On 12 July 2023, the new EU Foreign Subsidies Regulation (“FSR”) started applying to all non-EU and EU companies and all sectors of the economy. FSR filled a regulatory gap which existed since 1958. The European Commission (the “Commission”) is vested by FSR with wide investigative and decisional powers to prevent any distortions in the EU internal market caused by “foreign subsidies” (“FS”) granted by non-EU countries.

An FS is deemed to exist where a non-EU country provides, directly or indirectly, a “foreign financial contribution” (“FFC”), which is limited to one or more companies or industries and which confers a benefit (i.e., anything not obtained under normal market conditions) to a company engaging in an economic activity in the EU. The concept of FFC covers a broad range of measures, which include, inter alia: the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling; the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or the provision of goods or services or the purchase of goods or services.

Until now, no EU instruments addressed distortions caused by FS. Current EU trade defence instruments are limited to subsidised goods imported into the EU (in line with the WTO Agreement on Subsidies and Countervailing Measures) and cannot be used against FS in the form of subsidised investments, services or financial flows.

The FSR addresses distortions in the EU internal market caused by FS through two tools:

• as of 12 July 2023, the Commission can investigate any FFCs granted to any companies active in the EU; and

• as of 12 October 2023, all companies must notify FFCs when involved in certain concentrations and Member States public procurement proceedings.

Ex officio investigations

The Commission can start investigations on its own initiative (ex officio) if it suspects that distortive FS may be involved. The Commission may examine information coming from any sources (Member States, third countries, natural or legal persons, associations) regarding alleged distortive subsidies. Although the FSR does not establish any formal complaint mechanism, the Commission welcomes all informal contacts reporting indicia of distortive FS.

The Commission has no time limit for such an investigation, although it will endeavour to close an in-depth investigation and adopt a decision within 18 months from its opening. If the Commission concludes that an FS distorts the EU internal market, companies may offer binding commitments to remedy any distortion or, if not sufficient, the Commission may impose redressive measures which can include structural and non-structural remedies. The Commission may review concentrations that have already been implemented or public procurement contracts already awarded (this includes transactions or contracts concluded on or after 12 July 2023 and not implemented yet by 12 October 2023). The Commission can go as far as to order the companies to dissolve the concentration that has already been implemented. On the other hand, it cannot cancel a decision awarding a contract or order the termination of a contract.

The Commission may also request ad hoc FSR notifications from companies below the relevant notification thresholds for concentrations and public procurement procedures (see below), if it considers that a review is needed given its impact in the EU.

Mandatory notifications

As of 12 October 2023, companies are obliged to notify concentrations and participation in public procurement procedures involving FFCs by a non-EU country granted in the three years prior (i) to the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest (concentration), or the notification (public procurement).

FSR defines a category of FFCs that entail a special risk to distort competition (“most likely to be distortive”), such as 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. All FFCs falling in this category will require more detailed information to be provided in the notification form (amounts, rationale, granting entity, conditions attached, benefits granted).

Concentrations – merging parties or parties acquiring control must notify concentrations where:

• one of the merging parties, the acquired undertaking (i.e., the target) or the joint venture (“JV”^[1]) is established in the EU and generates an EU turnover ≥€500 million

and

• the combined FFCs involved (i.e., merging undertakings, acquirer + target or undertakings creating a JV + JV, respectively) > €50 million in the previous 3 years.^[2]

Public procurement – companies participating in public procurement procedures, economic operators, groups of economic operators, main subcontractors and main suppliers must notify FFCs if:

• the estimated contract value ≥€250 million

and

• the aggregate FFCs involved (granted to the economic operator, including its subsidiaries without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers) ≥€4 million per non-EU country in the previous 3 years.^[3]

This mandatory notification is suspensory: the concentration cannot close and the procurement contract cannot be awarded before the Commission’s decision. The procedure for concentrations will take 25 working days once the notification is complete (preliminary review) and 90 working days if an in-depth investigation is open (extendable). After the in-depth investigation, the Commission adopts a decision with commitments, a no objection decision or a prohibiting decision. The procedure for public procurement procedures will take 20 working days once the notification is complete (preliminary review, extendable by 10 working days) and 110 working days in case of an in-depth investigation (extendable by 20 working days). During the preliminary review and the in-depth investigation, all procedural steps in the public procurement procedure may continue, except for the award of the contract. After the in-depth investigation, the Commission adopts a no objection decision, a decision accepting the commitments, or a decision prohibiting the award of the contract.

Fines

Failure to notify or to comply with a Commission’s decision may trigger a fine of up to 10% of the company’s annual aggregated turnover or periodic penalty payments up to 5% in the previous financial year. Similarly, failure to cooperate or providing incomplete, incorrect or misleading information may lead to a fine of up 1% of the company’s aggregate turnover or periodic penalty payments up to 5% of the average daily aggregate turnover in the previous financial year.

Takeaways

All companies with activities in the EU are encouraged to optimise compliance and set up specific internal mechanisms to ensure that all the relevant information regarding FFCs is rapidly available, especially where companies foresee a concentration or participation in a public procurement in the EU that may reach the notification thresholds.

As the concept of FFC is very broad, companies must keep track of measures provided by non-EU countries (from their authorities or from entities, public or private, whose actions can be attributed to a third country) such as:

• transfer of funds or liabilities, capital injections, grants, loans, loan guarantees, fiscal incentives;

• setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling, any foregoing of revenue that is otherwise due (tax exemptions or the granting of special or exclusive rights without adequate remuneration);

• the provision of goods or services or the purchase of goods or services.

FOOTNOTES

[1] When creating a new JV (greenfield JV), as it cannot have any turnover of its own, this threshold is not met. However, a JV may have turnover of its own when it is created through the change from sole to joint control of a pre-existing company. This is the turnover that is considered (and not that of the initial controlling shareholder).

[2] Once the aggregate amount of FFCs >€50 million (notification threshold), the degree of details to be provided depends on the type of FFC received: (i) detailed information about FFCs “most likely to distort” and ≥€1 million over 3 previous years; (ii) only the list of all other FFCs ≥€1 million and of aggregate amount per non-EU country ≥€45 million over 3 previous years.

The following FFCs are exempted from any reporting obligation: tax or social contribution deferrals, tax amnesties and holidays, unless they are limited to certain sectors, regions or undertakings; tax reliefs for avoiding double taxation; provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business; individual FFCs

[3] Once the aggregate amount of FFC >€4 million (notification threshold), the degree of details to be provided depends on the type of FFC received: (i) detailed information about FFC “most likely to distort” and ≥€1 million over 3 previous years; (ii) only the list of all other FFC ≥€1 million and of aggregate amount per non-EU country ≥€4 million over 3 previous years.

The following FFCs are exempted from any reporting obligation: tax or social contribution deferrals, tax amnesties and holidays, unless they are limited to certain sectors, regions or undertakings; tax reliefs for avoiding double taxation; provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business; individual FFCs