Managing the impact of the new Foreign Subsidies Regulation
21 February 2023
21 February 2023
On 12 January 2023 the EU Foreign Subsidies Regulation (Regulation 2022/2560, "FSR" or the "Regulation") entered into force. The European Commission published its Draft Implementing Regulation ("Draft IR") on 6 February 2023, laying down the procedural framework and formalities of the FSR.
While the consultation on the Draft IR runs until 6 March 2023, companies involved in M&A activity and/or public procurement processes in the EU should already be aware of the new regulatory clearance requirements introduced by the FSR and the procedural elements set out in the Draft IR.
- Under the FSR, companies with activities in the EU will need to monitor foreign financial contributions and subsidies that they receive. The notion of financial contribution is broad: it may include tax breaks, public support in the context of Covid-19 or the Ukraine war, the provision of loans or guarantees by the State and the supply of goods/services to the public sector.
- Companies will need to notify foreign financial contributions received in the context of M&A and public procurement procedures where certain monetary thresholds are met. The European Commission will also be able to initiate an investigation where it suspects the existence of a distortive foreign subsidy.
- The European Commission will assess whether a given foreign subsidy distorts the internal market on a case by case basis. If so, the European Commission will be able to impose redressive measures.
- The new regime will apply from 12 July 2023 and notification requirements will apply from 12 October 2023. It will apply to foreign subsidies granted in the five years prior to 12 July 2023 for ex officio investigations and three years for M&A and public procurement contract reviews.
Subsidies granted by EU Member States are already subject to EU State aid control (see our Quickguide here). However, there have been concerns that subsidies granted by non-EU Member States may also impact the internal market. Under current rules, such foreign subsidies are not taken into account in the context of EU M&A and public procurement procedures. The FSR seeks to address this issue by enabling the European Commission to scrutinise subsidies granted by non-EU Member States. The application of the FSR will have significant consequences for both foreign and European companies.
The purpose of the FSR is to scrutinise financial contributions from non-EU countries and to address distortions caused by foreign subsidies on the internal market.
A foreign subsidy is a financial contribution by a third country which confers a benefit on an undertaking engaging in an economic activity in the internal market. As set out above, the notion of a financial contribution is broad and may include: transfer of funds, foregone revenue, tax breaks, public support in the context of Covid-19 or the Ukraine war, the provision of loans or guarantees by the State and the supply of goods/services to the public sector. The contributions may be granted by a foreign public entity/authority or by private entities whose actions can be attributed to the third country.
A distortion of competition occurs where a foreign subsidy may "improve the competitive position of the undertaking concerned in the internal market" which has a (potentially) negative effect on competition. The FSR provides guidance on factors which may be taken into account to assess whether a subsidy has a distortive effect, including the amount and nature of the subsidy and the situation of the relevant company.
The Regulation also provides examples of certain types of foreign subsidies that are most likely to distort the internal market, including foreign subsidies:
The FSR indicates that certain foreign subsidies are unlikely to be distortive, including when:
Where the individual amount of the financial contribution does not exceed EUR 200,000 over a period of three years, it shall not be considered to distort the internal market.
The European Commission will also consider whether the negative effects of the foreign subsidy on the internal market are outweighed by its positive effects, for example, on the development of the relevant economic activity. In this balancing exercise, the European Commission has a broad discretion to consider any other factors that it considers to be relevant.
The FSR provides the European Commission with three new tools:
Under the FSR, companies will need to notify the European Commission of mergers (including full-function joint ventures) involving a foreign financial contribution where the following thresholds are met:
A financial contribution will be considered granted from the moment the company obtains legal entitlement to said contribution and not from its actual disbursement. Unlike the EU Merger Regulation (Regulation 139/2004), there is no worldwide turnover threshold and the FSR includes an EU local nexus requirement for the relevant undertakings, including joint ventures.
On an ad hoc basis, the European Commission may also request prior notification of any transaction which does not meet these thresholds if it suspects a distortive foreign subsidy has been granted.
The Draft IR includes a notification form containing a pre-formatted table for parties to complete with a list of all financial contributions granted in the three years prior to the notification. For each financial contribution received, parties will need to indicate, at a minimum, the name of the receiving entity, granting entity, type and amount of the financial contribution, date of granting and whether the financial contribution was granted as a result of the tender procedure. In view of the burden on businesses, the Draft IR only requires parties to complete the table if: (i) the individual amount of the contribution is at least EUR 200,000 and (ii) the total amount of contributions per third country and per year is at least EUR 4 million.
The review timetable under the FSR is identical to that under the EU Merger Regulation:
The deal cannot be closed before the European Commission has completed its review (a stand-still obligation applies).
At the end of the in-depth review, the European Commission may: (i) not object, (ii) make commitments binding or (iii) prohibit the transaction.
Bidders are required to notify the contracting authority where:
Bidders that do not meet the above thresholds will need to provide the contracting authority with a declaration to that effect. The declaration must include a list of any non-notifiable foreign financial contributions they have received.
If a bidder fails to submit the required notification or declaration then the contract cannot be awarded to them. The contracting authority will transfer any notifications and declarations to the European Commission.
The European Commission will also have the power to request notification of any foreign subsidies received in the three years prior in any public procurement procedure (regardless of whether the notification thresholds are met) if it suspects that that a bidder may have received foreign subsidies.
The Draft IR includes a notification form containing a pre-formatted table for parties to complete with a list of all financial contributions granted in the three years prior to the notification. The notification requires the bidder to provide the same details as in a notifiable M&A transaction.
As with the merger notification tool, the FSR provides for two separate phases:
At the end of its review, the European Commission will: (i) prohibit the award of the contract; (ii) issue a decision that it does not object; or (iii) issue a decision, subject to commitments.
Importantly, the award procedure will not be suspended during the European Commission's review. As a result, the contract may be awarded to the economic operator which submitted the most economically advantageous bid which was not subject to the European Commission's scrutiny. The award decision may be made before the European Commission has completed its review of any tenders which have been notified to it.
The European Commission may, on its own initiative, investigate any market situation where it suspects the existence of a distortive foreign subsidy. Analogous to its powers to investigate anti-competitive behaviour, the European Commission will have broad investigative powers to collect relevant information, including the ability to send requests for information to third parties and to carry out inspection outside the EU (with the consent of third countries and the relevant company).
Following its investigation, the European Commission may impose reporting and transparency obligations on the undertakings concerned. Under the Draft IR these reporting and transparency obligations may be broad in scope, insofar as companies may be required to report any foreign financial contributions received once a year, their participation in concentrations/public procurement procedures or their implementation of commitments following a decision with redressive measures.
The European Commission will be able to impose fines of up to 10% of the parties' combined worldwide turnover for: (i) failing to notify a relevant transaction or bid; (ii) breaching the standstill obligation; and (iii) failing to comply with the European Commission's decision. There is also a risk of daily fines for ongoing breaches.
Failure to cooperate with the investigation may result in fines of up to 1% of the total turnover of the company concerned and periodic penalty payments.
The unit of the European Commission tasked with enforcing the FSR expects a high level of activity. According to the impact assessment accompanying the proposal for the Regulation, each year the European Commission anticipates:
The FSR will impose new and potentially burdensome administrative obligations on companies. Companies will need to identify and quantify financial contributions granted by third countries and, if necessary, notify M&A activity and/or bids for public procurement and concession contracts.
The FSR will enter into force gradually:
To assess the potential risk, companies should:
Companies will need to take an iterative approach to risk assessments as further guidance is expected and the final version of the Draft IR will be published in due course.