News Update Competition

27 May 2021

On 5 May 2021, the European Commission ("the Commission") published its proposed Regulation ("the Proposal") to address potential distortive effects of foreign subsidies in the Single Market.

The Proposal, which has adopted the white paper published in June 2020, enables the Commission to investigate whether non-EU countries provide subsidies to companies active in the EU and intervene if the subsidy distorts the internal market. Specifically, the Commission will be able to conduct investigations on its own initiative and relevant mergers and public procurement bids will have to be notified to the Commission. The Proposal aims to address the lack of an instrument dealing with foreign subsidies as the current WTO-framework is limited to the import of non-EU subsidised goods. The Proposal will have wide-ranging implications, as any foreign subsidy exceeding the threshold of EUR 5 million over the last three fiscal years may be investigated.

Key takeaways

• The concept of 'foreign subsidy' is very broad and comparable to State aid: all kind of financial or in-nature contributions from any public authority or State-owned firms can be subject to foreign subsidy control.
• New ex-ante requirement to notify transactions where the EU turnover of the EU target exceeds EUR 500 million and where the undertakings concerned have received financial contributions of EUR 50 million or more from third countries in the three calendar years prior to notification.
• For contracts of EUR 250 million or more, bidders for public procurement must provide information ex-ante on foreign subsidies to the relevant contracting party, which must in turn inform the Commission.
• The Commission also has the competence to conduct ex-officio investigations of foreign subsidies even below the relevant thresholds.
• The Commission has power to take interim measures or impose fines for incomplete or misleading information or for failure to notify.

The Proposal: a deeper look

Definition of foreign subsidy
The Proposal sets out the rules and procedures for the Commission to investigate foreign subsidies that distort the internal market and to redress these distortions. Remarkably, the proposal has a partial retroactive application. In an investigation the Commission may examine foreign subsidies granted in the ten-year period prior to the Regulation's application if the foreign subsidies distort the internal market after the Regulation's adoption.

Just like the concept of State aid, the definition of “foreign subsidy” is very broad. It includes all direct and indirect financial contributions by the public authorities of non-EU countries which confer a benefit to an undertaking, a group of undertakings or a given industry sector.

If the foreign subsidy's existence is established, the Commission will conduct an individual assessment to determine whether the foreign subsidy improves the competitive position of the recipient on the internal market and, in doing so, actually or potentially distorts the internal market. The Commission will assess each case individually, considering several factors such as the subsidy's amount, nature, purpose and conditions, and effects. The Commission will also consider the situation of the undertaking and the relevant markets concerned. In essence, the Commission will balance the foreign subsidy’s distortive effects with its positive effects on the relevant economic activity's development. If the subsidy’s distortive effects are not outweighed by its positive effects, the Commission may adopt redressive measures or accept commitments from the undertakings concerned. The Proposal does not contain much additional information about how this test will be carried out. Ideally, the Commission should clarify how the test will be conducted and the weight of each factor considering how important this balancing test is.

There are certain categories of subsidies that, in line with the State aid rules, are most likely to distort the internal market. They include rescue and restructuring aid to ailing firms (unless there is a genuine restructuring plan), unlimited guarantees for debts, subsidies that directly facilitate a transaction and subsidies enabling an undertaking to submit an unduly advantageous tender. The proposal contains a de minimis threshold - a foreign subsidy is unlikely to distort the internal market if it does not exceed EUR 5 million in total over any consecutive period of three fiscal years.

Concentrations
The Commission proposes to adopt an obligatory and suspensory notification system for transactions that have been subsidised with a standstill obligation, its own thresholds, timelines and sanctions. The definition of a concentration is the same as under the EU Merger Regulation: any change of control on a lasting basis or the creation of a full function joint venture should be notified if the applicable thresholds are exceeded.

The ex-ante notification must be made if the following conditions are met:
(i) the target, merging party, joint venture or one of its controlling parents must be established in the EU and produce an aggregate turnover of at least EUR 500 million in the EU; and
(ii) the foreign subsidies must exceed EUR 50 million on an aggregated basis over the past three years.

In practical terms, this new obligation may further delay transaction timelines as this creates an additional filing obligation, along with separate potential filing procedures for merger control and foreign investment.

The procedural rules resemble the EU merger control rules. The Commission has 25 working days for a Phase 1 review and 90 working days for a Phase 2 review after it receives a complete notification. This second period can be prolonged by 15 working days if commitments are offered.

In cases where there is failure to notify the Commission or gun jumping, the Commission can impose fines of up to 10% of aggregate turnover. If the undertaking provides incorrect or misleading information, the Commission can also impose fines of up to 1% of aggregate turnover.

Public procurement
The Proposal provides that public procurement bidders must notify the contracting entity about all foreign financial contributions that they obtained in the previous three years. Alternatively, they must declare that they did not receive any foreign subsidies. This notification requirement is applicable for EU public procurement procedures with a EUR 250 million value or more. If no information on the existence of foreign subsidies is provided, the contract shall not be awarded to the participant in question. This additional notification requirement may refrain potential participants from partaking in EU public procurement processes.

The contracting entity will transfer any notifications to the Commission. The Commission has 60 days to conduct a preliminary assessment and 200 days to investigate in depth whether the company benefitted from a foreign subsidy that distorts the internal market.

Failure to notify a subsidy can be sanctioned with fines up to 10% of aggregate turnover, and up to 1% for providing incorrect or misleading information.

Ex-officio investigations
The Commission can also examine on its own initiative any foreign subsidy that allegedly distorts the internal market. This means that the Commission may investigate any subsidy, even transactions or public procurement procedures that do not exceed the relevant notification thresholds.

In this context, the Commission is granted far-reaching powers including information requests and dawn raids. The Commission may request information from the undertakings concerned, from other undertakings based in the EU and in third countries. Moreover, dawn raids can take place on the company's premises in and outside the EU with the undertaking and the third country government's consent.

If an undertaking does not cooperate, the Commission is entitled to adopt a decision based on the "facts available". Such a decision could potentially be prejudicial for the relevant undertaking as the Commission in that case may base its decision on the information provided by third parties, such as complainants.

Redressive measures and commitments
The Commission has the power to impose structural and behavioural redressive measures to remedy any potential internal market distortion caused by the subsidy. These measures include reducing market presence by divesting certain assets, repaying the subsidy, or dissolving an implemented concentration.

Undertakings may also offer commitments to address the distortion. The undertaking concerned could offer to repay the subsidy, together with the applicable interest. Unless the undertakings offer commitments that would effectively remedy the distortion, the Commission can prohibit a concentration or the award of a public contract.

Final comment

The Proposal is in line with the wider trend to deeply screen investments made by non-EU countries, for instance, on the basis of the foreign direct investments Regulation. It remains to be seen to which extent the Commission will make use of its extensive competences to investigate all foreign subsidies affecting the internal market.

As there is a large degree of discretion for the Commission, this may become a very politicised instrument.