Foreign subsidies regulation: the next new tool in the European Commission’s toolbox?

In May 2021, the European Commission (the Commission) published a proposal for a Regulation on foreign subsidies distorting the EU’s internal market. According to the Commission, foreign subsidies seem to have facilitated the acquisition of EU undertakings, influenced investment decisions, distorted trade in services or otherwise influenced the behaviour of their beneficiaries in the EU market, to the detriment of fair competition. The Commission’s proposal aimed to address these distortions and close a regulatory gap: subsidies granted by non-EU governments are currently not scrutinized, but subsidies granted by Member States are subject to review under the EU’s State Aid rules. In June 2022, the European Commission and Council have agreed on the Regulation on foreign subsidies distorting the internal market (the Regulation), introducing minor amendments to the Commission’s initial proposal. The final draft of the Regulation was published on 11 July 2022. The Regulation is expected to impact transactions as of mid-2023.

The proposed Regulation is set to become the next new tool in the Commission’s toolbox to ensure fair competition on the EU’s internal market after recently addressing foreign direct investments and ‘killer acquisitions’ (see for further information on these subjects our blogs on ‘killer acquisitions’ and FDI legislation in the Netherlands here and here).

The definition of ‘foreign subsidies’

The Regulation addresses possible unfair competition through foreign subsidies. A foreign subsidy in the context of the Regulation is defined as an intervention that meets three cumulative conditions (Article 2):

1. Financial contribution: There is a financial contribution provided, directly or indirectly, by a third country.
2. Benefit to an undertaking(s): The financial contribution confers a benefit to a company engaged in an economic activity in the EU’s internal market.
3. ‘Selective’ advantage: The benefit is conferred to only an individual undertaking or industry or several undertakings or industries.

Investigative tools

The Regulation provides for three investigative tools for the Commission with respect to possible competitive advantages for companies receiving foreign subsidies:

1. Merger control: A notification-based tool to investigate concentrations involving a financial contribution by a non-EU government, where the EU turnover of at least one of the merging undertakings, the acquired undertaking or the joint venture is at least €500 million and the (combined) foreign financial contribution is at least €50 million in the previous three financial years.
2. Public procurement: A notification-based tool to investigate bids in public procurements involving a financial contribution by a non-EU government of at least €4 million over the last three financial years, where the estimated value of the procurement is €250 million or more. In this procedure, the bidder needs to inform the contracting authority on any subsidies it has received, after which the contracting authority informs the Commission.
3. General screening / notifications: A tool to investigate all other market situations and smaller concentrations and public procurement contracts, which the Commission can start on its own initiative (ex officio) and may request ad-hoc information.

As a general rule in the Regulation, a foreign subsidy is unlikely to distort the EU’s internal market if its total amount is below €4 million over any consecutive period of three financial years.

Procedural aspects

Deadlines and enforcement

The procedures differ for each of the three investigative tools. However, parties involved should be prepared for lengthy procedures.

The merger control and public procurement investigations can consist of two phases: (i) a preliminary investigation and (ii) possible further in-depth investigation:

• For concentrations, the Regulation provides for 25 working days for a preliminary review and 90 working days for an in-depth investigation (Article 23).
• For public procurement, the general time limits were set at 20 (optional extension with 10) and 110 (optional extension with 20) working days respectively (Article 29).

Both procedures include a standstill obligation that prohibits the execution of a concentration or the award of a contract during the Commission’s investigation. The Regulation does not provide any timing for the use of the ex officio tool. When enforcing the Regulation, the Commission will enjoy a broad range of instruments (Articles 10-16). Including information requests, inspections (dawn raids) within the EU or abroad and the Commission can impose fines on the undertakings concerned in case of inter alia non-cooperation with an investigation.

Distortions of competition

During an investigation, the Commission will have to establish whether the foreign subsidy distorts competition on the EU’s internal market. The Regulation provides in Article 3 that a distortion on the internal market shall be deemed to exist where (i) a foreign subsidy is liable to improve the competitive position of the undertaking concerned in the internal market and (ii) the subsidy actually or potentially negatively affects competition on the internal market. A distortion on the internal market shall be determined on the basis of indicators, such as the amount and nature of the subsidy, the position of the undertaking and the markets concerned. The Regulation sets out the types of foreign subsidies that are most likely to distort the internal market (Article 4). Examples include foreign subsidies directly facilitating a concentration.

Balancing test and redressive measures

The Regulation requires the Commission to balance the negative effects of a foreign subsidy (distortion on the internal market) with positive effects on the development of the relevant economic activity (Article 5). To remedy an actual or potential distortion on the internal market caused by a foreign subsidy, the Commission can accept commitments by the undertakings concerned or impose (far-reaching) redressive measures (Article 6). Such measures include, for example, a reduction of capacity or market presence or even repayment of the foreign subsidy, including an appropriate interest rate.

Conclusion

The Regulation on foreign subsidies distorting the internal market can have major implications on companies receiving foreign subsidies. Such companies could face lengthy investigations by the Commission and possibly far-reaching redressive measures. It will particularly be interesting to see in what cases and how frequent the Commission will turn to the general ex officio investigative tool. At the very least, this particular tool leaves a considerable amount of discretion to the Commission and will require careful consideration by companies active in the EU that have or may receive foreign subsidies.