Questions and Answers: New Regulation to address foreign subsidies distorting the Single Market

Source: EuPC
11 January 2023

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INDEX

Context

Scope of the Regulation

Content of the Regulation

Application

The Global Context

Next Steps

CONTEXT

What is the aim of the Regulation? What issue does it aim to address? Why were the existing tools not sufficient?

The EU relies on a strong, open and competitive Single Market for its prosperity and resilience.

EU competition, public procurement and trade defence rules play an important role in ensuring fair conditions of competition for all companies in the Single Market.

However, the existing tools do not apply to foreign subsidies which provide their recipients with an unfair advantage when acquiring EU companies, participating in EU public procurements or making other investment decisions in the Single Market, leaving a 'regulatory gap'.

In this respect:

  • EU antitrust rules and EU merger control rules do not enable the Commission to specifically take into account whether a company may have benefited from distortive foreign subsidies.
  • EU State aid rules apply only to aid granted by EU Member States. In contrast, subsidies granted by non-EU governments fall outside EU State aid control, even if they have effects on the Single Market.
  • WTO subsidy rules and EU trade defence instruments apply to traded goods, but do not apply when foreign subsidies support investments, mergers and acquisitions, bids in procurement procedures, or when services are concerned.
  • The Foreign Direct Investment (FDI) Regulation aims at tackling threats posed by foreign takeovers and investments to Member States' security and public order.
  • The existing EU Public Procurement framework does not specifically address distortions to the EU procurement markets caused by foreign subsidies.
  • The International Procurement Instrument aims at opening third country public procurement markets to European companies, but does not address subsidised tenders in the EU, which distort the Single Market.

The Foreign Subsidies Regulation aims to address this regulatory gap.

SCOPE OF THE REGULATION

Does the Regulation intend to protect specific sectors or industries?

The aim of the Regulation is to ensure a level playing field across all economic activities in the Single Market with regard to foreign subsidies. It therefore applies equally to all sectors of the economy and all companies active in the EU.

Nevertheless, the Regulation sets out the possibility for the Commission to conduct  market investigations into specific sectors, types of economic activity or foreign subsidy instruments to identify possible distortions and practices that are specific to a given sector, activity or subsidy instrument. 

Does the Regulation target any specific country?

No, the Regulation does not target any particular country. It will apply equally to subsidies granted by all non-EU countries that distort the Single Market.

CONTENT OF THE REGULATION

How will the new instrument work?

The Commission will have the power to investigate financial contributions granted by non-EU authorities to companies active in the EU. If the Commission identifies the existence of foreign subsidies, which distort competition in the EU, it may redress their distortive effects.

In this context, the Regulation introduces three tools, which will be enforced by the Commission:

  • An ex-ante notification obligation  for concentrations where (i) the EU turnover of the company to be acquired, of at least one of the merging parties or of the joint venture is of at least €500 million and (ii) the involved aggregate foreign financial contribution is of at least €50 million;
  • An ex-ante notification obligation for  public procurement procedures, where (i) the estimated contract value is at least €250 million  and (ii) the bid involves a foreign financial contribution of at least €4 million per non-EU country; and
  • For all other market situations, the Commission can start investigations on its own initiative (ex-officio), including the possibility to request ad-hoc notifications for smaller concentrations and public procurement procedures.

With respect to the two notification tools, the acquirer or bidder will have to notify ex-ante financial contributions received from non-EU governments and public authorities in relation to concentrations or public procurements meeting the relevant thresholds. Pending the Commission's review, the concentration in question cannot be completed and the investigated bidder cannot be awarded the public procurement contract (standstill obligation).  

The Commission will also be able to request ad-hoc notifications for concentrations and public procurement procedures below the relevant thresholds, if it suspects that foreign subsidies may have been involved in the transaction and the transaction is not yet concluded. In public procurement procedures, this also applies if the Commission receives new information leading it to suspect that a submitted notification or declaration was incomplete, or where such a notification or declaration is not transferred to the Commission.

Where a company does not comply with the obligation to notify financial contributions in a concentration or a public procurement procedure, the Commission may impose fines of up to 10% of the company's annual aggregated turnover.

The general investigation tool (ex-officio) will allow the Commission to investigate on its own initiative any type of economic activities and market situations, such as greenfield investments or the provision of services, when it suspects that a foreign subsidy may be involved. .

What is the definition of ‘foreign subsidy' for the purposes of the Regulation?

'Foreign subsidy' refers to any financial contribution provided directly or indirectly by a non-EU country,  which is limited to one or more companies or industries and which confers a benefit on a company engaging in an economic activity in the EU.

Foreign subsidies may take the form, for example, of zero-interest loans and other below-cost financing, unlimited guarantees, compensations, export financing not in line with the OECD Arrangement on officially supported export credits, preferential tax treatment, tax credits, or direct grants.

What time limits are set for the Commission's assessment?

The procedure to investigate foreign subsidies will consist of a preliminary review and, if there are sufficient indications of the existence of a foreign subsidy distorting the Single Market, an in-depth investigation.

For concentrations, the Regulation provides for 25 working days for a preliminary review and 90 working days for an in-depth investigation, in line with the time limits set out in the EU Merger Regulation. These time limits may be exceptionally extended.

For public procurement, the time limits are set at 20 working days for the preliminary review, which can be extended by 10 working days in duly justified cases, and 110 working days from the receipt of a complete notification for the in-depth investigation, which can be exceptionally extended by 20 working days. 

Detailed rules concerning the calculation of time limits will be included in the forthcoming Implementing Regulation.

What is the period of retrospective applicability?

For ex-officio review, the Commission can investigate foreign subsidies granted no more than ten years in the past from the moment of the start of the investigation.

However, the Commission will only be able to look at subsidies granted 5 years prior to the start of application of this Regulation when these subsidies distort the Single Market after the start of application.

For notified concentrations and public procurements, companies will have to notify foreign financial contributions granted three years in the past, including where such subsidies were granted prior to the start of application of the Regulation.

The Regulation shall not apply to concentrations concluded and public procurements awarded or initiated prior to its start of application.

How will the assessment be structured?

The Commission will first assess whether a financial contribution by a non-EU government constitutes a foreign subsidy within the meaning of the Regulation and, second, whether it distorts the Single Market.

The Regulation proposes a number of categories and indicators to assess whether foreign subsidies are distortive:

  • Categories of foreign subsidies most likely to be distortive include subsidies to an ailing company without a restructuring plan, unlimited guarantees, export financing not in line with the OECD Arrangement on officially supported export credits, foreign subsidies directly facilitating a concentration or enabling the submission of an unduly advantageous tender.
  • In all other cases, the Commission will consider certain indicators, such as, among others, the amount, nature and purpose of the subsidy as well as the situation of the company and the market concerned, to establish whether there is a distortion.

If the Commission establishes that a foreign subsidy exists and distorts the Single Market, it will balance the negative effects of the foreign subsidy in terms of the distortion of the Single Market with the positive effects of the subsidy on the development of the relevant subsidised economic activity.

When the negative effects outweigh the positive effects, the Commission can impose redressive measures or accept commitments from the companies concerned to remedy the distortion. The Commission will take the outcome of the balancing into account when deciding the appropriate nature and level of the redressive measures or commitments.

What type of redressive measures and commitments does the Regulation provide for?

The Regulation includes a range of structural and non-structural remedies that can be imposed by the Commission or proposed by the company concerned to remedy the distortion. For instance, they may include repayment of the subsidy, divestment of certain assets, reduction of capacity or market presence, offering access to a certain infrastructure or prohibition of a certain market behaviour.

In case of notifiable transactions, the Commission will also be able to prohibit the subsidised concentration or the award of the public procurement contract to the subsidised bidder.

How will the Regulation ensure that the administrative burden on companies is limited?

The Regulation aims at ensuring the efficacy and efficiency of enforcement, while limiting the administrative burden on companies and public authorities. 

This is achieved through:

  • The setting of relatively high thresholds for notification of concentrations and public procurements, in order to focus resources and burdens on the largest and potentially most distortive cases.
  • The general investigation tool, which enables the Commission to review other market situations as well as subsidised concentrations and procurements not meeting the thresholds, allows intervention to be targeted to cases where the Commission suspects that a foreign subsidy and a distortion of the Single Market may be involved.

APPLICATION

Who will be responsible for the enforcement of the Regulation?

The enforcement of the Regulation will lie exclusively with the Commission. However, Member States will be involved in particular through an advisory committee, where Member States' representatives will be consulted on draft decisions under this Regulation before they are adopted.

The Commission may also examine information about alleged foreign subsidies distorting the Single Market provided from any source, including Member States, companies and any natural or legal person or association.

How does the Regulation ensure that the enforcement is effective? What tools will you have to achieve this?

First, if a company does not notify the foreign financial contributions received in the context of a concentration or in a public procurement procedure, meeting the relevant thresholds, the Commission will be able to impose fines of up to 10% of the company's annual aggregated turnover. It will also be able to review the transaction as if it had been notified, with the possibility of prohibiting it.

To effectively collect information, in coherence with EU merger control, the notification system is complemented by deterrent sanctions in case companies intentionally or negligently submit false or misleading information.

In ex-officio cases, the initial information can come from the market, including from Member States, competitors, business associations or other interested parties.

The Commission will also be able to ask companies to supply relevant information and impose fines and penalties if they supply incomplete, incorrect or misleading information or if they do not supply the requested information within the prescribed time. It may also conduct on-site inspections, including in non-EU countries if the country in question does not object to such an inspection.

If, however, it is not possible to gather all the necessary information, the Regulation allows the Commission to decide the case based on the available facts.

THE GLOBAL CONTEXT

How does this fit in the international context?

The Commission remains committed to developing the international framework to ensure a level playing field for EU companies. This is why we continue to strive to address the issue of distortive subsidies through new international rules in parallel. In particular, we have been driving a process to advance this discussion together with the US and Japan.

The Foreign Subsidies Regulation complements these efforts  by closing a gap in our tools to ensure a level playing field in the EU. As a top priority, the Commission continues to work to reform the WTO, including with new rules on industrial subsidies. In addition, we will continue to address distortive subsidies through rules in our bilateral trade agreements.

NEXT STEPS

What are the next steps? When will the Regulation start to apply?

The Foreign Subsidies Regulation will start to apply on 12 July 2023. As of this date, the Commission will be able to launch ex-officio investigations. The notification obligation for companies will apply from 12 October 2023.

The Commission will present a draft Implementing Regulation, which will clarify the applicable rules and procedures, including the notification forms for concentrations and public procurement procedures, the calculation of time limits, access to file procedures and confidentiality of information. The Implementing Regulation and notification forms will be finalized and adopted before the start of application of the FSR.

 

Will the Commission provide any guidance on the new Regulation?

The Commission will publish guidelines on certain key concepts within three years after the entry into force of the FSR, including the criteria for determining a distortion in the Single Market, the balancing test and the criteria to request an ad-hoc notification.

To provide companies with more certainty early on, the Commission has committed to clarify the concepts of a distortion and the balancing test at the latest one year after the start of application.

For more information:

DG Competition website on Foreign Subsidies

Press release: Foreign Subsidies Regulation: rules to ensure fair and open EU markets enter into force

Facts page