: 2026-09-06 · Updated: 2026-09-06 Category: Guides Tags: TFEU, Article 107, Article 108, State aid, competition policy, EU Knowledge, EPSO The four cumulative conditions that make aid State aid, the difference between aid that shall be compatible and aid that may be, and why Article 108 is half the answer. ## Key takeaways - Article 107(1) makes aid incompatible with the internal market only when four conditions are met together: State resources, an advantage favouring certain undertakings or goods, distortion or threat of distortion of competition, and an effect on trade between Member States - Article 107(2) lists aid that SHALL be compatible — the Commission has no discretion. Article 107(3) lists aid that MAY be considered compatible — discretion is the whole point - The prohibition opens by reserving whatever the Treaties provide otherwise: it is a rule with built-in exceptions, not an absolute ban - Article 107 defines the substance; Article 108 supplies the procedure — notification, standstill, Commission review. A question about who authorises aid is an Article 108 question 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](/test/eu_knowledge) and of the field-related MCQs in the [competition policy](/blog/epso-competition-policy-specialist-competitions-guide) and [economics](/blog/epso-economics-specialist-competitions-guide) 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)](/blog/articles-101-102-tfeu-competition-rules-explained), [Article 288 (legal acts)](/blog/article-288-tfeu-legal-acts-explained) and [Article 267 (preliminary rulings)](/blog/article-267-tfeu-preliminary-rulings-explained). ## 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](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12016E/TXT): 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](/test/eu_knowledge), or start from [what the EU Knowledge test actually covers](/blog/epso-eu-knowledge-test-what-to-study). ## FAQ ### Are the conditions in Article 107(1) cumulative or alternative? Cumulative. All four must be present: the measure must be granted by a Member State or through State resources, in any form whatsoever; it must favour certain undertakings or the production of certain goods; it must distort or threaten to distort competition; and it must affect trade between Member States. Fail one, and the measure is not State aid within the meaning of the article at all. Options built on any one of those conditions rather than on all four together are the standard distractor. ### What is the difference between Article 107(2) and Article 107(3)? The verb. Article 107(2) says the listed aid shall be compatible with the internal market — it is compatible by operation of the Treaty, and the Commission simply verifies that the category applies. Article 107(3) says the listed aid may be considered to be compatible — that is a discretionary assessment the Commission carries out. Shall versus may is the single most tested line of this article, exactly as it is in Article 267. ### Does Article 107 ban all State aid? No. It opens by reserving whatever the Treaties provide otherwise, and then makes aid incompatible only where the four cumulative conditions are met — and even then, paragraphs 2 and 3 carve out substantial categories. A statement that the Treaty prohibits State aid outright is wrong; the correct framing is a general prohibition subject to defined exceptions. ### Who decides whether aid is lawful? The Commission, under the procedure in Article 108 TFEU. Member States must notify plans to grant or alter aid and may not put the measure into effect until the procedure has resulted in a final decision — the standstill obligation. The Council can, in exceptional circumstances and acting unanimously on application by a Member State, decide that aid is compatible by way of derogation. If a question asks who authorises, the answer is procedural and lives in Article 108. ## Official sources - EUR-Lex — Consolidated version of the TFEU (OJ C 202, 7.6.2016): https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12016E/TXT - European Commission — State aid control (official): https://competition-policy.ec.europa.eu/state-aid_en - EU Careers — EPSO testing (official): https://eu-careers.europa.eu/en/selection-procedure/epso-tests ## This article in other languages - French: https://eu-now.com/fr/blog/article-107-tfeu-state-aid-explained/llms.txt - German: https://eu-now.com/de/blog/article-107-tfeu-state-aid-explained/llms.txt - Spanish: https://eu-now.com/es/blog/article-107-tfeu-state-aid-explained/llms.txt - Italian: https://eu-now.com/it/blog/article-107-tfeu-state-aid-explained/llms.txt Source of record: https://eu-now.com/blog/article-107-tfeu-state-aid-explained — published by EU-now (eu-now.com), which is not EPSO and not affiliated with the European Commission.