As a general rule, member states are not allowed to grant aid to undertakings. The notion of aid is very wide and basically covers everything by which an undertaking would receive an economic advantage, whether it consists of a straightforward financial aid or indirect support such as tax advantages, better conditions for the purchase or lease of land, giving a loan or a guarantee for taking out a loan from a bank at better conditions than normal market rates, etc.
In principle, payments made under European Union rules are also considered as state aid if the member state exercises any discretion in the matter.
In the context of the Common Agricultural Policy this is the case with regard to payments under Rural Development. In contrast, the member states do not exercise any discretion regarding direct payments because European Union law predetermines the eligibility criteria. Therefore, direct payments are not considered as state aid.
The legislator (the European Parliament and the Council) may decide that the state aid rules do not apply to financial assistance made available by member states, and has done so, for example, with regard to Rural Development payments made in respect of agricultural activities, i.e. activities related to products listed in Annex I to the Treaty on the Functioning of the European Union. But even if there is a state aid, it is possible that the member state may be allowed to grant the aid because the Treaty provides for a series of derogations by virtue of which state aid may be declared compatible with the internal market by the Commission.
To assess this compatibility, the Commission has defined different sets of rules. For those cases where state aid rules apply in principle, member states may grant payments if they are of a low value (de minimis rule), if they have been authorised by the Commission following a notification by the member state concerned, or if the state aid is in accordance with pre-determined block exemptions. In cases where a member state provided state aid to its farmers without the prior authorisation by the Commission and which, in the view of the Commission, is incompatible with the internal market, the farmers may be obliged to pay it back, with interest, to the member state (see compatible state aid, illegal state aid, incompatible state aid, unlawful state aid).