State Aid to Football Clubs: Game Over

Professional football is a business worth billions of euros. Football clubs earn money by selling TV broadcasting rights and tickets as well as through marketing, merchandising, sponsorship, transfer of players, etc. For years the linkage between public authorities and professional sports has been very strong, often including financial advantages in the form of State aid. As professional football clubs derive their revenues and participate in acquiring football players throughout the EU, State aid is liable to affect intra-EU trade. However, until 2013, it seemed that the European Commission was unwilling to apply the EU State aid rules not only to professional football, but to sports in general. This changed abruptly in July 2016 when the Commission concluded numerous in-depth investigations regarding unlawful State aid to professional football clubs in Spain and the Netherlands.

The Real Madrid Case

The first indication of a trend reversal came in 2011 when Spanish citizens lodged complaints against Real Madrid, challenging a land transfer settlement agreement as providing illegal State aid to the football club. In 1996, Real Madrid and the Madrid City Council entered into a land swap agreement. The Madrid City Council agreed to transfer certain publicly owned plots of land in exchange for the plot of land Real Madrid owned. In 1998, the Madrid City Council concluded a contract for a transfer of several plots of land to Real Madrid to implement the previous land swap agreement. However, the Madrid City Council could not legally transfer one plot of land which, in 1998, was allegedly worth EUR 0.6 million. Given its failure to comply with its contractual obligation to transfer that plot, the Madrid City Council entered into a settlement agreement with the football club in 2011 and compensated the club for the plot of land it could not transfer now valued at EUR 22.7 million. When the European Commission investigated the land valuations it concluded that they did not reflect the market price. An independent study confirmed that the plot of land was undervalued in 1998 and highly overvalued in 2011. The land was initially valued under the classification for basic sports use by the public. Instead, the correct valuation should have been based on the price a sports infrastructure investor would pay for its commercial exploitation over the next decades, not on a short therm sale of infrastructure. This, however, would not lead to such a high increase of the value in 2011. The appropriate value should have been set at EUR 4.3 million.

The Commission then examined whether the Madrid City Council acted according to the “market economy vendor principle”. A prudent market economy vendor would carry out its own assessment of the commercial rationale before entering into a settlement agreement. It was established that the Madrid City Council failed to do so. The Commission also determined that the Madrid City Council did not seek legal advice before entering into the initial contract and the settlement agreement. Consequently, the Commission concluded that the Madrid City Council did not act as a “market economy vendor” and therefore overpaid Real Madrid by EUR 18.4 million. Finally, the Commission concluded that Spain used the money of tax payers to finance a professional football club while giving it an unjustified advantage over other EU clubs. Spain must now recover EUR 18.4 million from Real Madrid.

Commission Strikes Badly: Six at One Blow

Apart from Real Madrid, the Commission conducted three separate in-depth investigations regarding six other Spanish professional football clubs. They concerned the treatment of certain clubs as non-profit organisations for tax purposes and not as limited liability companies – which they in fact were. That way the clubs paid a 5% lower tax rate on their profits. The Commission found out that Spain granted these advantages for more than twenty years, without any objective justification. However, during the course of the investigation Spain changed the legislation, thereby ending the discriminatory treatment. The exact amount to be recovered will be determined by the Spanish authorities.

In addition, the Commission found that Spain granted public guarantees for loans to three clubs which were not in financial difficulties. The clubs were able to obtain the loans on terms more favourable than the market ones, thus benefiting from an economic advantage over other clubs. In that regard, Spain has to recover EUR 30.2 million.

Dutch Kept an Eye on the Aid

Since March 2013 the Commission has also been examining benefits granted to five Dutch football clubs. These comprised the purchase of a stadium and training grounds, lowering the rental fee for the stadium with retroactive effect, and refinancing debt where the creditor acquired an equity position in exchange for the cancellation of the debt. Given that all Dutch football clubs under investigation were in financial difficulties, the Commission applied its Guidelines on State aid for rescuing and restructuring firms in difficulty. The Commission found that the transactions had been carried out on terms acceptable to a market investor: the football clubs had realistic viability prospects, downsized their payroll and contributed to the costs of their restructuring. Therefore, the Commission concluded that the State aid in question complied with EU law.

Conclusion

State aid is generally prohibited but may be exempted depending on the circumstances. Sport clubs and entities, among them professional football clubs, are neither immune to State aid law nor immediately granted an exemption. The Commission's recent decisions are welcomed as they contribute to a level playing field for professional sports across Europe.

If you have questions related to this topic please feel free to contact Mrs Ida Dojcinovic (Ida.Dojcinovic@bblaw.com)