On 29 June, the European Commission has adopted a third amendment to extend the scope of the State aid Temporary Framework adopted on 19 March 2020 to enable Member States to support the economy in the context of the COVID-19 outbreak. This follows a first and second amendment in April and May 2020 respectively.

This third amendment is aimed at supporting micro, small and start-up companies further with their liquidity shortages and greater difficulties to access financing even if they were already in financial difficulty on 31 December 2019. Such will apply, unless the companies are in insolvency proceedings, have received rescue aid that has not been repaid, or are subject to a restructuring plan under State aid rules.

Conditions have also been introduced that provide incentives for private investors to participate alongside the State in recapitalisations, thus reducing the need for State aid and the risk of distortions to competition. In particular, if the State decides to grant recapitalisation aid, but private investors contribute to the capital increase in a significant manner (in principle at least 30% of the new equity injected) at the same conditions as the State, the acquisition ban and the cap on the remuneration of the management are limited to 3 years. Furthermore, the dividend ban is lifted for the holders of the new shares as well as for existing shares, provided that the holders of those existing shares are altogether diluted to below 10% in the company.

Furthermore, in line with the principle of neutrality towards public or private ownership of the Treaty on the Functioning of the European Union, the amendment will also enable companies with an existing State shareholding to raise capital from their shareholders similar to private companies. Where the conditions above as regards the participation of private investors in the capital increase are met and the State was a shareholder already before the granting of recapitalisation aid, investing pro rata to its existing shareholding, the Commission does not consider it necessary to impose specific conditions as regards the State's exit.

With these amendments, the Commission has clarified that aid should not be conditioned on the relocation of the production activity or of another activity of the beneficiary from another country within the European Economic Area (EEA) to the territory of the Member State granting the aid, since such a condition would be particularly harmful for the internal market.

Should you have any queries or wish to discuss further, please send an email to covid@kpmg.com.mt.

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