New regulation on foreign subsidies

Background

On 5 May 2021, the European Commission (the "Commission") submitted a proposal for a new regulation on foreign subsidies which distort competition in the internal market (the "Regulation"). 

The rationale behind the Regulation is the current regulatory distinction between subsidies received from other EU Member States and those 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 lead to a distortion of competition within the internal market. This may occur, for example, in connection with business transactions that are wholly or partially financed by foreign subsidies, or in the awarding of public contracts to undertakings that receive such foreign subsidies.

Consequently, the purpose of the Regulation is to close this regulatory gap by providing the Commission with a range of tools to address foreign subsidies which may distort competition within the internal market.

General comments

The Commission will be provided with three new tools to address foreign subsidies which may distort competition within the internal market:

• An obligation to notify the Commission of business transactions exceeding certain thresholds.
• An obligation to notify the Commission in connection with public procurements exceeding certain thresholds.
• The power of the Commission to investigate on its own initiative other situations involving foreign subsidies.

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, four cumulative conditions must be met (i) there must be 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 more undertakings or industries.

The Regulation sets out 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 offsetting of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt/equity swaps, and debt rescheduling. It also includes the foregoing of revenue 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 or purchase of goods or services.

The financial contribution must have been provided by a third country. This includes both financial contributions granted by central governments and public authorities as wells as by public and private undertakings, where their actions can be attributed to a third country.

The financial contribution must confer a benefit on one or more undertakings engaged in economic activities within the internal market. A financial contribution is deemed to confer a benefit if it could not have been obtained under normal market conditions. It must also be granted selectively to the relevant undertaking(s) or industries.

Assessment of foreign subsidies

Unlike state aid granted by an EU Member State, foreign subsidies are not, as a rule, prohibited. The Commission must determine on a case-by-case basis whether the foreign subsidy distorts competition within the internal market.

A distortion of competition within 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, in doing so, actually or potentially has a negative effect on competition.

The Regulation sets out a non-exhaustive list of factors to be considered when assessing whether a distortion of competition exists. These include the size and nature of the foreign subsidies, the situation of the relevant undertaking, the level and development of the undertaking's economic activity within the internal market,  the purpose of the subsidies, any conditions attached to them, and their use within the internal market.

The Regulation establishes a presumption that foreign subsidies are unlikely to distort competition within the internal market if the total amount received by an undertaking does not exceed EUR 4 million over a consecutive period of three years. In addition, foreign subsidies are generally not considered to distort competition within the internal market if their total amount falls below the de minimis threshold pursuant to EU state aid rules, namely, EUR 200,000 per third country over a consecutive three-year period.

In other situations, the Commission must conduct a so-called "balancing test", i.e., it must weigh the negative effects of the foreign subsidies in the form of a distortion of competition within the internal market against their positive effects on the development of the subsidised economic activities within the internal market. 

In this context, the Regulation identifies several types of foreign subsidies which are most likely to distort competition within the internal market. These include (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.  For these types of foreign subsidies, the Commission is not required to carry out a detailed assessment based on the general balancing test outlined above.

If the Commission finds that foreign subsidies distort competition within the internal market, the Commission may impose redressive measures on the beneficiary or accept commitments offered by the beneficiary.

Notification obligation for certain business transactions

The Regulation introduces a notification obligation for certain business transactions. This obligation implies that such transactions must be notified with, and approved by, the Commission prior to completion of the transaction.

Failure to comply with the notification obligation may result in a fine. The Commission may impose fines of up to 10% of the aggregate turnover of the undertakings concerned in the preceding financial year if a transaction is implemented without prior approval. 

Business transactions are defined in the same manner as in competition law. This includes transactions where (i) two or more previously independent companies are merged into a single undertaking, (ii) one or more persons or undertakings acquire direct or indirect control of the whole or parts of one or more other undertakings, and (iii) a joint venture is established, which, on a lasting basis, performs all the functions of an autonomous economic entity.

The notification obligation arises 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 of at least EUR 500 million within the EU; and
• The undertakings involved have received financial contributions, either separately or in combination, exceeding EUR 50 million from third countries in the three financial years preceding the transaction, as follows:
   
  • In the case of an acquisition: the acquirer(s) 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 itself.

However, the Commission may also request notification of business transactions that do not meet the thresholds, provided that the transaction has not yet been implemented and the Commission suspects that foreign subsidies may have been granted to the undertakings concerned within the three years preceding the transaction.

The deadlines for the Commission's assessment of notified business transactions align with those applicable under EU merger control. From the receipt of a complete notification, the Commission has 25 working days to carry out a preliminary assessment of the notified transaction. If, before the expiry of this period, the Commission determines that further investigation is necessary, it may initiate an in-depth investigation. From the date of this initiation of an in-depth investigation, the Commission has 90 working days to complete its assessment. However, this period may be extended by 15 working days if the undertakings concerned offer commitments. In addition, the Commission may further extend the deadline by another 25 workings days in agreement with the undertakings concerned.  

If the Commission finds that the foreign subsidies distort competition within the internal market, and the balancing test indicates that the negative effects are not outweighed by any positive effects, it may impose redressive measures (either structural or behavioural), accept commitments from the beneficiary undertaking, or – where the distortion of competition cannot be remedied – 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.  

Failure to comply with the notification obligation is subject to a fine. The Commission may impose fines of up to 10% of the total aggregate turnover of the economic operators concerned in the preceding financial year. 

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 according to the EU procurement rules, is equal to or exceeds 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 exceeding 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 combined lots for which the economic operator submits a tender is equal to or exceeds EUR 125 million.

If the conditions for a notification are met, the economic operator must notify the contracting authority of all financial contributions received within the past three years. The contracting authority will then submit the notification to the Commission. If the conditions for notification are not met, the economic operator must provide a declaration to the contracting authority confirming that it has not received any notifiable financial contributions.

In public procurements, the notification or the declaration must be submitted together with the offer. In restricted procedures and other two-phase procurement procedures, it must be submitted both with the application for prequalification and with the offer.

Following receipt of the notification, the Commission initiates a preliminary review of the notification. If the Commission considers the notification to be incomplete, it will request the economic operator to complete it within 10 working days. If the economic operator fails to do so within this deadline, the Commission will adopt a decision declaring the economic operator's offer non-compliant with the consequence that the contracting authority must reject the offer. 

Once the Commission has received a complete notification, it has 20 working days to assess the financial contributions. In duly justified cases, the Commission may extend this deadline by a further 10 working days. If, before the expiry of the 20/30 period, the Commission finds that further investigations are necessary, it may initiate an in-depth investigation. In such cases, the Commission has 110 working days calculated from the date of receipt of the complete notification to carry out an in-depth investigation. In duly justified cases, the Commission may extend this deadline by an additional 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 must await the outcome of the Commission's investigation.

If the Commission finds that the foreign subsidies distort competition within the internal market, and the balancing test shows that the negative effects are not outweighed by any positive effects, the Commission may accept commitments from the economic operator. If the distortion of competition cannot be remedied at all, the Commission may prohibit the award of the contract to the economic operator.

"Own initiative" investigations

Finally, the Regulation empowers the Commission to initiate investigations on its own initiative in other situations where foreign subsidies may potentially distort competition within the internal market.

If, based on the preliminary review, the Commission finds sufficient indications that an undertaking has received foreign subsidies distorting competition within the internal market, it may decide to initiate an in-depth investigation. If, following an in-depth investigation, the Commission finds that the foreign subsidies do not distort competition, it will issue a decision not to raise objections. Conversely, if the Commission finds that the foreign subsidies distort competition, it may impose redressive measures on the beneficiary or accept commitments from the beneficiary.

The Commission may also impose interim measures where there is a risk of serious and irreparable damage to competition within the internal market. Such measures will apply until a final decision is adopted.

Commencement

The regulation will enter into force 20 days after its publication in the Official Journal of the European Union and, with a few exceptions, will apply from six months after that date. Consequently, the Regulation is expected to apply from the summer of 2023.

Practical considerations

The Regulation gives rise to a number of practical considerations, particularly in relation to business transactions and public procurement procedures.

Business transactions

The Regulation will lead to more complex transactions processes, as it introduces an additional notification obligation for certain transactions. The Regulation applies alongside the merger control rules and the foreign direct investment (FDI) regimes. Accordingly, a transaction may, in future, be notifiable to both (i) the Commission under the Regulation, (ii) the Commission and/or one or more national competition authorities under the merger control rules, and (iii) one or more national authorities under the FDI regimes. The Regulation may also give rise to new considerations in transactions where, for instance, certain acquirers in an auction process may require approval from the Commission, while others may not.

Public procurement procedures

The Regulation will also increase the complexity of public procurement procedures, as it introduces a notification obligation in connection with certain procurement processes. It will therefore be of significance to both contracting entities and tenderers. When planning procurements, contracting authorities must take into account any applicable notification procedure, as a contract cannot be awarded to an undertaking which has received foreign subsidies until approval has been obtained from the Commission. For tenderers, it is essential to determine whether they, or their key subcontractors or suppliers, have received financial contributions from third countries within the past three years.