New regulation on foreign subsidies
Background
On 5 May 2021, the European Commission (the "Commission") submitted a proposal of a new regulation on foreign subsidies distorting competition in the internal market (the "Regulation").
The reason for the Regulation is the present regulatory distinction between subsidies received from other EU Member States and subsidies received from third countries. When undertakings receive subsidies from other EU Member States, such subsidies are subject to the EU state aid rules. Conversely, when undertakings receive subsidies from third countries, the subsidies are not subject to similar rules, which may potentially imply a distortion of competition in the internal market. It may, for instance, be the case in relation to business transactions financed in full or in part by foreign subsidies or granting of public contracts to undertakings receiving foreign subsidies.
Consequently, the purpose of the Regulation is to close this regulatory gap by providing the Commission with a number of tools for handling foreign subsidies that may distort competition in the internal market.
General comments
The Commission will be provided with three new tools for addressing foreign subsidies that may distort competition in the internal market:
- Obligation to notify the Commission of business transactions above certain thresholds.
- Obligation to notify the Commission of financial contributions in connection with public procurements above certain thresholds.
- Investigation by the Commission on its own initiative of other situations where foreign subsidies occur.
The following provides an overview of the new rules.
Definition of foreign subsidies
Foreign subsidies are 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".
The definition of foreign subsidies overall corresponds to the definition of state aid according to EU state aid rules. Accordingly, there must be (i) a financial contribution, (ii) provided by a third country, (iii) which confers a benefit on the beneficiary, and (iv) it must be awarded selectively to one or several undertakings or industries.
The Regulation includes a non-exhaustive list of types of financial contributions. This includes, inter alia, the transfer of funds or liabilities, such as 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. It also includes the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights to undertakings without adequate remuneration. Finally, it also includes the provision of goods or services or the purchase of goods or services.
The financial contribution must have been provided by a third country. It includes both financial contributions granted by central governments and public authorities as wells as public and private undertakings, if their actions can be attributed to a third country.
The financial contribution must confer a benefit on one or several undertakings engaged in economic activities in the internal market. A financial contribution is deemed to confer a benefit if it could not have been obtained under normal market conditions. The financial contribution must be granted selectively to the relevant undertaking/undertakings or industries.
Assessment of foreign subsidies
Contrary to state aid granted by an EU Member State, foreign subsidies are as a rule not prohibited. The Commission must determine on a case-by-case basis whether the foreign subsidies distort competition in the internal market.
A distortion of competition in the internal market shall be deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market.
The Regulation includes a non-exhaustive list of matters which should be taken into consideration when assessing whether distortion of competition exists. This includes the size of the foreign subsidies, the nature of the foreign subsidies, the situation of the relevant undertaking, the level and evolution of economic activity of the undertaking on the internal market, and the purpose and conditions attached to the foreign subsidies as well as its use on the internal market.
The Regulation includes a rule of presumption that it is unlikely that foreign subsidies to an undertaking will distort competition in the internal market, if the total amount of the foreign subsidies does not exceed EUR 4 million over a consecutive period of three years. In addition, foreign subsidies are not generally deemed to distort competition in the internal market, if their total amount does not exceed the amount of the de minimis aid pursuant to the EU state aid rules, i.e., the foreign subsidies do not exceed EUR 200,000 per third country over a consecutive period of three years.
In other situations, the Commission must conduct a so-called "balancing test", e.i., balance the negative effects of the foreign subsidies in the form of distortion of competition in the internal market in relation to their positive effects on the development of the subsidised economic activities in the internal market.
In that respect, the Regulation lists several types of foreign subsidies which are most likely to distort competition in the internal market. This includes (i) foreign subsidies granted to ailing undertakings, (ii) foreign subsidies in the form of an unlimited guarantee for the debts or liabilities of the undertaking, (iii) export financing measures that are contrary to the OECD Arrangement on officially supported export credits, (iv) foreign subsidies directly facilitating a concentration, and (v) foreign subsidies enabling an undertaking to submit an unduly advantageous tender. As far as these types of foreign subsidies are concerned, it is not necessary for the Commission to make a detailed assessment of the subsidies based on the above.
If the Commission finds that foreign subsidies distort competition in the internal market, the Commission may impose redressive measures on the beneficiary of the subsidies or accept commitments from the beneficiary.
Notification obligation for certain business transactions
The Regulation introduces a notification obligation for certain business transactions. The notification obligation implies that certain business transactions must be notified with and approved by the Commission before completion of the transaction.
Infringement of the notification obligation is subject to a fine. The Commission may impose fines of up to 10% of the aggregate turnover of the undertakings concerned in the previous financial year, if a transaction subject to the notification obligation is not implemented without prior consent.
Business transactions are defined in the same way as in competition law, i.e., it covers transactions where (i) two or several till then independent companies are merged into one undertaking, (ii) one or several persons or undertakings acquire direct or indirect control of the whole or parts of one or several other undertakings, and (iii) a joint venture is created performing on a lasting basis all the functions of an autonomous economic entity.
The notification obligation occurs when the following thresholds are exceeded:
- At least one of the merging undertakings, the acquired undertaking or the joint venture is established in the Union and generates an aggregate turnover in the EU of at least EUR 500 million; and
- The following undertakings have been granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding the merger:
- in the case of an acquisition, the acquirer or acquirers and the acquired undertaking;
- in the case of a merger, the merging undertakings;
- in the case of a joint venture, the undertakings creating the joint venture and the joint venture.
However, the Commission may also request notification of business transactions where the thresholds have not been exceeded if the transaction has not been implemented yet, and the Commission suspects that foreign subsidies may have been granted to the undertakings concerned in the three years prior to the transaction.
The deadlines for the Commission's assessment of notified business transactions correspond to the merger control deadlines. From receipt of a complete notification, the Commission has 25 working days to perform a preliminary assessment of the notified transaction. If the Commission before expiry of the deadline of 25 working days finds that additional investigations are required, the Commission may initiate an in-depth investigation. From the initiation of an in-depth investigation, the Commission has 90 working days to assess the transaction. However, this period may be extended by 15 working days if the undertakings concerned offer commitments. In addition, the Commission may extend the period by another 25 workings days in agreement with the undertakings concerned.
If the Commission finds that the foreign subsidies distort competition in the internal market, and the balancing test shows that the negative effects are not outweighed by positive effects, the Commission may impose redressive measures (structural or behavioural), accept commitments from the beneficiary undertaking, or – if the competition distortion cannot be remedied at all – prohibit the transaction.
Notification in connection with public procurement procedures
The Regulation further introduces a notification obligation in connection with certain public procurement procedures. The notification obligation implies that financial contributions from third countries in connection with public procurements must be notified to and approved by the Commission before a contract is awarded.
Infringement of the notification obligation is subject to a fine. The Commission may impose fines of up to 10% of the aggregate turnover of the economic operators concerned in the previous financial year, if a financial contribution is not notified.
A notifiable financial contribution in connection with a public procurement is deemed to arise where the following thresholds are exceeded:
- The estimated value of the public procurement calculated in accordance with the calculation of the contractual value according to the EU procurement rules is equal to or greater than EUR 250 million.
- The economic operator, including its main subcontractors and suppliers involved in the same tender, has been granted aggregate financial contributions from third countries in the last three years equal to or greater than EUR 4 million per third country.
Where the contracting authority decides to divide the procurement into lots, it is also a condition that the value of the lot or lots for which the economic operator submits an offer is equal to or greater than EUR 125 million.
If the conditions for a notification are fulfilled, the economic operator must notify all financial contributions received within the last three years to the contracting authorities, who will then submit the notification to the Commission. If the conditions for notification are not fulfilled, the economic operator must provide a statement to the contracting authority that it has not received any notifiable financial contributions.
In public procurements, the notification must be submitted together with the offer, while it must be submitted both together with the application for prequalification and the offer in restricted procedures and other two-phase procurement procedures.
Following receipt if the notification, the Commission initiates a preliminary review of the notification. Where the Commission finds that the notification is incomplete, the Commission requests that the economic operator complete the notification within 10 working days. If the economic operator does not complete the notification within this deadline, the Commission adopts a decision declaring the economic operator's offer non-compliant with the consequence that the contracting authority must reject the offer.
When the Commission has received complete notification, the Commission has 20 working days to assess the financial contributions. In duly justified cases, the Commission may extend the dealine by 10 working days. If the Commission before the end of the 20/30 working days finds that additional investigations are required, they may initiate an in-depth investigation. In that case, the Commission has 110 working days calculated from the receipt of the complete notification to carry out an in-depth investigation. In duly justified cases, the Commission may extend the time limit by 20 working days.
During the Commission's investigations, all procedural steps in the public procurement process may continue, except for the award of the contract, which has to await the Commission's investigation.
If the Commission finds that the foreign subsidies distort competition in the internal market, and the balancing test shows that the negative effects are not outweighed by positive effects, the Commission may accept commitments from the economic operator, or – if the competition distortion cannot be remedied at all – prohibit that the economic operator is awarded the contract.
"Own initiative" investigations
Finally, the Regulation empowers the Commission to investigate at its own initiative in other situations where foreign subsidies occur which may potentially distort competition in the internal market.
If, based on the preliminary review, the Commission finds sufficient indications that an undertaking has received foreign subsidies distorting competition in the internal market, the Commission may decide to launch an in-depth investigation. If, following an in-depth investigation, the Commission finds that foreign subsidies do not distort competition in the internal market, the Commission makes a decision not to raise an objection. Conversely, if the Commission finds that foreign subsidies distort competition, the Commission may impose redressive measures on the beneficiary or accept commitments from the beneficiary.
The Commission may also order interim measures where there is a risk of serious and irreparable damage to competition in the internal market. The decision on preliminary measures will apply until the final decision has been made.
Commencement
The regulation will come into force 20 days after publication in the Official Journal of the European Union and will, with a few exceptions, be in force from six months from commencement. Consequently, the Regulation is expected to apply from the summer of 2023.
Practical considerations
The Regulation gives rise to a number of practical considerations, in particular in relation to business transactions and public procurements.
Business transactions
The Regulation will imply more complex transactions processes, as it introduces an additional notification obligation for certain transactions. The Regulation applies next to the merger control rules and the foreign direct investment (FDI) rules. Accordingly, a transaction may in future be notifiable to both (i) the Commission under the Regulation, (ii) the Commission and/or one of several national competition authorities under the merger control rules, and (iii) one or several national authorities under the FDI rules. The Regulation may also entail new considerations in relation to transactions where, for instance, certain acquirers in an auction process must be expected to need approval from the Commission, while it is not the case for others.
Public procurement procedures
The Regulation will also imply larger complexity in public procurements, as it introduces a notification obligation in connection with certain procurement processes. The Regulation will consequently be important to both contracting entities and tenderers. When planning procurements, contracting authorities shall take into consideration any notification procedure, as the contract cannot be awarded to an undertaking which has received foreign subsidies before the Commission's approval is obtained. For tenderers, it is crucial to note whether they have received financial contributions from third countries within the last three years, or if their most important subcontractors or suppliers have.