The new Foreign Subsidies Regulation (the "FSR" or the "Regulation") – entering into force today, 12 January 2023 – introduces a further regulatory hurdle for companies active in the EU with financial connections to third countries. The FSR enables the European Commission (the "EC") to screen foreign subsidies that may have a negative impact on the internal market by allowing it to review M&A transactions and public procurement procedures that include financial contributions from non-EU Member States. For companies, the FSR imposes a mandatory prior notification obligation for such transactions and procedures if the Regulation's notification thresholds are exceeded, as well as a risk of heavy fines for non-compliance. Even if the notification thresholds are not met, the FSR enables the EC to screen any potential market distortions on its own initiative. While highlighting the trend of the EU's increased scrutiny of transactions on several fronts, the FSR also adds regulatory hurdles to public procurement procedures.
What is the FSR about?
The FSR is a new legislative tool that allows the EC to screen foreign subsidies in the European internal market. In its White Paper from 2020, the EC noted that the internal market appeared to have been distorted by subsidies from third countries in recent years, for example by providing the recipients of such subsidies an unfair competitive advantage to acquire companies or obtain public procurement contracts in the EU. While subsidies granted by the EU Member States are regulated by the EU state aid rules, which prevent Member States from granting aid that unduly distorts competition in the internal market, there has not been a similar EU instrument that controls foreign subsidies and their possible distortions to fair competition.
The FSR aims to address this enforcement gap. It provides the EC with extensive tools and powers to launch investigations and review foreign subsidies granted to companies active in the internal market. The FSR does not empower the EC to call into question the grants of foreign subsidies as such, but allows it to take them into account in transactional and public procurement contexts.
The FSR entered into force today, 12 January 2023 (i.e. the 20th day following that of its publication in the Official Journal of the European Union on 23 December 2022), and in general it will apply from 12 July 2023 onwards (i.e. 6 months after the date of entry into force). The notification obligation applies from 12 October 2023.
What is a 'foreign subsidy'?
A 'foreign subsidy' within the meaning of the FSR is deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries. In addition to the central government and public authorities at all other levels, 'third country' refers to any public or private entity whose actions can be attributed to a third country. A financial contribution confers a benefit if the recipient could not have received it under normal market conditions.
The concept of financial contribution under the FSR is broad and includes, inter alia, the transfer of funds or liabilities (e.g. capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling), the foregoing of revenue that is otherwise due (e.g. tax exemptions or the granting of special or exclusive rights without adequate remuneration) or the provision of goods or services or the purchase of goods or services. No causal link between the financial contributions received and the transaction or public procurement process is required to trigger a notification.
When is a prior notification mandatory?
The FSR introduces three tools for the EC: two notification-based tools to investigate transactions, on one hand, and foreign subsidies in public procurement procedures, on the other, as well as a general tool to investigate any potential market distortions involving foreign subsidies on the EC's own initiative.
First, concerning transactions, only transactions that constitute a 'concentration' as defined in the FSR must be notified. The definition of a 'concentration' largely follows that of the EU Merger Regulation (139/2004, the "EUMR"), and refers to a merger, an acquisition of control, or a creation of a so-called full-function joint venture.
As a general rule, a concentration must be notified to the EC if:
- at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and
- the acquirer or acquirers and the acquired undertaking / the merging undertakings / the undertakings creating a joint venture and the joint venture – depending on the type of the concentration at hand – were granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
A notifiable concentration must not be implemented before the EC's clearance or before the review period has elapsed.
The FSR does not apply to concentrations for which the agreement was concluded, the public bid was announced, or a controlling interest was acquired before 12 July 2023.
Second, as to public procurement procedures, as a general rule, the FSR obliges to notify foreign subsidies to the contracting authority/entity, which forwards the information to the EC, if:
- the estimated value of the public procurement or framework agreement net of VAT is at least EUR 250 million; and
- the economic operator (including its subsidiary companies without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender) was granted aggregate financial contributions in the three years prior to notification of at least EUR 4 million per third country.
Where the contracting authority/entity decides to divide the procurement into lots, a notifiable foreign financial contribution is deemed to arise where the estimated value of the procurement net of VAT is at least EUR 250 million and the value of the lot or the aggregate value of all the lots to which the tenderer applies is at least EUR 125 million and the foreign financial contribution is at least EUR 4 million.
Even if the above-mentioned thresholds are not exceeded, economic operators must list in a declaration all foreign financial contributions received and confirm that they are not notifiable in accordance with the FSR. In an open procedure, the notification/declaration must be submitted only once, together with the tender. In a multi-stage procedure, the notification/declaration must be submitted twice, first with the request to participate and then as an updated notification/declaration with the submitted tender or final tender.
If the public procurement procedure includes foreign subsidies that need to be notified, the contract may not be awarded before the EC's clearance or before the review period has elapsed.
The FSR does not apply to public procurement contracts that have been awarded or procedures initiated before 12 July 2023.
Third, the general investigation tool empowers the EC to investigate any potential market distortions involving foreign subsidies. The EC may therefore start a review on its own initiative (ex officio) or request an ad-hoc notification for concentrations or public procurement procedures that do not meet the notification thresholds. In such cases, the FSR empowers the EC to investigate foreign subsidies granted in the five years prior to 12 July 2023 where such foreign subsidies distort the internal market after 12 July 2023.
When does a foreign subsidy distort competition?
If a transaction or a financial contribution in a public procurement procedure must be notified, or the EC decides to act ex officio, the EC will assess whether the foreign subsidy improves the competitive position of the recipient in the internal market and whether, in doing so, it actually or potentially negatively affects competition in the internal market. The FSR includes a list of factors the EC may consider, such as the amount, nature and purpose of the subsidy, the recipient's size and level of the recipient undertaking's economic activity in the EU.
The FSR recognizes that certain categories of subsidies may create distortions 'because of their nature', i.e. they are most likely to distort the internal market (e.g. a subsidy granted to an ailing undertaking which will likely go out of business in the short or medium term in the absence of any subsidy, a guarantee for the debts or liabilities of the undertaking without any limitation as to the amount or the duration, a subsidy directly facilitating a concentration or a subsidy enabling an undertaking to submit an unduly advantageous tender). If the subsidy falls within this category the burden of proof is reversed, and the investigated undertaking has to prove that the subsidy is not distortive.
The EC may conduct a balancing test on the subsidy's positive and negative effects. In this assessment, the EC must consider also all the evidence and information on positive effects it receives from the Member States or any natural or legal persons. Primarily, any positive effects should relate to the development of the relevant subsidised economic activity on the internal market. The FSR also grants the EC the power to consider the subsidy's positive effects relating to the EU's set of policy objectives. This could mean that, for example, a distortive subsidy granted to protect the environment or combat climate change could ultimately comply with the FSR. However, in the case of categories of foreign subsidies that are deemed most likely to distort the internal market, positive effects are naturally less likely to outweigh negative effects.
Where the total amount of a foreign subsidy does not exceed EUR 4 million over any consecutive period of three years, the subsidy is considered unlikely to distort the internal market. Moreover, where the total amount of a foreign subsidy does not exceed EUR 200,000 (i.e. the amount of de minimis aid as defined in Regulation (EU) No 1407/2013) per third country over any consecutive period of three years, the subsidy is not considered to distort the internal market.
What are the possible remedies and sanctions?
If a foreign subsidy's negative effects outweigh its positive ones, the EC may impose (in ex officio reviews only) a wide range of structural or non-structural redressive measures to address the distortion, or (in any type of case) accept commitments to this effect offered by the investigated undertaking. Redressive measures or commitments may consist, for example, of divestments, requiring the undertakings to dissolve the concentration concerned, repayment of the foreign subsidy (incl. an appropriate interest rate), reducing capacity or market presence (incl. by means of a temporary restriction on commercial activity), obligation to offer access to infrastructure, the licensing of assets acquired or developed with the help of foreign subsidies, or refraining from certain investments.
Failing to notify a notifiable concentration or a notifiable subsidy in a public procurement procedure and the implementation of such concentration before a clearance from the EC may result in a fine of up to 10 % of the company's aggregated worldwide turnover. Moreover, any circumventions of or attempts to circumvent the notification obligations as well as failures to comply with the EC's decision imposing redressive measures or accepting commitments may lead to a similar fine.
The EC's enforcement powers under the FSR closely resemble the powers it has in competition enforcement proceedings pursuant to Regulation (EC) 1/2003. The EC is empowered to gather necessary information for its investigations, such as sending information requests ("RFIs") to companies, conducting on-site inspections, or launching market investigations into specific sectors or types of subsidies. The FSR grants the EC the possibility of imposing a fine in case of non-compliance with its enforcement powers. For example, when incomplete, incorrect or misleading information to an RFI is provided, or the requested information is not provided within the prescribed time limit, or an incorrect or misleading answer is given during an inspection with regard to explanations of facts or documents, the EC may impose a fine of maximum 1 % of the company's aggregate worldwide turnover.
How long is the review procedure?
The EC's review procedure closely resembles that of the merger control review under the EUMR, including, for example, separate preliminary ("Phase I") and in-depth ("Phase II") reviews and an obligation not to implement the concentration or award the contract in the public procurement procedure prior to the EC's clearance ('standstill obligation'). The FSR also grants the EC a possibility to extend its review periods of concentrations in cases of incomplete replies to RFIs (so-called stop-the-clock provisions). The obligations related to and the timeframes of the notification procedures are in general as follows:
|Standstill obligation||Phase I||Phase II||Specific extensions||Stop-the-clock extensions||Other|
|Concentrations||Yes||25 wd* from a complete notification||90 wd from opening Phase II||15 wd to Phase II in case commitments offered||Yes||In total max. 20-wd further extension(s) in Phase II upon parties' request or consent|
|Public procurement procedures||Yes (all procedural steps may continue, except for the award of the contract)||20 wd from a complete notification||Max. 110 wd from a complete notification||10 wd to Phase I in 'duly justified cases' and 20 wd to Phase II in 'duly justified exceptional cases'||No, but reopening if suspicion of incomplete notification||In multi-stage public procurement procedures: 20-wd Phase I from complete notification, review suspended until (final) tender submitted; then full 20-wd Phase I from complete updated notification and max. 90-wd Phase II from complete updated notification|
If, during a Phase I review, the EC receives sufficient indications that an undertaking has received a distortive foreign subsidy, it will initiate a Phase II review. Otherwise, it will close the review. Phase II review ends with the EC adopting a no objection decision, a commitment decision, or a decision prohibiting a concentration or the award of the contract.
There are no exact time limits concerning ex officio reviews. The FSR merely states that the EC should endeavour to adopt a decision within a period of 18 months of the opening of an in-depth investigation.
The FSR introduces a new legal framework for companies receiving foreign subsidies and engaging in M&A transactions and public procurement procedures in the EU. By introducing another possibly complex and time-consuming authority process, the FSR likely leads to more uncertainty as regards transactions and tenders. The FSR represents a parallel regulatory regime applicable to transactions in addition to the existing merger control, foreign direct investment control and the Digital Markets Act (Regulation (EU) 2022/1925, applicable as of 2 May 2023) regimes; therefore, the timing implications resulting from possibly several parallel regimes should be considered carefully in deal planning.
What companies should do without delay is to ensure that their processes to track financial contributions are properly put in place. Moreover, it is vital to find out whether any possible financial contributions received at least during the last three years might constitute 'foreign subsidies' under the FSR, and whether these contributions might trigger the notification obligation (applicable from 12 October 2023) in coming transactions or tenders (i.e. the ones initiated on or after 12 July 2023, see above). Despite the broad definition of the 'financial contribution' under the FSR, the wide geographic scope involved, and consequent likely burdensome data gathering, it pays off to clarify these issues and keep them up-to-date in the future in order to avoid the risk of heavy fines or other adverse measures, such as the repayment of the foreign subsidy. Such efforts will moreover save invaluable time in future M&A transactions and tendering processes.
Although the FSR is very detailed and 45 pages long (for comparison, the EUMR is 22 pages long), it is not in many ways sufficient for its proper practical application. Consequently, it is expected that the EC will soon publish (first for public consultation) another document, an Implementing Regulation, which will set out, for example, what must be included in a notification under the FSR as well as further procedural details. The EC will publish also other guidance in form of guidelines regarding the application of the FSR. This will concern, for example, the application of the criteria for determining the existence of a distortion in the internal market caused by a foreign subsidy, the application of the balancing test, and the application of the EC's power to request a prior notification for below-thresholds concentrations and financial contributions in public procurement procedures. At least some of this guidance will be published within the first year of FSR's application, but some may take longer. Hopefully, the Implementing Regulation (including the notification form(s)) and additional guidance on the above-mentioned as well as many other relevant points will come sooner rather than later and further clarify the new regime as it seems that the FSR itself does not shed enough light on many practical questions, leaving several questions open.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.