EU Commission proposals to regulate foreign subsidies

On 17 June 2020, the European Commission ("Commission") published a White Paper on "levelling the playing field as regards foreign subsidies". The White Paper sets out the Commission's initial proposals aimed at reducing distortions to the EU internal market as a result of subsidies from non-EU governments. 

The Commission was tasked by the European Council in 2019 to identify new tools to address the distortive effects of foreign subsidies. The proposals stem from a belief that EU businesses are being put at a disadvantage compared to certain non-EU investors who are backed by state subsidies in a way EU businesses are not. The Commission states that foreign subsidies appear to have increasingly facilitated acquisitions of EU businesses, influenced other investment decisions or distorted the market behaviour of their beneficiaries. The Commission notes that, unlike foreign subsidies, subsidies from EU countries are controlled by the State aid rules, which seek to ensure that EU markets are not unduly distorted by such aid.

Regarding acquisitions, the Commission explains that subsidies may allow an acquirer to pay a higher price for an asset than it otherwise would have done, potentially leading to excessive purchase prices, lower efficiency gains and an inefficient allocation of resources. The Commission states that subsidies may be driven by a desire to get a foothold in strategically important markets or privileged access to critical infrastructure. Similar issues arise in public procurement processes.

The Commission accepts it has some existing tools to tackle subsidies, including the WTO Agreement on Subsidies and Countervailing Measures. For example, additional import duties may be imposed on goods produced by entities backed by state subsidies. However, these rules only apply to goods; not services, investment or other financial flows. Whilst the EU Regulation on screening foreign direct investments, which will come into force in October 2020, is of some relevance, its scope is much narrower: it only applies to foreign investment which may impact security or public order, for example, due to effects on critical infrastructure and technologies.

The Commission therefore concludes that additional tools are needed. 

The White Paper proposals

The Commission proposes for discussion three main new mechanisms:

Compulsory notification mechanism for subsidised acquisitions of EU targets with the following features: 

• The proposals would apply to subsidies explicitly linked to acquisitions, and measures which distort the market indirectly by increasing the financial strength of acquirers.
• A mandatory approval process similar to (but separate from) merger control. Like merger control, the Commission suggests that it be prohibited to implement a relevant acquisition pre-approval, and that the Commission itself should be the decision-maker.
• If the Commission found that an acquisition was facilitated by distortive foreign subsidies, it could either accept remedies, or prohibit the acquisition. Remedies might include divestments, capacity reductions, third party access obligations or mandatory licences.
• The proposed measure would potentially be wider than EU merger control in that it might capture not only acquisitions of control, but also acquisitions of "material influence".
• The regime would only capture subsidised acquisitions. Subsidies for this purpose would include (amongst others) capital injections, grants, loans, guarantees, fiscal incentives or other preferential tax treatment and debt forgiveness. If the subsidy was granted by a government acting as a market investor might, it appears that, like EU State aid law, no relevant benefit would be considered granted. The Commission suggests that subsidies below EUR 200,000 would not be captured (this is the threshold for de minimis aid in the EU). Note that subsidies granted up to one year post-closing would also be covered.
• The Commission indicates there would be a threshold for mandatory notification. This may relate to the turnover of the EU target (the Commission suggests EUR 100 million), but it could be a looser qualitative threshold.
• Subsidies would only be problematic if they distort the EU market. However, subsidies directly facilitating acquisitions would normally be considered distortive. The distortive effect of other subsidies would need to be assessed. Amongst other things, regard would be had to whether the acquirer has privileged access to its domestic market that it could use to leverage its EU position. The Commission also envisages a balancing test based on comparing the distortive effect with any positive impacts the investment might have in the EU (the EU interest test).

Compulsory notification of foreign subsidies by bidders for government contracts. To avoid public procurement processes being similarly distorted, the White Paper proposes the following:

• That EU public buyers be required to exclude from procurement procedures operators that have received distortive foreign subsides. This could also lead to exclusion from subsequent procedures.
• This would be achieved by bidders having to notify the awarding authority when submitting their bid whether they (or related entities) have received, or are expecting to receive, foreign subsidies over a certain threshold.
• It would then be assessed whether the subsidy facilitates participation in the procurement procedure, either directly or indirectly. Where the subsidy enables submission of an offer that would otherwise be economically less sustainable (e.g. bidding significantly below market price), a distortion would be presumed. In other cases, the distortive effect would need to be assessed.
• In terms of procedure, a designated national authority would in principle decide whether there was a relevant subsidy. However, if a detailed investigation is commenced, the authority would have to consult with the Commission on its proposed decision.
• Investigations would be subject to time limits so as not to unduly delay award procedures. The Commission suggests 15 working days for a preliminary review and three months for an in-depth investigation. The contract could not be awarded to the relevant operator during the investigation, but it could be awarded to another bidder. Note that if the designated authority decides a subsidy had been granted, the issue would revert to the awarding authority to decide whether the subsidy distorted the procurement process.

General instrument to control distortive effects of subsidies. This is arguably the most controversial proposal due to its breadth. The White Paper proposes the following:

• It would be a general measure addressing subsidies provided to beneficiaries established or active in the EU that cause distortions in the EU market in all market situations (including, it seems, acquisitions and procurement processes).
• The Commission and national authorities could take action against distorting foreign subsidies. The Commission suggests that if, following an in-depth investigation, it is concluded that the proper functioning of the internal market may have been or may be distorted (note the use of "may"), measures could be imposed to redress that distortion. As in the context of acquisitions, an EU interest test would be applied to balance possible distortions against positive impacts that the relevant activity or investment might have.
• Certain categories of subsidy would be considered most likely to cause distortions. These include export financing not in line with OECD officially supported export credits, subsidies to ailing undertakings, unlimited guarantees, tax reliefs and subsidies facilitating an acquisition. Other measures would need to be assessed in more detail.
• In terms of remedies, as in State aid cases, a requirement to repay monies to the relevant country could be imposed. However, the Commission notes that it may be difficult to determine whether a subsidy has actually and irreversibly been paid back to a third country. Similar remedies to those in the context of acquisitions may therefore also be appropriate.

Conclusions

The Commission proposals are ambitious in scope and could have far-reaching implications, including on the ability of EU investors to invest in other countries. As the Commission recognises, there may be difficulties in determining whether subsidies have been granted, as well as whether they are distortive. Given that the process of establishing whether State aid has been provided by EU countries is often not straightforward, determining whether distorting contributions have been given by foreign governments can be expected to be even more fraught.

It remains to be seen whether the EU Member States will support such a wide-ranging set of proposals. There is likely to be some opposition to giving the Commission further exclusive powers in relation to acquisitions. Some Member States may also think it sends the wrong message at a time when foreign investment is still very much needed. In any event, it is unlikely to be clear until next year what form any proposed regime will actually take.