Earmarking period for subsidies: Risks under grant law

If the public sector supports the acquisition of items with state funds, the funding conditions regularly include the requirement that these items be inventoried and used for a certain period of time in accordance with the funding purpose.

The grant recipient is well advised to take this requirement seriously. Failure to do so may result in revocation and repayment. The key points of the so-called earmarking period are therefore highlighted below using the example of the funding of a hydrogen filling station in Hesse, the operation of which is to be discontinued in the course of a strategic realignment a few years after its construction.

The funding purpose and the funding objective are inextricably linked

A clearly defined funding purpose sets the course for all questions relating to the earmarking period.

By granting a subsidy, the public sector always pursues an overarching objective. In the example case, according to the relevant funding guideline, such objective is to strengthen the business location by promoting innovations in the field of electromobility.

This objective is to be achieved through specific measures or activities. The funding purpose and the specific funding objective associated with it are inextricably linked: The purpose in question is the way in which the funding objective is to be achieved. The funding objective is the effect that is to be achieved by fulfilling the purpose in question; as the decisive element of the grant, the further course must be based upon it, and its content provides decisive indications for the interpretation of unclear funding provisions.

Against this background, most of the administrative regulations (VV) for Art. 44 of the state budget regulations contain binding internal administrative requirements for regulating the purpose of funded projects. For example, Nos. 4.2 and 4.2.3 of the VV to Art. 44 LHO Hessen states: "The notice of grant must in particular contain [...] the exact designation of the funding purpose and – if items are acquired or produced with the help of the grant – if applicable, an indication of how long they are tied up for the funding purpose. In addition, the following applies: The designation of the funding purpose must be defined so clearly and in such detail that it can also serve as the basis for an accompanying and final review of the success of the project or the funding program. If necessary, the funding purpose must be specified in more detail by means of explanations".

In the example case, the grant notice specifies the “construction of an innovative hydrogen filling station for refueling fuel cell buses operated by public transport companies” as the specific funding purpose.

Earmarking period: often not explicitly defined

According to the aforementioned administrative regulation, a grant notice must specify how long an item purchased or manufactured with grant funds – in this case the hydrogen filling station – is to be “bound for the funding purpose”.

Funding notices often do not contain an explicit provision on the duration of the earmarking of purchased items. In such case, it is necessary to fall back on a possible regulation on the duration of the inventory of funded items or on the specifications of the respective funding guidelines and the so-called general ancillary provisions for project funding (ANBest-P). The latter are regularly declared to be part of the grant notice and contain fundamental statements on earmarking and prohibitions on disposal within the earmarking period. As part of an overall view of the notice provisions and the aforementioned regulations, this serves as basis to clarify, by way of interpretation, whether an earmarking and, if applicable, its specific duration can be inferred from the grant notice; only a sufficiently specific and thus legally effective earmarking can be a permissible point of reference for legal sanctions.

Start of the earmarking period with the occurrence of the intended effect

The specific start of an earmarking period is often not regulated in the grant notice either. It must therefore also be determined by interpreting the notice. In this context, a link to the issuance of the notice is ruled out from the outset, as this never marks the start of the substantive funding objective’s achievement.

The respective specific funding objective is decisive. In addition to the wording of the grant notice and any underlying funding guidelines, the objective content of the declaration from the recipient's point of view and the circumstances known and recognizable to the beneficiary must be taken into account in accordance with Art. 133 BGB.

In the example case, the funding objective is to promote innovative technologies in the field of electromobility. This objective is not achieved by the mere construction of an innovative installation, whether for research or real operation, but only by the subsequent commissioning, which, for example, serves to test the new technology in practice and already reduces CO2 emissions. The funding objective is the desired effect, not the installation or construction measure. As this objective determines the specific implementation measure, it is obvious that the start of the earmarking period for subsidized objects and installations should be understood in functional rather than structural terms.

(Only) when the intended effect occurs, i.e. when the intended use begins, is there a legitimate state interest in a certain temporal guarantee and safeguarding of the funding purpose. If the specific funding guideline refers to Art.

71 of Regulation (EU) No. 1303/2013 in this context, this is usually an appropriate solution. This provision is linked to the “final payment to the beneficiary” and allows the minimum duration of use to begin with it; in terms of content, it requires an audited proof of use as well as statements on the technical results achieved (see no. 6.2 sentence 2 ANBest-P) and is easy to determine in fact and with legal certainty.

Discretionary decision to revoke the grant notice if the funds are not (or no longer) used for the intended purpose

An approved funding may only be used for the specific purpose for which it was granted. Grants that are not or no longer used for the intended purpose must generally be repaid with interest. The ineffectiveness, withdrawal or revocation of grant notices as well as the reimbursement of the grant and interest on the reimbursement claim are legally regulated in administrative procedural law, in particular in Art. 48, 49, 49a HVwVfG (No. 8.1 VV to Art. 44 LHO Hessen). According to Art. 49 (3) sentence 1 no. 1 HVwVfG, an originally lawful grant notification “may” be revoked in whole or in part with effect for the past, even after it has become unappealable, “if the benefit is not used, is not used as soon as possible after it is provided or is no longer used for the purpose specified in the administrative act”.

Specifications for this discretionary decision are contained in the VV to Art. 44 LHO:

“8.2.3 The granting authority must regularly revoke a grant notification in accordance with Art. 49 (3), 49a HVwVfG in whole or in part without delay, also with effect for the past, and reclaim the grant, even if it has already been used, if it is not or no longer used for its intended purpose.”

“8.2.4 A case pursuant to Art. 49 (3) HVwVfG also exists if items procured from the grant are not or no longer used for the intended purpose during the earmarking period. As a rule, the grant notice must be revoked in proportion to the grant amount attributable to the items. When deciding on the extent of the revocation, the period of appropriate use shall be reasonably taken into account."

The regular legal consequence of a breach of the earmarking period is the (partial) revocation of the grant notice. However, according to No. 8.2.6 VV to Art. 44 LHO, “in the cases of Nos. 8.2.2 to 8.2.5 and in the discretionary decisions under the HVwVfG, the granting authority must take equal account of the particularities of the individual case (including the duration of the appropriate use) as well as the grant recipient’s interests and the public interests when exercising its discretion”.

Discretionary basis for (partial) revocation: This is how the granting authority decides

In the example case, a final discontinuation of operations of the subsidized hydrogen filling station by the beneficiary transport company would lead to the subsidy funds no longer being used for the intended purpose. This would open the way for a discretionary decision to revoke the grant notice.

The decisive discretionary aspect for the granting authority is then primarily the overarching funding objective on which the grant is based and to which the specific funding purpose is aligned.

Example of the hydrogen filling station: three exemplary scenarios

Accordingly, in the example case, one could distinguish between three possible scenarios, namely the final discontinuation of the filling station’s operation, the entry of a third party into all rights and obligations established by the funding decision or the takeover of the hydrogen filling station by a third party outside the previous funding obligations.

Scenario 1: Discontinuation of operations

In the first case, only a revocation is likely to be appropriate, unless the grant recipient can prove that the hydrogen filling station is no longer technically suitable for the intended purpose, for example, due to a lack of operational fuel cell buses (cf. no. 8.2.4 VV to Art. 44 LHO Hessen); however, making it impossible to continue using the funded facility on one’s own responsibility by selling vehicles to be refueled as part of a strategic realignment cannot justify the impossibility of further use for the intended purpose under grant law.

Scenario 2: Sale to third parties including funding-related earmarking

In the second scenario a deviation from the standard case of (partial) revocation of the funding notice generally seems to be discretionary if the funding recipient proves that the sold hydrogen filling station will continue to serve the funded objective of innovative technology that supports electromobility by refueling and using fuel cell vehicles in a legally secure manner even in the hands of a new owner and that all conditions of the funding notice will continue to be observed in the future.

Scenario 3: Sale to third parties outside the funding-related earmarking

If, on the other hand, the subsidized filling station is sold to a third party in the third scenario without the third party contractually assuming the previous obligations under funding law, the statutory case (required by the aforementioned administrative regulations) of revoking the grant notice with the subsequent, at least pro rata, reimbursement obligation would probably still apply; merely continuing to operate the facility – in particular without a legally binding earmarking period and the reporting obligations essential for the project assessment and the success of the funding – is unlikely to be deemed sufficient within the scope of the dutiful exercise of discretion in order to refrain from revocation and reimbursement.

Conclusion: consider the earmarking period from the outset

Companies should check funding notices carefully, in particular with regard to the funding purpose and the earmarking period. Even if the duration of the earmarking is not explicitly stated, it is often derived from funding guidelines or ancillary provisions. It is not the time of acquisition that is decisive, but the start of use for the intended purpose.

In the event of changes – such as the decommissioning or sale of the subsidized installation – there is a risk of reclaims if the earmarking is no longer fulfilled.

It is therefore crucial to develop legally compliant transfer models or utilization concepts in advance and to know and use the granting authority’s discretionary powers at an early stage. We will be happy to advise you on funding projects and all your questions relating to funding law.

Many thanks to Dr. Peter Czermak for his valuable support in writing this article.