Impact of the Foreign Subsidies Regulation 25. August 2023

The Regulation on foreign subsidies distorting the internal market (2022/2560/EU) has been in force since 12 January 2023. Since 12 July 2023, it also directly affects companies.

To whom does the regulation apply and what does it specifically regulate? We have taken a closer look at the current effects on companies and its impact.

The Foreign Subsidies Regulation (the FSR) aims to close the regulatory gap linked to foreign subsidies and the resulting distortions in the European internal market (the Internal Market). Consequently the FSR shall further ensure fair conditions of competition within the EU.

The FSR has been effective since 12 January 2023. Thus, companies have an increased need for actions – especially in M&A transactions and in public procurement procedures. Notification obligations for companies will become effective as of 12 October 2023.

What is a foreign subsidy?

A foreign subsidy is deemed to exist where a company engaging in activities in the Internal Market receives a direct or indirect financial contribution from a third country, thereby conferring the company with a competition-distorting benefit. Furthermore, such a subsidy has to be legally or factually limited to one or more companies or industries.

The term financial contribution is broadly defined. On the one hand, it includes capital injections, loans, loan guarantees, but also the provision of goods or services as well as the foregoing of revenue that is otherwise due (such as tax exemptions, debt forgiveness, granting of special or exclusive rights without adequate remuneration).

To be relevant in the context of the FSR, the financial contribution has to be provided directly by a state (e.g. the central government or public authorities), by a foreign public entity or by a private entity whose actions can be attributed to the third country (e.g., state-owned enterprises). Note for completeness that the definition of third countries also includes all non-EU EEA and EFTA countries.

Further, the financial contribution must actually or potentially negatively affect competition in the Internal Market. In concrete terms, this means that the foreign subsidy must be capable of improving the competitive position of a company within the Internal Market.

Whether a foreign subsidy ultimately distorts the Internal Market is in principle a case-by-case decision based on specific indicators. The FSR (in Article 5 FSR) provides for several categories of foreign subsidies that are most likely to distort the Internal Market (e.g., subsidies to ailing companies, unlimited guarantees for debts or liabilities, subsidies directly facilitating a concentration).

Competences of the European Commission

To ensure compliance with the FSR, the European Commission (EC) has been given the following wide-ranging powers:

  1. Ex officio review of foreign subsidies;
  2. Review of notifiable concentrations (M&A transactions);
  3. Review of notifiable participation in public procurement procedures.
  1. Ex officio review by the European Commission
    As of 12 July 2023, the provisions on the ex officio review of foreign subsidies by the EC are fully applicable. The EC is empowered to investigate, on its own initiative, whether foreign subsidies are distorting the internal market. The EC does not have to be exclusively “investigative” itself. Also Member States, or any natural and legal persons, and associations (especially co-competitors are no be noted in this regard) may serve as information providers.If the EC conducts an ex officio review, it proceeds according to a defined procedure: (1) preliminary review, (2) in-depth investigation, (3) commitments, (4) redressive measures. Commitments and redressive measures include refraining from certain investments, repayment of the foreign subsidy or reduction of market presence. In addition, interim measures can also be imposed in certain situations.

    The companies concerned, but also other companies or associations of companies as well as third countries are subject to certain obligations to provide information in the review procedure. Non-compliance may result in fines and periodic penalty payments.

    We recommend companies to be proactive and to analyse their existing business models, business practices as well as new business initiatives for possible foreign subsidies (direct or indirect), foreign (non-EU) participations or other foreign influence in order to be able to identify potential risks in this context at an early stage and, in the best case, to avoid or at least minimize them.

  2. M&A transactions requiring notification
    The EC has the responsibility to review certain notifiable concentrations in the light of the FSR and, if necessary, to prohibit or attach certain commitments to such transactions. The notification requirement for companies starts only on 12 October 2023.However, it should be noted that also any M&A transaction which has been concluded on or after 12 July 2023 but which is not going to be closed by 12 October 2023 will be subject to the notification obligation (thus: signing as of 12 July 2023 and closing after 12 October 2023[1]).

    The notification obligation for companies is triggered if the acquired company or one of the merging companies has an aggregate turnover of EUR 500 million in the EU and one of the companies involved in the transaction has received a financial contribution from third countries of EUR 50 million within the last three years.

    Further, it is important to note that the notification must be made prior to the completion of the transaction and the merger or acquisition may not be completed until the transaction has been cleared by the EC. Also, the EC may impose fines and periodic penalty payments in the event of non-compliance with the requirements of the FSR.

  3. Participations in public procurement procedures requiring notification
    In the context of public procurement procedures initiated on or after 12 July 2023, the EC has also the responsibility to examine and, in the event of the discovery of competition-distorting subsidies from third countries, to either prohibit the award of the contract (conclusion of the contract) or to make it subject to certain commitments.In public procurement procedures, the notification obligation is triggered if the estimated contract value exceeds EUR 250 million and the economic operator has received financial contributions totalling at least EUR 4 million per third country in the three years prior to the notification. In this context the term “financial contribution” also includes the provision and purchase of goods and services.

    Provided that the thresholds for public procurement procedures are not exceeded by the foreign subsidies, no notification, but a corresponding declaration is required.  Notifications and declarations must be made to the contracting authority during the bidding process, which forwards them to the EC.

    Until the notification has been cleared, the contract may not be awarded to a company that has received foreign subsidies.

    Similarly, to M&A transactions, the notification requirement applies to companies as of 12 October 2023. In the event of non-compliance with the requirements of the FSR, the EC may impose fines and periodic penalty payments.

Implementing regulation

On 10 July 2023, the EC also issued the implementing regulation for the FSR. This regulation (2023/1441/EU) defines further procedures for the application of the FSR. In particular, it provides a better picture of what information is required for notifications. Annex 1 and 2 of the regulation contain forms for (i) notification of a concentrations pursuant to the FSR and (ii) notification of financial contributions in the context of public procurement procedures pursuant to the FSR.

Conclusion and outlook

It seems that the EC is getting ready for the investigation of significant foreign subsidies and is equipped to prevent and/or sanction any distorting effects on competition in the Internal Market. Thus, companies are now also in demand: analysis if a business case is affected by the FSR and preparation of activities for any contact points with the FSR should be proactively undertaken.

[1] https://competition-policy.ec.europa.eu/foreign-subsidies-regulation/questions-and-answers_en

About the authors:
Wolfgang Guggenberger Wolfgang Guggenberger is a senior associate at PHH Rechtsanwält:innen and specializes in corporate and business law.
Theresa Karall is an associate at PHH Rechtsanwält:innen and specializes in public commercial law.