New EU Foreign Subsidies Regulation: extensive powers of intervention for the European Commission
International trade and investment are pillars of the global economy and enable companies to distribute their products and services worldwide.
So far, the only means for addressing distortions of competition in the EU caused by foreign subsidies are anti-subsidy duties. In many cases, however, this instrument does not go far enough. For this reason, the EU has decided to develop and enact a new instrument, which is unique in the world so far, the EU Foreign Subsidies Regulation (EU-FSR).
What is the EU Foreign Subsidies Regulation?
The EU Foreign Subsidies Regulation is an EU regulation that aims to ensure fair conditions of competition in the EU. It entered into force on 12 January 2023 and took effect on 12 July 2023, certain notification obligations apply from 12 October 2023. The regulation allows the European Commission (“Commission”) to comprehensively review foreign (non-EU) subsidies that may have an impact on competition in the EU and enables the Commission to impose very broad remedies.
In addition, it contains extensive notification requirements for companies wishing to carry out transactions or participate in public tenders in the EU from 12 October 2023. In order to complete a required notification, companies worldwide will have to provide detailed data on the financial contributions received from non-EU Member States, globally. As of today, most companies do not have such data readily available. It cannot be pulled in a quick and comprehensive manner through existing systems. This means, identifying and aggregating the data can require considerable time and resources. It will be difficult to assemble the required data within the time constraints of a typical deal or bid process. Companies are well advised to address this issue early to ensure deal readiness.
Scope and Application
The EU foreign subsidies regulation applies to all economic activities within the European Union and imposes notification obligations for certain mergers and public procurement procedures.
Powers of the European Commission
The Regulation grants the European Commission extensive powers of investigation to obtain the necessary information and identify distortions of competition caused by subsidies from third countries. The Commission can issue requests for information to companies, conduct market investigations and carry out inspections in the EU, as well as outside of the EU if it receives permission from the respective third country. It can also use market information provided by companies, Member States, and other interested parties.
The four instruments of the Commission
The Regulation provides for four key instruments that can be used by the Commission:
Companies may only complete notifiable transactions if they have been notified to and approved by the Commission. Notifiable transactions are mergers, the acquisition of a majority or controlling interest and the formation of a full-function joint venture. A transaction is notifiable if at least one of the merging companies, the acquired company or the joint venture is established in the Union and has a total turnover in the EU of at least EUR 500 million. In addition, the parties (including the buyer), in the aggregate, must have received more than EUR 50 million in financial contributions from third countries in the last three years. Only foreign subsidies granted in the three years preceding the conclusion of the agreement, the publication of the takeover bid or the acquisition of a controlling interest shall be taken into account in the assessment. The substantive assessment is limited to evaluating whether foreign subsidies have an impact on the relevant transaction.
Companies must notify their participation in public procurement procedures to the Commission if the estimated value of the contract is at least EUR 250 million (or EUR 125 million if divided in lots) and the foreign financial contribution per third country is EUR 4 million or more. In such procedures, the Commission may prohibit the award of the contract to undertakings receiving subsidies that distort the internal market. Foreign subsidies which distort or threaten to distort a public procurement procedure shall be understood as foreign subsidies which enable an economic operator to submit an unjustifiably cheap tender. The substantive assessment is limited to evaluating whether foreign subsidies allow the bidder to offer uncompetitively cheap prices.
The Commission may, on its own initiative, examine information from any source on alleged foreign subsidies distorting the internal market. Relevant are all financial contributions of up to 10 years (but no earlier than 12 July 2018) that distort the internal market after 12 July 2023. Typically, there is no distortion if less than EUR 4 million was granted within 3 years or if the conditions for de minimis subsidies are met.
In the course of market investigations, the Commission may examine entire sectors for foreign subsidies. For this purpose, the Commission may require companies in the particular sector to supply the necessary information and may carry out the necessary inspections. In addition, the Commission may also request Member States or the third country concerned to supply information. As a result of the investigation, the Commission publishes a report a report on the results of its market investigations. The information obtained from such market investigations may be used in the framework of individual procedures.
Sanctions and remedies
Notified transactions may not be implemented until approved by the Commission (stand-still obligation). In public procurement processes, which exceed the notification thresholds, a contract cannot be awarded until the Commission has cleared relevant bidders. A violation of these rules can lead to significant fines, up to 10% of the total annual turnover of the company concerned. In addition, the Commission can prohibit the implementation of a transaction or annul the award of a public contract to a bidder if it finds that the relevant party benefited from subsidies that affected the transaction or its bid.
Standard of Review
When assessing whether a foreign subsidy distorts competition in the common market, the Commission balances the negative effects of the relevant subsidies against the positive effects in terms of the development of the subsidized economic activity and can take remedial action if a distortion of the internal market is found. As noted above, in merger reviews, the Commission focuses solely on effects of foreign subsidies in the context of a particular transaction. In public procurement processes, the focus is on whether foreign subsides enable the bidder to offer uncompetitively cheap prices.
Possible remedies are:
- In merger and public procurement reviews companies can offer commitments but are not required to do so. However, the Commission may prohibit transactions or disqualify a bidder. In ex-officio proceedings, the Commission may impose remedies without the consent of the undertakings (Art. 11 (2)). These must be proportionate.
- Explicitly mentioned examples:
- Granting access to infrastructure
- Reducing capacity or market presence, if necessary by temporarily restricting business activities
- Forgoing certain investments
- Licensing on fair, reasonable and non-discriminatory terms and conditions
- Publication of the results of research and development
- Disposal of certain assets
- Order to reverse the merger
- Repayment of the foreign subsidy, including an appropriate interest
- Order to adjust governance structure.
- In addition: Possibility to set further obligation to provide information on mergers or award procedures (Art. 8).
Need for action for companies
What do companies need to do now? First of all, companies which plan transactions or the participation in public procurement processes in the EU or the EU Member States should start gathering the foreign financial contributions data. In the case of planned transactions, companies must check whether a notification obligation exists and, if so, allow sufficient time to comply with it. The same applies if a company intends to participate in relevant public procurement procedures. Moreover, companies may want to monitor the investigation activity of the Commission for relevance to their business activities.
- Three buckets: grants/loans, tax and commercial contracts
- Prioritize relevant countries, use safe harbours
- Use existing reporting lines (tax, DAC 6, accounting, etc.), use/adapt IT tools
- Consider deal readiness, if relevant transactions cannot be excluded
- Assess whether financial contributions impact the transactions
- Examine whether relevant for the company? Adaptation of existing processes
- Assess whether financial contributions impact a particular bid
- Brief board on risk of ex officio notification in particular in big projects
- Monitor EU Commission investigations in your sector, or relating to measures that your company benefited from (e.g. Inflation Reduction Act)
To avoid possible sanctions, companies should inform themselves in good time about their obligations in connection with mergers and public procurement procedures.
How PwC Legal can support companies
PwC coordinates the planning and collection of all relevant information across the group and helps set up the necessary business processes.
We offer an experienced, multidisciplinary team with expertise in all relevant areas. This includes specialists in the EU FSR process, forensics/accounting, tax law and state aid law. In addition, we bring in business process specialists to ensure that necessary new business processes can be meaningfully anchored in your company. Of course, all our experts work with the latest technologies to create lean and reliable processes.