The European Commission has told member states that British companies with a significant presence in Northern Ireland will still be subject to EU state aid rules in the absence of a free trade agreement by the end of the year, RTÉ News understands.
The revelation comes amid signs that there will be a bruising clash between the EU and the UK over the controversial issue of state aid and what is called the "level playing field" during the forthcoming free trade agreement (FTA) negotiations.
RTÉ News understands the EU will demand that the UK sign up to broad swathes of level playing field (LPF) provisions if an FTA is to be concluded.
"If there is no LPF there is no FTA," a senior EU source told RTÉ News.
The EU is insisting on a level playing field as it fears that the UK could undercut EU companies if they lower their standards on state aid, competition rules, the environment, labour law and taxation.
In recent days both the European Commission president Urusla von der Leyen and the EU's chief negotiator Michel Barnier have repeatedly warned that an FTA that offers the UK zero tariffs and zero quotas in accessing the single market must be accompanied by level playing field provisions.
In a related development member states were today told by the European Commission that British firms that have significant subsidiaries in Northern Ireland would be subject to EU state aid rules in the future, even though the Protocol in the Withdrawal Agreement only applies to Northern Ireland.
EU sources say the Commission is taking a broad interpretation of the Protocol to the effect that companies in Great Britain, which have subsidiaries in Northern Ireland, would still be subject to EU state aid rules.
Under the Irish Protocol, agreed as part of the revised Withdrawal Agreement, Northern Ireland will be subject to EU state aid rules, as it will effectively remain in the EU's single market for goods.
The Protocol will take effect at the end of this year, unless the British Prime Minister agrees to extend the transition period.
If there is no FTA concluded by the end of this year, Commission officials told member states, then a large British company which has subsidiaries in Northern Ireland, would be subject to the effects of the Irish Protocol, meaning it would still have to comply with EU state aid rules.
This is because the Commission believes that some large British companies, like supermarkets, are so integrated in Northern Ireland, that if they are subject to British state aid support then the Irish Protocol would cover such companies.
If a comprehensive FTA, which contained level playing field provisions on state aid, then that regime would supersede the Irish Protocol when it came to British firms.
Member states were told today that the EU would take a tough line on level playing field provisions.
As part of the EU’s ongoing preparation for the trade negotiations once the UK leaves at the end of January, officials were told the EU would take as its baseline the level playing field provisions which Theresa May agreed in the original Withdrawal Agreement back in November 2018.
Mrs May had agreed that the UK would sign up to so-called "non-regression" clauses across the board, meaning London would promise not to lower its standards in labour laws, the environment, and climate change.
Under Mrs May’s deal, the UK would also have accepted "dynamic alignment" when it came to state aid rules, meaning the UK would have to remain in lockstop with EU legislation on state aid into the future.
However, the UK has ruled out any dynamic alignment with the EU as part of a free trade deal.
Last week a UK official told RTÉ News: ""Some talk about dynamic alignment as if this is the only way we can achieve fair and open competition. The UK has high standards. We have led the argument within the EU for a lot of these high standards. But ministers are not going to accept dynamic alignment. There has to be a balance."
However, EU officials suggest the EU will insist that the UK accept dynamic alignment on state aid rules, and accept Theresa May’s commitments to "non-regression" clauses.
The original Withdrawal Agreement included a temporary UK-wide customs union with the EU.
Given that that would have granted the UK tariff-free and quota-free access to the single market ahead of a free trade agreement, the EU insisted that Mrs May make a commitment on level playing field issues.
It’s understood France and a number of Nordic countries have suggested that the EU go even further than the original "non-regression" clauses and insist on dynamic alignment in the field of the environment and climate change.
This is because the EU is embarking on much more ambitious carbon emissions targets, and those member states believe that promises made in 2018 will quickly be out of date.
British sources have told RTÉ News that Boris Johnson will accept the need for some level playing field commitments.
However, London is expected to look for a sliding scale of LPF commitments, where the UK will accept "non-regression" promises in some areas to gain higher access to the single market, but not in others, in which case London would accept a higher degree of trade friction.
However, both the European Commission and member states appear to have ruled this out.
Sources say that instead the EU will demand a holistic commitment on LPF, and that if it is not forthcoming then the free trade negotiations will be in trouble.