The European Union's Foreign Subsidies
Regulation ("FSR" or "Regulation No.
2022/2560") is a uniquely EU means to address potential
"distortions" in internal EU markets arising from the
ways in which foreign governments can support industry. It is
designed to "level the playing field" for European
competitors who are subject to EU internal disciplines on receipt
of State Aid. EU President Von der Leyen has instructed the Commission to enforce it
"vigorously."
What are foreign government "subsidies" and when
do they cause "distortions"?
The FSR defines a foreign subsidy as a financial contribution
granted by any non-EU public entity that confers a benefit on an
undertaking operating in the European Union's internal market
(Art. 3(1) of the FSR). That definition will be familiar to those
experienced with countervailing duties or WTO subsidies issues; a
key difference, however, is that the FSR addresses subsidies
benefitting an undertaking engaged in any economic activity in the
EU and thereby extends to service suppliers as well as those who
trade in products.
A distortion occurs when a subsidy improves the competitive
position of a company to the detriment of competition in an EU
market (Article 4(1) of the FSR). Because the concept of
"financial contribution" is broadly defined, a distortion
can arise from government actions ranging from procuring defense
equipment in the home market, through to government-owned banks
providing concessional financing for high-tech product development
or support services. If such foreign government actions provide a
company with competitive advantages, the Commission can take
action.
Commissioner Vestager has indicated that,
among third countries, the primary concern is Chinese firms, though
firms from other countries have also been investigated.
How does the FSR work in practice?
The regulation introduces a mandatory notification regime for
undertakings benefiting from certain foreign subsidies when either
engaging in mergers, acquisitions, joint ventures, or in the
context of public procurement. It also grants the Commission broad
powers to initiate an investigation ex officio based on
any source of information.
There is a limited exemption for public procurements related to
defense and security, falling under the scope of Directive
2009/81/EC, which are not subject to the notification obligation.
Nevertheless, the Commission may still examine them ex
officio.
The EU Commission has been active since the FSR entered into force
in mid-2023. It has started 157 investigations in merger
proceedings and at least three other investigations ex
officio. These investigations have also involved "dawn
raids" to collect information.
In at least one case, Emirates Telecommunications Group/PPF
Telecom Group, commitments were agreed with the Commission, as
a condition to an acquisition. This concerned the acquisition of
the European company ("PPF") by a UAE purchaser
("e&"), owned in turn by the UAE sovereign wealth
fund. e& is to amend its articles of association to remove
unlimited state guarantees, as well as forego exemptions from
bankruptcy law, which were considered undue foreign subsidies.
e& and its parent company also committed not to finance
PPF's EU activities, with limited exceptions subject to
Commission review. One can imagine these relatively far-reaching
interventions into the corporate and financing arrangements of the
buyer would be uncomfortable for many. It is also notable these
issues will often arise if the buyer is state owned.
The Commission has not yet initiated proceedings in the procurement
context. However, they are expected. The European Commission's
January 2025 "Competitiveness Compass for the EU"
identifies the EU being "highly dependent on non-EU
suppliers" in the defense and security industry as a risk. And
the former Finnish President Sauli Niinistö's report on
"Europe's Civilian and Military Preparedness
and Readiness," commissioned by the EU, presents the FSR
as part of the solution to this: the "foreign subsidies
regulations will help to integrate economic security objectives
more effectively into broader European policies."
How should my business respond?
- All businesses active in European markets, including European defense procurement markets and markets for services relevant in the defense sector, should familiarize themselves with the parameters of the FSR. Those responding to European procurement exercises will need to be particularly attentive to notification requirements, as will companies engaged in merger or acquisition activity. State owned entities should also pay particular attention.
- European stakeholders should consider whether competitors enjoy any advantages from the activities of foreign governments or their state entities, whether they are in the form or direct grants or concessional financing, tax breaks (including for R&D), government supply of goods or services (such as technology licenses), or by procuring goods or services. Where such foreign government activity tilts competitive conditions in EU markets, the Commission may be able to take action.
- Businesses active internationally (i.e., foreign or EU businesses that operate in foreign markets) should examine whether their interactions with foreign governments or state entities may create risk under the FSR. Chinese companies especially should be aware of key areas in which there is a risk of unexpectedly benefiting from a subsidy – for instance, receiving financing from a state-owned bank or purchasing raw or semi-refined materials from Chinese markets considered subsidized by the EU Commission. US companies operating in Europe should also be aware of the potential for US defense procurement to confer advantages that may later be examined by the Commission. Where subsidy risk is identified, companies should develop defensive strategies to minimize the prospects of action by the Commission.
CONCLUSION
In short, the FSR has introduced an additional layer of complexity
to trade with the EU. We anticipate that, in view of the
Commission's policy priorities, this may be of particular
relevance in the defense and security sectors. For European firms,
this is primarily an opportunity to rebalance advantages that
competitors may gain from their foreign activities. However,
European firms should be aware they too could receive "foreign
subsidies". Non-EU entities, especially Chinese firms,
operating and selling in the EU, should be diligent in
understanding their potential exposure and should take steps to
manage it.
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.
