The relationship between the European Union (EU) and Switzerland is a cornerstone of economic, political, and cultural integration in Europe. As close neighbours with deeply interconnected economies, the two parties have long relied on bilateral agreements to facilitate trade, mobility, and cooperation across various sectors. With Switzerland’s participation in the EU’s single market through key agreements, this relationship ensures stability and prosperity for both sides.
However, evolving global challenges and shifts in regulatory needs particularly on the EU side have led to negotiations for a new framework to modernize their partnership. The Bilateral III Agreement represents a critical effort to redefine this collaboration, focusing on equitable competition, dynamic alignment of rules, and mutual benefits. This insight explores the origins, significance, and key implications of the Bilateral III Agreement, with a particular focus on the complex issue of state aid.
What is the origin and significance of the Bilateral III Agreement?
The Bilateral III Agreement represents a pivotal step in redefining the partnership between the EU and Switzerland. It emerged following the termination of negotiations on the institutional framework agreement in 2021, a decision that marked a significant shift in their bilateral relationship. In response, both parties pursued a renewed path for collaboration, resulting in a Common Understanding in 2023 that established a basis for future negotiations. Building on this, Switzerland adopted a Definitive Negotiating Mandate in 2024, reaffirming its commitment to advancing discussions.
The Bilateral III Agreement employs a “package approach” that integrates multiple critical areas of cooperation. It focuses on strengthening Switzerland’s participation in the EU’s single market and addresses the following key sectors:
✔ New Agreements: Covering electricity, food safety, and health, these agreements reflect mutual priorities for collaboration.
✔ Participation in EU Programmes: Ensuring Switzerland’s involvement in areas like research, innovation, education, youth, sport, culture, and other initiatives fosters deeper integration with the EU.
✔ Institutional Elements: Establishing mechanisms for dynamic adoption of EU legislation, uniform interpretation of agreements, effective monitoring, and dispute settlement.
✔ State Aid Provisions: Incorporated into the agreements on air transport, land transport, and the future electricity agreement, aiming to ensure fair competition.
✔ Free Movement of Persons: Addressing principles and exemptions related to immigration and wage protection, with a balanced approach to mobility.
✔ Stabilisation of Swiss Contributions: Introducing a legally binding mechanism to ensure Switzerland’s future financial contributions to reduce economic and social disparities.
✔ Political Dialogue: Establishing means to steer the bilateral approach, ensuring continuous alignment and adaptation (Source: FDFA).
This package-based negotiation strategy aims to deliver a balanced and modernized framework for EU-Switzerland relations. For a detailed historical timeline and analysis of the evolution of Swiss-EU relations, refer to our previous article here.
What are the current rules governing state aid, and how do they apply to EU and Swiss companies?
The current state aid frameworks in the EU and Switzerland differ significantly, creating an uneven competitive landscape between companies operating in these jurisdictions.
EU State Aid Framework
In the EU, state aid is subject to a general prohibition under competition law to ensure a level playing field within the single market. However, there are numerous exceptions to this rule, allowing state aid when it serves the public interest. For example, subsidies for environmental protection, research and development, or regional development are permitted. Additionally, the EU’s system is highly flexible, with over 80% of state aid measures automatically authorized under streamlined procedures. This allows EU companies to access public funding more efficiently and frequently.
Swiss State Aid Framework
In Switzerland, there is no overarching state aid regulation comparable to the EU’s framework. The only sector with structured oversight is air transport, where the Competition Commission (COMCO) is involved in providing opinions before state aid is granted. Outside this sector, the absence of formal state aid rules means Swiss companies lack the same level of access to government subsidies as their EU counterparts. This creates a potential financial disadvantage for Swiss businesses when competing with EU companies that can benefit from public funding.
Key Implications
This disparity in state aid systems is a crucial issue in ongoing Bilateral III negotiations. The differences are particularly pronounced in sectors such as air transport, electricity, and overland transport, where companies directly compete across borders. Addressing these differences is essential for ensuring a level playing field in Swiss-EU economic relations.
What is the significance of the Common Understanding and the Definitive Negotiating Mandate regarding state aid?
The Common Understanding (27 October 2023) and the Definitive Negotiating Mandate (8 March 2024) outline the framework for harmonizing state aid rules under the ongoing Bilateral III Agreement negotiations between the EU and Switzerland, aiming to ensure a level playing field and avoid competition distortions.
The Common Understanding introduces a two-pillar model where:
✔ Swiss law is enforced by Swiss courts, and
✔ EU law is enforced by EU courts.
Additionally, there is a third pillar, with disputes resolved through an arbitration court in cases where conflicts arise, ensuring a neutral mechanism for resolving disagreements.
Switzerland will establish an independent administrative authority to control state aid ex ante. This authority will review measures and challenge non-compliant aid in Swiss courts, which must issue binding decisions. Swiss state aid rules are expected to be equivalent to EU standards, particularly in sectors like air transport, land transport, and electricity.
The Definitive Negotiating Mandate reinforces these principles while ensuring the protection of Swiss public interests, such as aid for natural disasters. Swiss courts will oversee compliance, balancing alignment with EU rules and sovereignty.
Together, these frameworks provide a path for aligning Swiss state aid rules with EU practices while maintaining judicial independence. They aim to foster economic cooperation, ensuring fairness in sectors crucial to EU-Swiss relations.
What is the current status of the negotiations and what changes are expected regarding state aid?
State aid discussions focus on three sectors tied to Switzerland’s access to the EU’s single market: electricity, air transport, and overland transport. The EU expects Switzerland to establish monitoring mechanisms for subsidies in these sectors, similar to the EU’s system. Currently, Switzerland only monitors state aid in air transport through the Competition Commission (COMCO).
Expected Changes:
- Establishment of a Monitoring Body: Switzerland will create a state aid supervisory authority responsible for:
✓ Ensuring transparency in subsidies.
✓ Reviewing and issuing opinions on state aid measures.
✓ Bringing non-compliance cases to Swiss courts if needed. - Increased Transparency: Swiss authorities will be required to report subsidies exceeding specific thresholds or those not covered by exemption provisions.
- Sector-Specific Adjustments: Existing subsidies in electricity and overland transport will need to comply with EU-equivalent rules, though most are expected to align. Public service provisions within Switzerland, such as domestic public transport, will remain unaffected as they fall outside the agreement’s scope.
- Draft Legislation in Progress: The EAER is preparing draft laws on state aid supervision, which will undergo consultation, ensuring compatibility with EU standards while considering Swiss interests.
These changes aim to create a level playing field and integrate Switzerland more closely into the EU’s internal market without compromising Swiss sovereignty.
When is the new legal framework regarding state aid expected to come into force?
As we approach the end of 2024, the negotiations for the Bilateral III Agreement are still ongoing. Despite significant progress, key issues, such as state aid and immigration, remain unresolved. The earliest optimistic scenario for completing negotiations is sometime in 2025.
Given the complex nature of the agreement and the required approval processes, including potential Swiss referenda, Bilateral III as a package is unlikely to come into force before 2027. This timeline allows for finalizing negotiations, drafting and implementing necessary legislation, and securing mutual ratification.
The Bilateral III Agreement represents a pivotal opportunity to strengthen and modernize EU-Swiss relations. By addressing critical areas such as state aid, electricity, air transport, and overland transport, the agreement aims to ensure fair competition, enhance transparency, and align regulatory frameworks. This comprehensive approach underscores the commitment of both the EU and Switzerland to fostering a stable and mutually beneficial partnership.
If your business operates across the EU and Switzerland, managing these evolving frameworks can be complex. At LINDEMANNLAW, we are uniquely positioned to provide tailored legal support, being admitted to the bar in both jurisdictions. Contact us today to ensure your compliance and to leverage opportunities within this dynamic legal landscape.
