Introduction

The year 2015 promises to be crucial, and possibly revolutionary, for State aid in football. The European Commission is taking its time in concluding its formal investigations into alleged State aid granted to five Dutch clubs and several Spanish clubs, including Valencia CF and Real Madrid, but the final decisions are due for 2015.

A few months ago, the Commission also received a set of fresh State aid complaints originating from the EU’s newest Member State Croatia. The complaints were launched by a group of minority shareholders of the Croatian football club Hajduk Split, who call themselves Naš Hajduk. According to Naš Hajduk, Hajduk Split’s eternal rival, GNK Dinamo Zagreb, has received more than 30 million Euros in unlawful aid by the city of Zagreb since 2006.

Investigations into potential aid granted to Dinamo are not something new. Croatia’s most successful club was already under scrutiny by the Croatian Competition Agency (CCA) prior to the country joining the EU on 1 July 2013. In a highly controversial decision dated from 13 June 2013, the CCA decided to terminate the proceedings. With Croatia joining the EU, the CCA ceased to have the legal competence to carry out State aid investigations. Instead, the European Commission has the exclusive competence to deal with the Dinamo Zagreb case.

It is no secret that football and politics, including direct State intervention, go hand-in-hand in many EU Member States. Remarks made by Spanish Government officials after news broke out that the Commission commenced formal investigations relating to Spanish clubs illustrate this point, thereby making it more sensitive for the Commission to decide these cases.

In that sense, the Dinamo Zagreb case could prove a real snake pit, since State funding of professional sports undertakings is authorised by a national law known as the “Sports Act”. In Naš Hajduk’s eyes, joining the EU has not changed existing practices since Dinamo is still receiving unlawful State aid. In fact, they believe that the main reason for the City of Zagreb’s public funding is to preserve the dominant position of Dinamo Zagreb in Croatian football. Furthermore, according to the complainant, the CCA’s decision to declare the aid compatible with Croatian national law was unjustifiable because the CCA did not correctly interpret the relevant provisions stipulated in the Stabilisation and Association Agreement between the European Communities and its Member States and the Republic of Croatia and the Treaty concerning the accession to the EU of the Republic of Croatia. 

This blog post will briefly discuss the measures imposed by the relevant Croatian authorities regarding public funding to Croatian sporting entities in general and Dinamo Zagreb in particular in light of the decision of the CCA. Furthermore, now that a complaint has been lodged with the Commission, I will analyse the key legal issues raised by the case.  

Background

Since Croatia gained its independence from Yugoslavia in 1991, GNK Dinamo Zagreb has been the country’s most successful football club by a distance. It has won 16 national championships in total, and is currently well on its way to win its 10^th consecutive title. Notwithstanding all the sporting success, it has suffered great financial difficulties in this period of time, which climaxed in a Croatian Court declaring the football club bankrupt in 2002. However, after restructuring the club, Dinamo was allowed to remain active in the highest professional football league of Croatia.[1]

Since the introduction of the latest version of the Sports Act in 2006, Dinamo has been consistently included in the public financing programs adopted on the basis of Articles 74-76 (Sport Financing) of this Act. Article 75 allows public funding in sport on State level, whereas Article 76 allows for public funding in sport on regional and local level. Article 76 (1) lists the types of programs that are suitable for public finding. The list includes: implementing sporting activities of children, youth and students; sports preparations, Croatian and international competitions, as well as the general and special health protection of athletes; hiring persons to do professional work in sports and; planning, construction, maintenance and use of sports facilities important to the public authorities.[2]

In Zagreb, for example, the system of public funding works as follows: The Zagreb Sports Association (SSGZ), a public institution or “sports community” created by the City of Zagreb, submits a proposal to the city regarding the public needs for sport within the city.[3] The final decision on this proposal and the annual budget for the public needs for sporting entities within the city lies with the governing body of the City of Zagreb in accordance with Article 74 (2) and 76 (4).

In general terms, the program on public funding in sport of the SSGZ includes:

• Investing in the development of young athletes;

• Encouraging participation in sport for larger number of citizens, especially children and youth.

However, the program also includes:

• Improving the quality of elite professional sport that encourages the development of sport and contributes to the reputation of the City of Zagreb

• Planning, construction, maintenance and use of sports facilities important to the City of Zagreb.

The criteria of what can be considered “elite professional sport” are found in the Conclusion on the allocation criteria for the promotion of professional sport.[4] Funding for elite professional sport could be awarded to all sporting entities who have won a European title, who have gained the right to participate in European competitions, or that are successful in domestic and/or European professional competitions. Based on these criteria, special agreements were signed between the City of Zagreb and elite professional sport entities such as basketball club KK Cibona, waterpolo club HAVK Mladost, handball club RK Lokomotiva Zagreb and football club GNK Dinamo Zagreb.[5]

The City of Zagreb argued that public funding to these elite sport clubs was needed because the private market did not provide sufficient sponsor money in order for these clubs to compete at an adequate competitive level. Nonetheless, the complaints were launched by people who believe that the part of the program that allows specific funding for elite professional sport creates a financial advantage for a selective groups of professional sport clubs, which in turn can lead to unlawful State aid under EU law or under article 70 (1) (iii) of the Stabilisation and Association Agreement.[6] It was therefore no great surprise that the Croatian Competition Agency was urged to decide whether the public funding to one of the recipients, Dinamo Zagreb, amounted to a breach of the EU State aid rules. 

The CCA’s decision

The CCA considered the measures not to constitute unlawful State aid under the Stabilisation and Association Agreement.[7] More specifically, the CCA argued that until Croatia joined the EU on 1 July 2013, the City of Zagreb complied with all the requisites of the Program of public needs in sport and with Article 76 of the Sports Act. Given that “the Sports Act, which is in force and applicable in the Republic of Croatia (…), enables the financing of professional sports by local and regional governments, including the City of Zagreb, the (CCA) has found that there are no legal requirements for assessing whether the resources assigned to Dinamo Zagreb (should be) considered illegal state aid.”[8]

However, the CCA underlined that from the date of accession onwards EU Law will be applicable to Croatia and recognised that the Sport Act could contradict the EU State aid rules.[9]  Consequently, the CCA recommended the Croatian legislator to reformulate the relevant provisions in the Sports Act.[10] Therefore, since joining the EU the Sports Act contains a new paragraph which reads as follows: In accordance with the provisions of (the Sports Act), the financing of professional sports by the national, regional and local governments of Croatia and the city of Zagreb that effects trade between the Croatian State and other EU Member States is only possible if (the financing) is in line with the rules regarding State aid.[11] However, according to the CCA, with Croatia joining the EU, the CCA seized to have the competence for carrying out further State aid investigations for the measures granted to Dinamo Zagreb from both before as after the date of accession.[12]

The question whether aid granted to Dinamo Zagreb specifically due to a lack of sponsor money constituted unlawful State aid was also discussed by the CCA in its decision. In the end, the CCA held that it was “unable to determine whether the sponsoring contracts signed between publicly owned legal persons and (Dinamo Zagreb) contained State aid due to the following: from 2010 to 2012 (Dinamo Zagreb) did not receive financing from sponsoring contracts concluded with (public entity) Zagrebacki Holding, whereas at the moment of signing of the concerned contracts (public entity) Croatia Osiguranje acted as a market economy investor while the City of Zagreb Tourist Board and (public entity) Hrvatska Elektroprivreda signed sponsoring contracts not only with (Dinamo Zagreb) but also with other professional sport clubs.”[13]

The CCA’s decision to consider the public funding in line with the Sports Act and the Program of public needs in sport was heavily criticised, especially by Naš Hajduk. In their view, the CCA erred in their decision to justify the aid granted to Dinamo Zagreb. Their second concern involves the funding programs themselves, which are still in place after Croatia’s accession to the EU. Since 2006, Dinamo has received up to 244 million Kuna (31.7 million Euro) by the City of Zagreb for a variety of services, and there is no indication that the City of Zagreb is planning to seize the funding any time soon.  

The complainants’ arguments

Firstly, the complaint stipulates that Dinamo Zagreb is receiving unlawful State aid because it is allowed to use the Maksimir Stadium and several training grounds free of charge. This “free of charge lease agreement” has been anchored in several agreements signed between the City of Zagreb and Dinamo Zagreb, the latest of which being signed on 13 October 2011 for a period of five years with the possibility of extending that lease. Using the football stadium and the training grounds for free constitutes a selective advantage, they argue, because no private operator would consider leasing out real estate free of charge.

Secondly, Naš Hajduk argues that the maintenance costs of the stadium are not being paid by Dinamo Zagreb, but by the City of Zagreb. In fact, the maintenance costs for the period 2010 – 2014 amounted to 4.8 million Euro. This amount can be considered as an unlawful aid granted to Dinamo Zagreb.

Thirdly, the City of Zagreb has funded (and still does) the operating costs of “sport clubs of a particular importance for the city”. Operating costs include: Youth development and expenses made by Dinamo Zagreb’s youth categories; travel and accommodation costs for matches played in European competitions, international friendlies and training programs; the organisation of home games in European competitions; and “other development programs”.

Fourthly, Naš Hajduk regards the fact that the City of Zagreb has (partially) paid the salaries of the football trainers working for Dinamo for the last three years as further evidence of unlawful State aid. As a rough average, the city pays the club 100.000 Kuna (13.000 Euro) a year per trainer. According to the complainant, 30 trainers received this amount in 2012, 23 in 2013 and 22 in 2014. In fact, the operating costs and the payment of trainer salaries combined would amount to nearly 4.9 million Euros.

Fifthly, in addition to describing which measures should be deemed as unlawful State aid, Naš Hajduk argued in the complaint that regardless of whether the measures are considered illegal State aid or not, the Croatian authorities failed to meet their notification obligation as stipulated in Article 108 (3) TFEU and Article 2 of the Procedural Regulations 659/1999. A notification by the Croatian authorities, they argue, is not just a procedural obligation for Member States, but it would also lead to greater transparency on public funding and would take away any doubts disagreeing citizens, such as themselves, might have about how the State spends public money.

Lastly, the complainant pointed out to the Commission that the CCA erred in its decision to justify the public funding under the national Sports Act. The principle of supremacy of EU law is also applicable as regards accession treaties such as the Stabilisation and Association Agreement between the European Communities and its Member States and the Republic of Croatia and the Treaty concerning the accession to the EU of the Republic of Croatia.  

Is Dinamo Zagreb receiving (unlawful) State aid?

Naš Hajduk believes, and perhaps rightly so, that the advantages gained by the free of charge lease contract, the maintenance costs of the stadium, the operating costs reimbursements and the trainer salaries cannot be justified because of “lack of sponsorship from the private sector”. Moreover, as regards the lease and maintenance agreements between the club and the city, there is a realistic possibility that the City of Zagreb did not behave in accordance with the Market Economy Investor Principle[14] and that Dinamo gained a financial advantage from these deals. It would not be the first time that the Commission would find such agreements contrary to Article 107 (1) TFEU. For example, in its decision regarding alleged municipal aid to several professional Dutch football clubs, the Commission found that the payment agreement between the municipality of Tilburg and the football club Willem II for the stadium provided a selective advantage to Willem II with the use of public resources. In essence, the Commission accepted the possibility that stadiums belonging to municipalities that are not rented out at market conditions to professional football clubs could entail State aid.[15]

Similarly, it cannot be denied that an undertaking would gain a financial advantage if the public authorities were to fund a large part of its operational costs, such as travel expenses, accommodation costs and (youth) trainings. The question remains however, whether the payment by the City of Zagreb of the operational costs endured by Dinamo Zagreb are selective. It is important to note the legal basis for the measures are found in the Sports Act, which is applicable in the entire Republic of Croatia. Even though it is not clear whether the public funding granted to other sport clubs in Zagreb differed from the public funding granted to the football club Dinamo, the measures do appear to be selective. Firstly, the criteria for public funding set by the SSGZ distinguish between professional sport that can be considered elite and (professional) sport not considered elite. Because Dinamo is considered an “elite professional sports clubs”, it is entitled to receive public funding. However, other professional sporting entities that are not considered “elite professional sports clubs” do not receive this public funding. Therefore, if the contested measures by the City of Zagreb are solely granted to Dinamo Zagreb for being an “elite sporting entity”, the measures could be considered selective in the light of Article 107 (1) TFEU. Secondly, the selectivity criterion should also be assessed by comparing how different regional and local governments fund their respective “elite sporting entities”. Once a discrepancy is found from one region to another regarding the amount of money granted to sports (i.e. because some local governments simply have more money to spend), the measure could be deemed selective.

Apart from determining whether the public funding of Dinamo could entail State aid, as is the case with all State aid cases, one has to look at possible arguments that could justify the measures. Keeping in mind recent State aid decisions, it becomes clear that measures that support sport’s educational, public health, social and recreational functions will be declared compatible with EU law.[16] It is therefore worth remembering that Article 76 (1) of the Croatian Sports Act, also includes the possibility of public funding with the aim of implementing sporting activities of children, youths and students, protecting the health of athletes and hiring persons to do professional work in sports. Furthermore, on numerous occasions in the last few years, the European Commission has declared State aid provided for sports infrastructure compatible, with EU law.[17]

The facts of the Dinamo Zagreb case show that at least part of the aid measures are aimed at supporting the educational functions of sport, i.e. covering expenses of Dinamo’s youth teams. Moreover, the City of Zagreb’s decision to aid Dinamo paying for the maintenance costs of the stadium and training grounds could show similarities with Commission decisions where such aid was declared justified. These measures may, in principle, be compatible with EU law, where there is a clear common objective. However, the positive effects on the common objective must outweigh the negative effects on competition and trade in order for these measures to be compatible with EU law. Therefore, in the Dinamo Zagreb case, this balancing test has to determine whether the objectives of the measures (i.e. improving the quality of elite professional sport that contributes to the reputation of the City of Zagreb and the planning, construction, maintenance and use of sports facilities important to the City of Zagreb) outweigh the negative effects this could have on other entities in general, and football clubs in particular.

In addition, it should not be forgotten that Croatia joined the EU on 1 July 2013. This means that Dinamo Zagreb received the contested aid before and after the date of accession. Therefore, another key question is to what extent the Commission can sanction Croatia for aid measures implemented before the accession date. It follows from settled EU case law that Articles 107 – 109 TFEU and the Procedural Regulations 659/1999 are applicable on to a Member State only as from its accession to the European Union.[18] Moreover, it follows inter alia from EU case law[19], and Article 19 of the Procedural Regulations that existing aid can be found to be incompatible with prospective effect only. With regard to the Dinamo Zagreb case, this effectively means that the Commission can only order a recovery of the aid granted to the football club after the date of accession. Therefore, should the Commission, for example, decide that the stadium lease agreement (signed in 2011) constitutes unlawful State aid, it can only order the recovery of the advantage gained through this agreement as of 1 July 2013.

The last point that Naš Hajduk addressed in their complaint to the Commission that the CCA incorrectly allowed the aid to be granted to Dinamo because it was compatible with Croatian national law. Irrespective of whether the CCA interpreted the Accession Treaties correctly or incorrectly, it is my understanding that EU law does not allow the Commission the power to overrule the CCA’s decision. As has been stated above, since the Commission can only order the recovery of the aid granted after the date of accession, it has no competence to decisions made regarding State aid before the date of accession. In other words, any options Naš Hajduk could have in challenging the CCA’s decision have to be found in national appeal procedures.

The Dinamo Zagreb State aid case currently finds itself in a preliminary investigatory phase. Given the Commission’s inconsistency regarding the time frames to decide whether to commence formal investigations or not, it is impossible to say if we can expect news from Brussels any time soon. Nonetheless, this case will certainly drive forward the discussion in the quickly expanding field of State aid and sport.

[1] Vanja Smokvina, “Case Law of the Croatian Supreme Court in the Fields of Sports Law – Emphasis on Labour Relations”, International Sports Law Journal, 2012/1-2, pages 106 - 108

[2] Article 76 (1) points 2, 4, 5 and 8 of the Sports Act

[3] Article 76 (2) of the Sports Act

[4] A Croatian version of the Program is available on: http://www.zagreb.hr/default.aspx?id=60227.

^[5] CCA UP/I 430-01/13-05/001, Financing of the Football Club Dinamo by the City of Zagreb and other publicly owned legal entities, pages 7 – 10 (Croatian version).

[6] Article 70 (1) (iii): “The following are incompatible with the proper functioning of the Agreement, in so far as they may affect trade between the Community and Croatia: any State aid which distorts or threatens to distort competition by favouring certain undertakings or certain products.”

[7] CCA UP/I 430-01/13-05/001, Financing of the Football Club Dinamo by the City of Zagreb and other publicly owned legal entities, (English version), page 1

[8] CCA UP/I 430-01/13-05/001, Financing of the Football Club Dinamo by the City of Zagreb and other publicly owned legal entities, pages 19

[9] Ibid, page 18

[10] Tatjana Jakovljević, “Public Support for Sports: The Name of the Game – Football!”, EStAL, 3/2013, page 445

[11] Article 74 (3) of the Sports Act

[12] CCA UP/I 430-01/13-05/001, Financing of the Football Club Dinamo by the City of Zagreb and other publicly owned legal entities, (English version), page 1

[13] Ibid

[14] The essence of the MEIP is that when a public authority invests in an enterprise on terms and in conditions which would be acceptable to a private investor operating under normal market economy conditions, the investment is not a State aid.

[15] SA.33584 – Alleged municipal aid to professional Dutch football clubs Vitesse, NEC, Willem II, MVV, PSV and FC Den Bosch in 2008-2011, paras. 51-52

[16] See for example: SA.31722 - Supporting the Hungarian sport sector via tax benefit scheme

[17] See for example: SA.37109 – Football Stadiums in Flanders; SA.35440 - Multifunktionsarena der Stadt Jena and; SA.37342 - Regional Stadia Development in Northern Ireland

[18] Case C-262/11 Kremikovtzi AD, paragraph 50

[19] Ibid, paragraph 54