The new EU Foreign Subsidies Regulation: how will it impact business activities?

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (FSR) will apply from 12 July 2023. The implementing regulation on the notification requirements is yet to be adopted by the European Commission (EC).

The draft presented in January 2023 faced many criticisms due to the huge administrative burdens it would create for both European and foreign undertakings. The purpose of the FSR is to address distortions caused, directly or indirectly, by foreign subsidies, with a view to ensuring a level playing field within the common market. However, the notification and declaration obligations go far beyond this objective.

The EC will have the power to investigate financial contributions granted by third countries to all companies active in the European Union (EU). If the EC finds that those financial contributions constitute distortive foreign subsidies, it will impose measures to redress their distortive effects.

Companies will be submitted to mandatory filing and standstill obligations in the case of concentrations or public procurement above certain thresholds and that involve a certain level of foreign financial contributions provided, directly or indirectly, by non-EU public authorities or public or private entities whose actions can be attributed to a third country. The notification obligation will come into force on 12 October 2023.

Significant fines may be imposed by the EC for non-compliance. Ignorance of the law is no excuse. So, what will the new European legal framework entail for companies?

What is a foreign subsidy?

Under the FSR, a foreign subsidy is deemed to exist when a third country provides, directly or indirectly, a financial contribution which confers a benefit on a European or foreign undertaking active in the internal market (advantage) and which is limited, in law or in fact, to one or more undertakings or industries (selectivity).

Financial contributions aimed at by the notification obligation have a broader scope than foreign subsidies and cover a wide range of public support, such as grants, remunerations of public contracts, fiscal exemptions, capital injections, loans and guarantees.

They are granted by third countries, public authorities or companies or private entities whose actions can be attributed to third countries, taking into account all relevant circumstances.

The financial contribution will be considered to confer a benefit on an undertaking and constitute a foreign subsidy if it could not have been obtained under normal market conditions. The existence of a benefit will be determined on the basis of comparative benchmarks, such as the investment practice of private investors, interest rates on market conditions, a comparable tax treatment, or adequate remuneration for a given good or service. This concept is similar to the market economy operator principle which is applied in state aid rules.

The distortion of the internal market

The EC will then assess on a case by case basis whether the foreign subsidy distorts the internal market on the basis of the amount of the foreign subsidy, its purpose and conditions attached, its use in the EU, the undertaking concerned, its size and market power, and relevant markets.

As a general rule, a foreign subsidy not exceeding €4m over a consecutive period of three years will be considered as unlikely to distort the internal market.

Foreign subsidies to an undertaking not exceeding €200,000 per third country over a consecutive period of three years will not distort the internal market within the meaning of the FSR.

Remedies imposed by the EC

If the EC establishes the existence of a foreign subsidy and its distortive effect, it may impose appropriate redressive measures or accept commitments proposed by the undertaking concerned. There is no further indication of how the EC will apply this balancing test in practice. The FSR provides for the possibility for the EC to adopt guidelines on those concepts, but not before 2026.

Redressive measures and commitments include a range of structural or non-structural remedies, such as the divestment of certain assets or providing access to infrastructure. In case of notified transactions, the EC may also prohibit the subsidised concentration.

The notification of concentrations

The parties will have to notify ex-ante financial contributions from third countries, prior to the conclusion of a concentration meeting certain thresholds.

As in merger control, a concentration arises where a change of control on a lasting basis results from: (i) the merger of two or more previously independent undertakings or parts of undertakings; (ii) the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings; or (iii) the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity.

A concentration must be notified if the acquired undertaking, one of the merging undertakings or the joint venture is established in the EU and generates a turnover in the EU of at least €500m in the previous financial year, and the merging undertakings, the buyer and the target company, or the undertakings creating a joint venture were granted combined aggregate foreign financial contributions of more than €50m in the last three years.

The obligation to notify relies on the parties acquiring the joint control or by the undertaking acquiring the exclusive control of the target company. The EC can also request ad-hoc notifications for smaller concentrations falling below the notification thresholds if it suspects the existence of distortive subsidies in the three years prior to the concentration.

In terms of timing, the EC may initiate an in-depth investigation of a notified concentration no later than 25 working days after receipt of the complete notification. In the absence of a decision to open the inquiry or a request for information, the operation will be implicitly approved. A decision must be issued within 90 working days after the opening of the in-depth investigation. Such a period may be extended by 15 working days.

The EC encourages companies to pre-notify their transactions in order to facilitate the process.

The implementing regulation will clarify the procedural aspects of compliance with the FSR and will include the notification forms plus guidance notes for concentrations transactions. A draft was submitted for public consultation until 6 March 2023. The EC is currently reviewing the text in light of the observations it received. The implementation regulation will be adopted in the coming weeks.

Public procurement procedures

The FSR also provides for specific rules on public procurement (including concessions) within the EU. Foreign subsidies that cause or risk causing a distortion in a public procurement procedure shall be understood as foreign subsidies that enable an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned.

The FSR imposes a notification obligation on a foreign financial contribution if the estimated total value of the procurement amounts to at least €250m and the economic operator was granted aggregate financial contributions of at least €4m per third country in the three financial years prior to notification.

Therefore, when submitting an offer in a public procurement procedure, the candidate will have to notify the contracting authority of all foreign financial contributions it has received in the three years prior to notification, provided that the abovementioned thresholds are met. Pending the EC’s review, the investigated bidder cannot be awarded the contract.

Below the notification thresholds, companies participating in a public procurement procedure will have to include in their offers a declaration of all foreign financial contributions they have benefitted from.

Once the notification or declaration is submitted, the contracting authority will submit the notification or declaration to the EC.

If, at the end of an in-depth investigation, the EC concludes that the candidate benefits from a foreign subsidy which distorts the internal market, it will request commitments that fully and effectively remove the distortion. If this is not possible, the EC will adopt a decision prohibiting the award of the contract.

Penalties for non-compliance with the FSR

The EC may impose fines for non-compliance with the FSR. Depending on the level of the infringement, fines of up to 10 percent of the aggregate turnover in the preceding financial year of the undertaking may be imposed. The EC is competent to investigate foreign support provided to an undertaking up to 10 years from the award of the subsidy.

When does the FSR apply?

The FSR applies to foreign subsidies granted in the five years prior to 12 July 2023 if such foreign subsidies distort the internal market after 12 July 2023. The notification obligation is applicable as of 12 October 2023.

Concentrations that were carried out before 12 July 2023 are not covered by the FSR. Notifiable concentrations for which the conclusion of the agreement, the public bid announced, or the acquisition of a controlling interest takes place on or after 12 July 2023, which are not closed before 12 October 2023, will have to be notified.

The EC may decide to open an ex officio investigation as of 12 July 2023, in which case it can investigate foreign subsidies granted as far back as 12 July 2018.

How can companies prepare?

Due to the broad concept of financial contributions that trigger notification and declaration obligations, many EU and foreign companies will be impacted by the FSR. Furthermore, public authorities will have to become familiar with the FSR reporting requirements in a very short period of time.

Adequate preparation is thus essential to avoid sanctions or lengthy transaction delays. The FSR will also have to be taken into consideration during due diligence to identify adequately these new risks.

For companies planning to extend their activities via a concentration or to participate in public procurement in the EU, it is essential to establish an internal process to gather information on any foreign financial contributions granted to each company of the group. Especially for large multinationals, collecting such information will require a huge amount of time. Furthermore, for some third countries, it may be difficult to identify financial contributions and their nature. It is advisable to start gathering this information as soon as possible.

 

Annabelle Lepièce is a partner and Marguerite Soete is an associate at CMS Belgium. Ms Lepièce can be contacted on +32 (2) 743 6934 or by email: annabelle.lepiece@cms-db.com. Ms Soete can be contacted on +32 (2) 674 8551 or by email: marguerite.soete@cms-db.com.

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BY

Annabelle Lepièce and Marguerite Soete

CMS Belgium

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