The EU’s answer: regulating foreign subsidies

On 12 January 2023, the Foreign Subsidies Regulation (‘FSR’) entered into force. The EU Commission states that the new set of rules for addressing distortions caused by foreign subsidies will allow the EU to remain open to trade and investment, while ensuring a level playing field for all companies operating in the Single Market.

The EU benefits from a sophisticated and effective system of state aid control, aiming at ensuring fair conditions for all companies engaging in an economic activity in the internal market and preventing Member States from granting state aid that unduly distorts competition in the internal market.

At the same time, companies might receive subsidies from third countries, which are then used to finance economic activities in the internal market in any sector of the economy, such as participation in public procurement procedures, or the acquisition of companies. Such foreign subsidies are currently not subject to the state aid rules of the EU.

The disparity seems evident: while companies that receive financial aid from an EU Member State are subject to the scrutiny of the EU state aid rules, companies that obtain financial contributions from a non-EU State are not subject to any or sufficient EU regulation.

The FSR addresses such distortions and closes this regulatory gap. It proposes new tools to effectively tackle foreign subsidies that cause distortions and undermine the level playing field in the internal market, all while eyeing to attract new clean tech investments from both inside and outside the internal market.

SCOPE

Under the new Regulation, the Commission will have the power to investigate financial contributions granted by non-EU governments to companies active in the EU. The understanding of financial contribution in the FSR is extremely broad. It covers all directly or indirectly provided financial means (including the foregoing of otherwise due revenue, as tax exemptions, and even intra-group transactions might constitute a problem if the parent company receives a financial contribution from a third country and the subsidiary in the EU benefits from it).

The FSR distinguishes between foreign contributions:

1. most likely to distort the internal market (e.g. subsidies to ailing undertakings, unlimited guarantees, export financing credits, or subsidies directly facilitating a concentration or an unduly advantageous tender);
2. unlikely distortive foreign subsidies (e.g. total amount not exceeding € 4 million in three consecutive financial years, total amount not exceeding de minimis state aid in three consecutive financial years, and disaster subsidies); and
3. foreign subsidies that could be distortive based on a case-by-case assessment.

If the Commission finds that such financial contributions constitute distortive subsidies, it can impose measures to redress their distortive effects. Commitments or redressive measures may consist of (among others): reducing capacity or market presence; refraining from certain investments; the divestment of certain assets; the repayment of the foreign subsidy, including an appropriate interest rate, etc. The Commission may even impose fines or periodic penalty payments up to 10% of the aggregate turnover or 5% of the average daily aggregate turnover.

The FSR introduces three tools for the Commission to investigate the above described scenarios:

1. a notification-based tool to investigate concentrations involving a financial contribution by a non-EU government, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves a foreign financial contribution of more than €50 million;
2. a notification-based tool to investigate bids in public procurements involving a financial contribution by a non-EU government, where the estimated contract value is at least €250 million and the bid involves a foreign financial contribution of at least €4 million per third country; and
3. a general tool to investigate all other market situations (like greenfield investments), where the Commission can start a review on its own initiative (ex-officio) or it request an ad-hoc notification for smaller concentrations and public procurement procedures.

RELEVANCE FOR FDIs

The general investigation tool would allow the Commission to start investigations on its own initiative (ex-officio). This would cover other types of market situations, such as greenfield investments. The FSR requires the Commission to consider the foreign subsidies provided during the three years prior to the notification or the initiation of its general ex-officio investigation in its assessment.

TIMELINE

The Commission’s ex officio investigative powers under the FSR will start to apply six months after, on 12 July 2023. The two notification-based tools for concentrations and public procurement procedures will apply nine months after the entering into force, on 12 October 2023.