Court of Justice of the European Union (EuGH) clarifies the 80 % rule for in-house procurement

Why public contracts cannot be awarded without limit and without competition, but the 80 % rule for in-house procurement must be observed.

Why the 80 % rule for in-house procurement exists at all

The European public procurement law follows a simple principle: Public contracts should in principle be awarded through competition. Competition is intended to secure fair prices, prevent corruption, and open market access for private enterprises. However, there are narrowly limited exceptions to this principle. One of the most important is the so-called in-house procurement. It allows public contracting authorities to award services without a call for tender to their own or controlled undertakings. The idea behind it is pragmatic: the state should not have to artificially tender out services that it factually performs 'in-house'. In order to prevent such an exception from being abused, the European legislator has established strict conditions. One of these is the so-called 80 % rule for in-house procurement.

What does the 80 % rule mean?

The 80 % rule for in-house procurement provides: an undertaking may only be commissioned without a call for tender if it works almost exclusively for the public contracting authority that controls it. Specifically, Art. 12 Abs. 3 Buchst. b der Vergaberichtlinie 2014/24/EU requires that the undertaking in question performs more than 80 % of its activities for the public contracting authorities that control it. Purpose of the rule: An undertaking that is active on the free market to a material extent should not be permanently sheltered from competition merely because it is (also) state-owned.

The practical conflict: Modern public undertakings often operate in group structures

In reality, many public undertakings are no longer simple single-purpose entities. Frequently there are:

• holding structures,
• subsidiary undertakings,
• market-oriented business divisions.

This is precisely where the problem arises: is it sufficient to consider only the turnover of the directly commissioned undertaking? Or must one take into account the entire economic profile of the group? This question was at the heart of the EuGH-Entscheidung C-692/23. The facts: in-house procurement in waste management Several Dutch public contracting authorities awarded waste disposal services directly to a jointly controlled undertaking. However, this undertaking was Parent company of a group, whose subsidiaries also provided services to third parties on the market. The public authority argued:

• The contracted company itself provided over 80 % of its services for public clients.
• The activities of the subsidiaries were not relevant, as they were legally independent.

Private competitors saw in this an impermissible circumvention of public procurement law. The national court referred the question to the EuGH.

The central legal question

The EuGH had to clarify: May the calculation of the threshold for the 80 % rule in in-house procurements be based only on the individual company – or must the turnover of the subsidiaries also be taken into account if the contracted company is the parent of a group? The decision of the EuGH: Economic reality takes precedence over formal considerations The EuGH decided unequivocally in favour of a comprehensive economic assessment. 1. "Activity" means economic activity – not merely formal turnover According to the EuGH's view, the concept of "activity" must be interpreted functionally. What is decisive is what economic power and market presence the contracted entity actually wields. An isolated consideration of the parent company would make it possible to systematically outsource market-based activities to subsidiaries in order to formally comply with the 80 % rule in in-house procurements. 2. Group turnover must be included The Court clarifies: If the contracted company is the parent company of a group, the turnover of the subsidiaries must also be taken into account when calculating the 80 % threshold, insofar as this turnover is consolidated financial statements or should be recorded. 3. Protection of competition as a guiding principle The in-house exemption is not a privilege, but rather an narrow exception. It may only apply if the enterprise operates essentially like an internal administrative department – and not like a market participant.

Why this decision is particularly important

The judgment affects not only waste management. It is relevant for:

• municipal energy suppliers,
• transport and infrastructure companies,
• IT service providers for the public sector,
• inter-municipal cooperations with subsidiaries.

Many previously common in-house models come under scrutiny as a result.

Concrete recommendation for practice

Public contracting authorities should henceforth, before any in-house award:

• analyse not only the individual company,but the entire group structure,
• examinewhether group-wide turnover exists,
• calculate thequota for the 80 % rule in in-house awards on the basis of consolidated economic activity,
• document this examinationin writing.

Where there is doubt as to whether the 80 % threshold is being met on a group-wide basis, a regular procurement procedure is the legally secure approach.

Summary

With the decisionC-692/23, the Court of Justice of the European Union (EuGH) strengthenscompetition protection in public procurement law. The80 % rule in in-house awardsis not a formal arithmetic trick, but an instrument fordistinguishing between internal service provision and market activity. Public contracting authorities must henceforthlook more closely– and in doing so take into account theeconomic reality of the entire group. Forprocurement-law-based advice– including in the design and review of in-house awards – the experts atAVANTCORE Rechtsanwältein Stuttgart are at your service. We have already discussed several Court of Justice of the European Union (EuGH) decisions on public procurement law:

No hidden risks in public construction contracts! – Transparency as a shield for bidders in procurement procedures

Distortion of competition due to staff changes must be reviewed – Court of Justice of the European Union (EuGH) overturns General Court decision on satellite award