On 14 December 2022, the Council of the EU (“Council”) and the European Parliament (“Parliament”) adopted Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (the “Foreign Subsidies Regulation” or “FSR”), which was published in the EU’s Official Journal on 23 December 2022. The FSR gives the European Commission (“Commission”) substantial new powers to investigate “financial contributions” granted by non-EU governments to companies operating in the EU and, where necessary, take measures to redress their distortive effects. Specifically, the Commission will be able to conduct such investigations through three new tools: two notification-based tools to investigate concentrations and bids in public procurements above certain thresholds and a general tool to investigate all other market situations and lower-value mergers and public procurement procedures.
The FSR was proposed by the Commission in May 2021 with the aim of addressing the perceived “regulatory gap” in the EU’s single market, whereby subsidies granted by non-EU governments go largely unchecked, while subsidies granted by Member States are subject to close scrutiny under the EU’s state aid regime. At the time, the EU’s growing concerns about the effects of foreign subsidies had already become apparent in other fields. For instance, the EU has, for several years, been a strong proponent of reforms to the subsidy rules in the World Trade Organization (“WTO”) to make them more effective.[1] Also, in trade defense investigations, the Commission has recently adopted unprecedented approaches to countervailing foreign subsidies. For instance, the Commission has used the EU’s anti-subsidy instrument to countervail a subsidy granted to facilitate the acquisition of an EU company,[2] and it has imposed duties to countervail so-called “transnational” subsidies, i.e., subsidies granted to recipients located in a territory other than that of the granting government, in two investigations.[3] Through these actions, the Commission arguably has already significantly expanded the powers accorded to it under the WTO’s Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) to act against certain kinds of subsidies.
The Commission considers that foreign subsidies have the potential to distort the EU’s internal market and undermine the level playing field by granting their beneficiaries an unfair advantage vis-à-vis EU operators. The risk of such distortions is deemed to be particularly acute when it comes to certain economic activities, concentrations (i.e., mergers, acquisitions, and joint ventures) that are partially or fully financed through foreign subsidies, and subsidised bids in public procurement procedures. In this context, the Commission proposed the introduction of two new tools focusing on procedures for concentrations and public procurement of a certain significance of value, while at the same time reserving the possibility to investigate ex officio all other market situations (including smaller concentrations and procurement procedures).
Interinstitutional negotiations on the Commission’s proposal started in May this year, after the Council and the Parliament each adopted their positions. The text that was formally adopted does not deviate much from the Commission’s original proposal, and it eventually endorsed the notification thresholds that were set forth therein, despite some divergent positions that were expressed during the negotiations.
The following sections outline certain key elements of the new instrument, of which some provisions will start applying on 12 July 2023.
“Foreign Subsidy” and “Financial Contribution”
The purpose of the FSR is to address distortions caused by foreign subsidies, with a view to ensuring a level playing field in the EU market. The Regulation defines a “foreign subsidy” as a situation in which “a third country provides directly or indirectly a financial contribution which confers a benefit to an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries.”[4] This definition closely resembles that of a subsidy in the WTO’s SCM Agreement as well as in the EU’s basic Anti-Subsidy Regulation.[5] Consequently, the Commission’s substantive assessment is likely to closely mirror the assessment it performs in anti-subsidy investigations.
However, the notification obligations for companies, as described below, for mergers and acquisitions transactions and public procurement bids are not triggered by the mere existence of a foreign subsidy, but by the granting of a “financial contribution.” Thus, companies do need to engage in an assessment of whether their transactions with foreign governments may fall under the definition of a “foreign subsidy” under the FSR, but they are required to notify anything that qualifies as a “financial contribution.” This term is defined very broadly in Article 3(2)(a) of the FSR, which does not provide an exhaustive list of what it may encompass. Other than direct grants, various other benefits, such as loans, debt forgiveness, debt to equity swaps, and even the provision or purchase of goods or services, may qualify as “financial contributions.”
Given the broad nature thereof, tracking the provision of financial contributions by foreign governments for the purposes of complying with the FSR is expected to create significant compliance burdens for companies. This is particularly true since, as explained below, the obligation to notify certain transactions under the FSR depends on the reception of such contributions in the aggregate, meaning that smaller contributions by different third country governments could add up to give rise to an obligation to notify.
New Investigation Tools
Under the FSR, the Commission will be empowered to investigate “financial contributions” granted by non-EU governments to companies operating in the EU by means of three new tools:
1. A Notification-Based Tool to Investigate Concentrations
Pursuant to Article 20 of the FSR, companies will be required to notify mergers and acquisitions when:
a) at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and
b) the undertakings involved in the concentration were granted from third countries combined aggregate financial contributions in the three financial years prior to notification of more than EUR 50 million:
Concentrations that meet the above requirements are referred to in the FSR as “notifiable” concentrations. They must be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
Notably, as mentioned above, the requirement for companies to notify these concentrations under the FSR depends on the “aggregate” value of the financial contributions received by all parties to the transaction (i.e., in case of a merger, the merging undertakings; in case of an acquisition, the acquirer(s) and the acquired undertaking). The companies involved will, therefore, need to consider any contributions they receive from foreign governments, irrespective of how small or why they were granted. Of course, the size and nature of their subsidies will eventually be relevant factors for the Commission to assess whether the subsidy is distorting the internal market and needs to be counteracted.
In addition to “notifiable” concentrations falling under Article 20, the Commission may request the prior notification of any other concentration at any time prior to its implementation if the Commission suspects that foreign subsidies may have been granted to the parties involved in the three years prior to the concentration.
2. A Notification-Based Tool to Investigate Bids in Public Procurement Procedures
Pursuant to Article 28 of the FSR, notification for public procurement procedures is required when the following two conditions are met:
a) the estimated total value of the public procurement is equal to or greater than EUR 250 million, and, where the contracting authority decides to divide the procurement into lots, the value of the lot or the aggregate value of all the lots to which the tenderer applies is equal to or greater than EUR 125 million.
b) the economic operator, including its subsidiary companies without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender in the public procurement procedure, was granted aggregate financial contributions equal to or greater than EUR 4 million per third country in the three financial years prior to notification.
Similar to concentrations, financial contributions in public procurement procedures which are not deemed “notifiable” within the meaning of Article 28 may nevertheless be subject to notification upon a request by the Commission, if the Commission suspects that an economic operator may have benefitted from foreign subsidies in the three years prior to the submission of the tender or request to participate in the public procurement procedure.
3. A General Tool to Investigate All Other Market Situations
For all other market situations, including concentrations and public procurement procedures that do not meet the notification thresholds of Articles 20 and 28, the Commission will have the power to launch an ex officio investigation into foreign subsidies received by companies. Such ex officio review is not subject to any pre-conditions and may be initiated upon information from any source regarding alleged distortive foreign subsidies, including information from Member States or any natural, or legal, person or association. The Commission’s powers in this respect are, therefore, very broad, especially considering that the Commission will be able to investigate subsidies granted up to five years before the FSR enters into force (which was reduced in the adopted Regulation from the 10 years originally proposed by the Commission).
Procedure and Assessment by the Commission
Once notified to the Commission, notifiable concentrations are subject to a standstill period during which they cannot be implemented until the Commission decides to not initiate an in-depth investigation into their distortive nature, to not object to the concentration, or decides to allow the concentration subject to certain commitments or redressive measures binding on the company to remedy the distortion. With regards to public procurement procedures, all procedural steps in the public procurement procedure may continue during the Commission’s assessment, except for the award of the contract.
The Commission’s assessment of foreign subsidies, whether pursuant to notification or under the general market tool, comprises of two stages:
1. Preliminary Review
During this stage, the Commission assesses, on a preliminary basis, whether the financial contribution under examination constitutes a foreign subsidy and whether it distorts the internal market. To that end, the Commission may request any information it considers necessary for its review from the undertaking under investigation, other undertakings or associations of undertakings, or even from the third country in question. The Commission may also conduct inspections within and outside the Union. Inspections outside the Union will only be conducted if the government of the third country does not object to the inspection.
Importantly, in cases of non-cooperation by the undertaking in question or the third country that granted the subsidy, the Commission is empowered under the Regulation to make a decision on the basis of the facts available. Specifically, the Commission may do so if the undertaking or third country under investigation:
- fails to provide the information requested by the Commission;
- provides incorrect or incomplete information;
- refuses to accept the Commission’s inspection; or
- otherwise impedes the preliminary review or the in-depth investigation.
Of note, all of the above procedural powers very closely mirror those of the Commission in trade defence investigations, such as anti-subsidy investigations.
The Commission also has the power to impose fines or periodic penalty payments on the undertaking(s) in question in cases of non-cooperation. Moreover, if the undertaking that fails to cooperate is directly or indirectly controlled by the government of the third country in question, that undertaking may be deemed to have received a foreign subsidy.
It will therefore be important for companies whose financial contributions are examined under the FSR to be cooperative and as involved as possible in the Commission’s investigation, given the risk of being fined as well as the Commission adopting a decision based on the facts available, which may be more adverse for the undertaking in question than if it had cooperated.
If, pursuant to the preliminary review, the Commission has sufficient indications that a distortive foreign subsidy may exist, it shall initiate an in-depth investigation, informing the relevant parties and issuing a notice in the EU’s Official Journal. Otherwise, the Commission shall close the preliminary review, after which the transaction or public procurement may be completed.
2. In-Depth Investigation, Remedies, and Fines
During the in-depth investigation, the Commission will further assess the foreign subsidy and will have the same powers to do so as those described above for the preliminary review (i.e. inspections, requests for information, potential ability to rely on the facts available, etc.).
If the Commission determines that the subsidy has distortive effects, it shall balance these with any positive effects of the foreign subsidy. Depending on the outcome of this balancing exercise, the Commission may:
- Accept commitments offered by the undertaking(s) concerned, if it considers that these commitments can effectively remedy the distortion on the internal market. This could entail, for instance, a commitment by the undertaking(s) in question to temporarily restrict its/their commercial activity in the EU market or to refrain from certain investments.
- Impose redressive measures to remedy the distortion in the internal market, which may go as far as requesting the parties in question to dissolve their transaction or to repay the distortive foreign subsidy. Pursuant to Article 7(4) of the FSR, the redressive measures that the Commission may impose may consist, inter alia, of the following:
a) offering access under fair, reasonable, and non-discriminatory conditions to infrastructure, including research facilities, production capabilities or essential facilities, that were acquired using or supported by the foreign subsidies distorting the internal market, unless such access is already provided for by Union legislation;
b) reducing capacity or market presence, including by means of a temporary restriction on commercial activity;
c) refraining from certain investments;
d) the licensing of fair, reasonable, and non-discriminatory terms of assets acquired or developed with the help of foreign subsidies;
e) the publication of results of research and development;
f) the divestment of certain assets;
g) requiring the undertakings to dissolve the concerned concentration;
h) the repayment of the foreign subsidy, including an appropriate interest rate; and
i) requiring the undertaking concerned to amend their governance structure.
- Adopt a no objection decision where it concludes that either the preliminary assessment of the distortive nature of the foreign subsidy is not confirmed or the distortion on the internal market is outweighed by positive effects.
When an undertaking does not comply with a decision with commitments or a decision with redressive measures, the Commission may, by decision, impose fines of periodic penalty payments. As regards fines, they can be up to 10% of the aggregate turnover of the undertaking in the preceding financial year, while periodic penalty payments can be up to 5% of the average daily aggregate turnover of the concerned undertaking in the preceding financial year for each day of non-compliance.
Looking Ahead
The FSR was published in the EU’s Official Journal on 23 December 2022 and will enter into force on the twentieth day following that of its publication. As mentioned above, some of its provisions will start applying on 12 July 2023. However, the notification obligations set out in Articles 21 and 29 of the Regulation will apply starting 12 October 2023.
The Commission can also, from 11 January 2023, adopt implementing acts to lay down more detailed rules and procedures inter alia for the notification of concentrations and public procurement bids and for and the various steps to be taken during the Commission’s investigations. The FSR provides that the first such acts shall be adopted by 12 July 2023.
The FSR also envisages that the Commission shall publish, by 12 January 2026 at the latest, guidelines for economic operators regarding various aspects of how the existence of a distortive foreign subsidy is determined and whether it should be counteracted, as well as on the application of the Commission’s powers to request the prior notification of concentrations and public procurement bids. These guidelines are meant to be based on experience gained during the first few years of implementing the FSR. Before issuing such guidelines, the Commission will have to carry out consultations with stakeholders and Member States on the above-mentioned issues.
Steptoe’s international trade team has significant experience in the field of trade defence investigations, including anti-subsidy investigations, and has been following the development of the EU’s Foreign Subsidies Regulation. We are available to assist you with any questions you may have, in close cooperation with our competition law team.
[1] See, for instance, the EU’s concept paper on WTO reform, available here.
[2] Commission Implementing Regulation (EU) 2018/1690 of 9 November 2018 imposing definitive countervailing duties on imports of certain pneumatic tyres, new or retreaded, of rubber, of a kind used for buses or lorries and with a load index exceeding 121 originating in the People’s Republic of China and amending Commission Implementing Regulation (EU) 2018/1579 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of certain pneumatic tyres, new or retreaded, of rubber, of a kind used for buses or lorries, with a load index exceeding 121 originating in the People’s Republic of China and repealing Implementing Regulation (EU) 2018/163.
[3] Commission Implementing Regulation (EU) 2020/776 of 12 June 2020 imposing definitive countervailing duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People’s Republic of China and Egypt and amending Commission Implementing Regulation (EU) 2020/492 imposing definitive antidumping duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People’s Republic of China and Egypt; Commission Implementing Regulation (EU) 2022/433 of 15 March 2022 imposing definitive countervailing duties on imports of stainless steel cold-rolled flat products originating in India and Indonesia and amending Implementing Regulation (EU) 2021/2012 imposing a definitive anti-dumping duty and definitively collecting the provisional duty imposed on imports of stainless steel cold-rolled flat products originating in India and Indonesia.
[4] Article 3(1) of the FSR.
[5] 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.
