Foreign subsidies under EU control

Nevertheless, the EU system has been criticised for not being able to sufficiently target vital security interests and financial advantages granted to companies by non-EU governments. To some extent, financial distortions are curbed by trade law, but this only applies in the case of subsidised overseas imports entering the EU market.< ahref="#section1">[1] Mergers, acquisitions and public contracts granted to beneficiaries of non-EU funds, however, remain unscrutinised.

In order to increase scrutinisation of transactions with the involvement of non-EU companies, some Member States have adopted foreign direct investment screening laws. During the COVID-19 pandemic, indeed, we witnessed the blossoming of foreign direct investment (“FDI”) screening mechanisms in EU Member States. Although the EU adopted a regulation dedicated to FDI screening,[2] the power to block problematic non-EU investments did not shift from the national level to Brussels. This EU law creates a system of communication between member states and the Commission, where the Commission is allowed to issue opinions on FDIs reviewed at the national level on grounds of security or public order.

Regulation 2022/2560[3] (the “Regulation”), which entered into force on 12 January 2023 targets the beneficiaries of foreign support including contractors organising bidding processes. This is a further step in the EU to scrutinize and act against alleged unfair practices by non-EU actors.

Who and what will be caught by the new provisions?

The substantive and procedural provisions of the Regulation are based on solutions that are well-known in competition law (antitrust, merger control and State aid) as well as trade law, in particular the EU anti-subsidy rules. As in these regimes, the new provisions will be mainly enforced by the European Commission.

In fact, the notion of foreign subsidy encompasses not only financial contributions to a company, but also relaxations of certain public obligations, e.g. tax or social contribution deferrals. It can also include the provision/purchase of goods or services. The general de minimis exemption assumes that certain smaller foreign subsidies are not distortive and are therefore admissible.

As to the origin of foreign subsidies, the Regulation follows State aid concepts, and includes both public and private entities “whose actions can be attributed to the third country, taking into account all relevant circumstances”.

The transactions exceeding statutory thresholds will be notifiable…

The new Regulation introduces two notification-based tools, namely:

a) Concentrations – the notion of concentration is similar to that in the EU merger control system. It includes mergers, acquisitions, and the creation of certain joint ventures. A transaction will be notifiable if one merging party’s, the target’s or the joint-venture’s annual EU-wide turnover exceeds EUR 500 million and its non-EU financial contribution exceeds EUR 50 million (calculated for a 3-year period);

b) Public procurements – the foreign financial contribution in a public procurement will be notifiable if: (i) the value of the contract exceeds EUR 250 million; and (ii) the sum of financial contributions received within a 3-year period by the participating company exceeds EUR 4 million (per non-EU state).

Once these thresholds are exceeded, notification will be mandatory after 12 October 2023.

… but those of lower value can be investigated as well

Apart from the notification-based instruments, from 12 July 2023 the Commission will gain the power to investigate any “alleged foreign subsidies distorting the internal market”. This will allow it to intervene in cases of concentrations and public procurement below the notification thresholds, as well as in other situations, such as greenfield investments. The Commission will be able to analyse subsidies granted as far back as 10 years from the moment of investigation, but no earlier than 12 July 2018 (5 years before the Regulation starts to apply).

Procedural déjà-vu

Under the new Regulation, the procedural powers of the Commission will largely mirror those we know from the competition law toolbox. Depending on the circumstances, the Commission will be able to prohibit a company from being subsidised, demand that such subsidisation be rectified, or demand that a subsidy that has already been received be reimbursed. Non-compliance with a Commission’s decision may result in a fine.

As far as ex-officio investigations are concerned, the Commission will have quite important investigative powers to conduct inspections both within the EU and abroad. Entities located in the EU will be legally bound to submit to inspections, and non-compliance will be sanctionable with fines. Out-of-EU inspections will be voluntary, but a refusal to submit to one could result in the non-cooperating party being treated unfavourably.

Details under construction

Given that the notification-based tools are inspired by the EU merger control system, the notifications of subsidised concentrations and public procurements will be made on forms inspired by the Form CO (annex to the Merger Implementing Regulation).[4] In that regard, the accompanying implementing regulation is announced to be adopted in October 2023, when such notifications become mandatory.

The European Commission is currently consulting on that draft regulation – which includes draft notification forms (for concentrations and public procurements respectively). Apart from the detailed content of the notification forms, the draft regulation will provide a legal framework for the Commission’s investigative powers, including conducting interviews and collecting oral statements during inspections, or collecting information from third parties such as contracting authorities and contracting entities in public procurements. The draft also aims to regulate the procedure for submitting and reviewing commitments and redressive measures. Last, but not least, the implementing regulation will lay down the rules of handling documents and case files, as well as the procedural rights of third parties.

The Regulation is certainly a further reinforcement of the Commission’s policy to defend the European Union against unfair competition by non-EU countries in whatever way. It does lead to further administrative requirements for businesses and adds another set of rules to the checklist of in-house counsel in deals, public procurement situations or any other type of foreign subsidy relevant to its organisation.

For more information please contact Szymon Golebiowski or Hein Hobbelen.

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[1] Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union (OJ L 176, 30.6.2016, pp. 55–91 with amendments).

[2] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (OJ L 79I , 21.3.2019, pp. 1–14 with amendments).

[3] Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (OJ L 330, 23.12.2022, pp. 1–45).

[4] Commission Regulation (EC) No 802/2004 of 7 April 2004 implementing Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (OJ L 133, 30.4.2004, pp. 1–39).