EU Foreign Subsidies Regulation – a new means of controlling the internal market
12/05/23
The European Union has recently adopted the Foreign Subsidies Regulation (FSR) with the aim of ‘levelling the playing field’ by screening financial support to organisations from non-EU Member States. Previously, such an instrument only existed for state aid provided by EU27 Member States. With the application of the FSR, foreign support that improves the competitive position of an undertaking or that may distort competition in the internal market can be addressed by the European Commission via a wide range of redressive measures.
In times of globalisation, green subsidies initiatives, increasing protectionism and crisis countermeasures, the expected impact of the FSR is huge. We expect that this will cause some friction with initiatives such as the USA Inflation Reduction Act, state-sponsored dumping practices and job-creation initiatives outside the EU.
The regulation entered into force on 12 January 2023 and is effective from 12 July 2023 for ex officio investigations by the European Commission. The first notifications will be due on M&A transactions or public procurement bids which close after 12 October 2023. In practice, this means that exactly two months remain to prepare for the application of the FSR.
To help you make the best use of the remaining time, we’ve put together an introduction to FSR and some advice on how you can prepare for its implementation.
The concept of distortive ‘foreign subsidies’
The FSR provides that ‘a foreign subsidy shall be deemed to exist where a third country provides a financial contribution which confers a benefit to an undertaking engaging in an economic activity in the internal market and which is limited to one or more undertakings or industries.’
Based on this definition, the FSR aims to cover situations in which economic operators are relieved of the inherent costs of their economic activities. Indeed, four considerations must be taken into account when assessing the existence of a ‘foreign subsidy distorting the internal market’:
A financial contribution is made (the term financial contribution is to be interpreted broadly and includes transfers of funds, certain types of tax benefits, debt rescheduling, some guarantees, grants, free loans, contracts that are not at-arm’s-length or any such similar measures);
The financial contribution is directly or indirectly attributable to a non-EU Member State, be it the third country’s government directly or a public or private company (in)directly controlled by the third country;
The financial contribution confers a benefit to the recipient that is not normally available under customary market conditions; and
The financial contribution is selective, i.e. the contribution provides the benefit to one or more specific recipients, but not any company which applies for it/the sector as a whole.
Once the existence of a foreign subsidy has been established, the Commission will carry out a balancing test. In this test, it will measure the negative effects of the foreign subsidy in terms of distortion in the internal market against the positive effects on the development of the relevant subsidised economic activity on the internal market, ‘while considering other positive effects of the foreign subsidy such as the broader positive effects in relation to the relevant policy objectives, in particular those of the Union.’
If the Commission finds that a distortive foreign subsidy (or subsidies) exist, it may impose (structural or non-structural) redressive measures on the group. For example, it may block the procurement bid or prohibit completion of the M&A transaction. Alternatively, the group may propose certain commitments (such as agreeing to repay the foreign subsidy or providing the Commission access to certain infrastructure) which may lead to the Commission to allow the group to use the foreign subsidies under certain conditions.
It is important to note that foreign subsidies where the total amount does not exceed EUR 4 million over a consecutive period of three years are likely to be too small to be distortive. In addition, foreign subsidies that do not exceed EUR 200,000 per third country should be considered as not distorting the internal market.
FSR Enforcement tools
In order to ensure proper enforcement of the FSR, the European Commission has been conferred broad powers to investigate foreign subsidies and contracting authorities must comply with the notification requirement in large M&A transactions and large public procurement bids.
A. Ex officio investigations by the European Commission
The first general tool open to the Commission is that it may launch an investigation on its own initiative to screen ‘all other market situations’ that are not covered by the notification requirement (the ‘ex officio’ tool). This also includes the possibility for the Commission to request that the parties notify a transaction/bid where the thresholds for notification are not met.
The ex officio tool will become effective on 12 July 2023, exactly two months from now.
B. Notification requirement
The FSR also provides for two specific situations where a mandatory notification procedure will be required prior to the completion of an M&A transaction or public procurement bid. Indeed, when the below conditions are met, organisations will have to run through a mandatory screening procedure:
M&A transaction |
Public procurement bid |
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The implementing regulation will set out the information which must be provided in the notification and is scheduled to be adopted by the European Commission in the current quarter. The draft implementing regulation states that the following information should be provided:
details of financial contributions received in the three years prior to the concentration/procurement bid from non-EU countries, including value and type;
an explanation for each financial contribution regarding the link to the M&A transaction/public procurement bid;
additional upfront information if the financial contribution is of a type ‘likely to be distortive’;
an executive summary of the M&A transaction and involved parties or description of the public procurement procedure; and
for M&A transactions only: details of the concentration, including the economic rationale, value and sources of finance used to fund the transaction and the bidding process (if applicable).
Note that such contributions will be considered on an undertaking-wide basis, i.e. the entire (multinational) group and not just one or multiple EU based entities. Hence, foreign subsidies with no direct connection to the transaction/procurement bid may also be investigated. For both M&A transactions and public procurement procedures, only foreign subsidies granted in the three years prior to (i) conclusion of the deal agreement or announcement of the public bid or (ii) notification to the public procurement authority, are taken into account.
Failure to comply with the notification requirement or the closing of the transaction whilst it is still pending the approval of the European Commission, comes with a risk of high penalties of up to 10% of the aggregate turnover of the undertaking in the preceding financial year.
The first notifications will be due on M&A transactions or public procurement bids which close after 12 October 2023.
Compliance obligation - how to prepare
Given the broad interpretation of ‘foreign subsidies’, it is clear that this will result in an additional compliance burden. The reason being that undertakings will need to monitor foreign subsidies both when doing business in the EU, as well as when carrying out relevant M&A or public procurement activities.
Therefore, we believe that the following actions are relevant when preparing for the application of the FSR:
Map and monitor financial contributions by non-EU countries (group-wide/all brands).
Prepare a risk assessment if foreign subsidies are identified
on existing operations; or
when pursuing M&A transactions or public procurement bids.
If risks are identified, decide on the appropriate strategy (e.g. an assessment of the distortive effect of the foreign subsidy or a balancing test to confirm whether the positive effects outweigh the negative effects) and consider whether proactive discussion with the European Commission would be beneficial going forward (e.g. when pursuing a group restructuring).
Where relevant, adapt the existing processes
a. to ensure at least the minimum required information is at hand at all times; and
b. to ensure a limited impact on business operations.
Consider active monitoring of notification procedures or an ex officio review(s).
Please let us know if you would like to discuss this further with one of our specialists. We will keep you informed of future developments.
