The EU efforts concerning foreign subsidies to ensure a European level playing field in corporate activities are being augmented with a new regulation. It will both close gaps in existing legislative tools and, probably, transform the WTO rules on industrial subsidies. Hence, the EU will continue to address distortive subsidies through rules in the EU-bilateral trade agreements.
The reasons behind the new regulation are evident: the EU companies are operating in an increasingly volatile global economy, where they are increasingly involved with more external partners with often unfair activity and/or distorting the level playing field. The new regulation will ensure that all companies doing business in the EU are treated equally. It will enable the Commission to tackle distortive support from third countries, to the benefit of competition and for a level playing field in the EU Single Market.
Thus, for the EU companies, the new regulation is really a “game changer”; as it will create fairer rules of competition with foreign competitors. Besides, the European procurement market, which accounts for over 14% of the EU GDP, serves as both a strong economic tool and an important geopolitical instrument; hence, the EU cannot tolerate any more the distortion implied by foreign subsidies to the detriment of the EU’s competitive firms that play by the rules.
Commission’s top priorities in foreign trade are concentrated presently on additional regulatory and administrative tools on industrial subsidies. Thus, the new rule on Foreign Subsidies Regulation, FRS will start to apply from July 2023 and the Commission will be able to launch ex-officio investigations in subsidies; however, the notification obligation for companies will apply from October 2023.
The Commission will present a draft of “implementing regulation”, which will clarify the applicable rules and procedures, including the notification forms for concentrations and public procurement procedures, the calculation of time limits, access to file procedures and confidentiality of information. The Implementing Regulation and notification forms will be finalized and adopted before the start of application of the FSR.
The Regulation was proposed by the Commission in May 2021 and agreed by the European Parliament and the Council in record-time, i.e. already in June 2022.
More in: https://ec.europa.eu/commission/presscorner/detail/da/qanda_21_1984
New rules on distortive foreign subsidies
The Foreign Subsidies Regulation, FSR applies to all economic activities in the EU: it covers concentrations (mergers and acquisitions), public procurement procedures and all other market situations. The new rules give the Commission the power to investigate financial contributions granted by non-EU countries to companies engaging in an economic activity in the EU and redress, if needed, their distortive effects.
The new regulation includes three tools, which will be enforced by the Commission:
a) An obligation for companies to notify to the Commission concentrations involving a financial contribution by a non-EU government where: 1) the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million, and 2) the foreign financial contribution involved is at least €50 million;
b) An obligation for companies to notify to the Commission participation in public procurement procedures, where: 1) the estimated contract value is at least €250 million, and 2) the foreign financial contribution involved is at least €4 million per non-EU country; the Commission may prohibit award of contracts in such procedures to companies benefiting from distortive subsidies.
c) For all other market situations, the Commission can start investigations on its own initiative (ex-officio) if it suspects that distortive foreign subsidies may be involved. This includes the possibility to request ad-hoc notifications for public procurement procedures and smaller concentrations.
Commission’s investigative powers and procedures
Since July 2023, the public procurement contracts cannot be completed and awarded while under investigation by the Commission. In case of breach of this obligation, the Commission can impose fines, which may reach up to 10% of the company’s annual aggregated turnover. The Commission can also prohibit the completion of a subsidised concentration or the award of a public procurement contract to a subsidised bidder.
The FSR grants the Commission a wide range of investigative powers to gather the necessary information, including: a) sending information requests to companies; b) conducting fact-finding missions within and outside the Union; and c) launching market investigations into specific sectors or types of subsidies.
The Commission may also rely on market information submitted by companies, by the EU member states, and/or by any natural or legal person or association.
If the Commission finds that a foreign subsidy exists and distorts the EU Single Market, it may balance the negative effects in terms of the distortion with the positive effects of the subsidy on the development of the subsidised economic activity. If the negative effects outweigh the positive ones, the Commission may impose structural or non-structural regressive measures on companies, or accept them as commitments, to remedy the distortion (e.g. divestment of certain assets or prohibition of a certain market conduct).
As a general rule, subsidies below €4 million over three years are considered ‘unlikely’ to be distortive while subsidies below the EU State aid “de minimis” thresholds are considered non-distortive.
In the context of notified concentrations and public procurement procedures, the Commission can look at foreign subsidies granted up to three years before the transaction. However, the new regulation does not apply to concentrations concluded and public procurements initiated before 12 July 2023. In all other situations, the Commission can look at subsidies granted 10 years in the past. However, the new regulation only applies to subsidies granted in the five years prior to 12 July 2023 where such subsidies distort the Single Market after the start of application.
More information in Commission’s websites: = DG Competition website on Foreign Subsidies; = Press release: Foreign Subsidies Regulation: rules to ensure fair and open EU markets enter into force; and = Facts page.