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Freshfields Risk & Compliance

| 8 minutes read

It’s tabled: Proposal for the EU Foreign Subsidies Regulation published

The European Commission published its proposal for a Regulation on foreign subsidies distorting the internal market. The Commission has identified this Proposal as a key step to target distortions in the EU single market caused by companies benefitting from so-called “foreign subsidies”, i.e. financial contributions from third countries. It is a cornerstone initiative of the Commission’s wider Industrial Strategy, an update of which has been published concurrently.

The Proposal picks up on the key principles already included the Commission’s White Paper, published in June 2020 (see our blog posts here and here). In response to the market feedback received during the consultation (see our blog post here), the Commission has introduced a number of amendments. The Proposal will now make its way through the legislature (and, as such, is subject to possible amendments). The current expectation is that the Regulation will enter into force towards the end of this year.

Overarching principles

The Proposal seeks to implement three different mechanisms – a general ex officio investigation tool, a mandatory notification system for transactions, and a public procurement screening mechanism. All three mechanisms will be enforced by the Commission, presumably DG COMP. This is a change to the initial idea of shared responsibilities between the Commission and Member States as foreseen in the White Paper, responding to widespread concerns among market participants that shared responsibilities could result in deviating enforcement of the new legal instruments.

The definition of a “foreign subsidy” is very broad and, like the concept of “State aid”, captures all direct and indirect financial contributions by third country governments and public entities which confer a benefit to an undertaking, an industry or several undertakings or industries.

The relevant legal test under the Proposal is whether a foreign subsidy actually or potentially distorts competition on the internal market. The Commission will undertake a case-by-case assessment of factors such as the amount of the subsidy, its nature, the individual situation of the undertaking and the relevant markets as well as the effects of the subsidy on these markets. In essence, the Commission is required to “balance” a foreign subsidy’s distortive effects with its positive effects on the development of the relevant economic activity (formerly “EU interest test” in the White Paper).

In terms of types of subsidies which are most likely to distort the internal market, the Proposal is very close to EU State aid rules. Notably, rescue and restructuring aid, which in the EU can be approved as compatible State aid (against restructuring obligations), is singled out as an example of very distortive aid.

The Proposal increases the safe-harbour threshold to EUR 5 million over any consecutive period of three fiscal years (so much higher than the threshold of EUR 200,000 suggested in the White Paper, which mirrored the De Minimis Regulation of State aid). It remains to be seen how calculations of foreign subsides will be made in practice to assess whether financial contributions made are below or above the EUR 5 million threshold, potentially a very knotty issue.

Finally, the Proposal reflects the long list of redressive measures that were already considered in the White Paper, including reducing capacity or market presence, repayment of the foreign subsidy, or structural measures such as the divestment of certain assets or a requirement to dissolve an already implemented concentration. The list is long and essentially grants the Commission access to the best of both worlds: the typical remedies under the EU Merger Regulation (EUMR) as well as possible conditions and obligations imposed on State aid beneficiaries under the EU’s State aid rules.

Ex officio review of foreign subsidies

This “catch-all” procedure allows the Commission to examine on its own initiative any allegedly distortive foreign subsidy granted to any undertaking engaging in an economic activity in the EU (except for imports of goods). Unlike the suggestion in the White Paper, Member States will not have own investigatory powers but will be able to feed into the Commission’s investigation.

The Proposal sets out a two-stage investigation process: a preliminary review followed by an in-depth investigation if there are sufficient indications that an undertaking has been granted a foreign subsidy that distorts the internal market.

If the foreign subsidy’s distortive effects are not outweighed by its positive effects, the Commission may impose redressive measures or accept commitments from the undertakings concerned. In case of a serious risk of substantial and irreparable damage to competition in the internal market, the Commission may also adopt interim measures pending the outcome of its investigation.

The Proposal equips the Commission with standard investigatory powers, including the right to conduct on-site inspection visits to collect necessary information and requests for information – even outside the EU territory if the undertaking concerned and the foreign state consent. In case of non-cooperation by the undertaking concerned, the Commission may:

  • impose fines up to 1 per cent of the aggregate turnover of the undertakings concerned and periodic penalty payments up to 5 per cent of the average daily aggregate turnover of the undertaking for each working day of delay;
  • assume that the non-cooperating undertaking received the benefit of a financial contribution; and
  • adopt a decision based on facts available (thus potentially to the detriment of the undertaking concerned)

Similar to EU State aid procedures, third parties having an interest in the procedure, including Member States and third countries, will have the opportunity to express their views on the case in reaction to the opening decision.

The Proposal also foresees that the Commission can conduct market investigations into particular sectors where there is a reasonable suspicion that foreign subsidies may distort the internal market. In the course of these market investigations, the Commission may request undertakings, Member States and/or the third countries concerned to supply necessary information. It can also carry out inspections. This ties in neatly with the Commission’s increased practice of conducting sector inquiries under EU antitrust rules. While the Commission is adamant in that its Proposal is not targeted at certain sectors or industries, it is highly likely that this market investigation tool will be employed by the Commission to test the “subsidised” nature of certain industries within the EU internal market. Conveniently structured, the Commission can then open individual cases into that sector by using the information gathered during the market investigation.


The Proposal seeks to introduce a mandatory notification system for subsidised transactions with a standstill obligation. For the first time since the EUMR came into force, the Commission proposes to introduce a second, independent ex-ante notification procedure for merger transactions with its own thresholds, timelines and sanctions. For businesses, this potentially means a third set of filing obligations in Europe in addition to merger control and foreign investment filings. Investors from outside the EU are likely to be most burdened by this system. The Proposal does not include any safeguards against procedural duplication or cumulation of remedies with merger filings. It remains to be seen whether implementing rules will allow the submission of a combined notification or the like.

The Proposal requires an ex ante notification if the following conditions are met:

(i) Concentration in the form of change of control on a lasting basis, including full-function joint ventures– essentially the same notion of “change of control” as under the EUMR;

(ii) Target / merging party / JV or one of its parents is established in the EU and generates an aggregate turnover of at least EUR 500 million in the EU; and

 (iii) Undertakings concerned received foreign subsidies exceeding EUR 50 million on an aggregated basis over the past three years.

As an aside, the Commission can also “call in” any concentration below these thresholds where it suspects that the undertakings concerned may have benefitted from foreign subsidies in the three prior years. So, in essence, there is no legal certainty for undertakings having self-assessed their notification requirements and concluded that a concentration does not meet the relevant thresholds. The Commission can still “call you in”.

The procedural rules including review periods, penalties and rules on gun jumping mirror EU merger control rules, i.e. the Commission has an initial period of 25 working days for a Phase 1 review and a period of 90 working days for a Phase 2 review (extended by 15 working days if commitments are offered). Gun jumping or failure to notify a reportable concentration can be fined with up to 10 per cent of aggregate turnover.

Public procurement

The Proposal foresees a general requirement for undertakings participating in public procurement procedures with a value of EUR 250 million or more to notify foreign financial contributions they, or their main suppliers or subcontractors have received over the previous three years, to the contracting entity. The contracting entity will forward the notification to the Commission. Participants who do not notify such information or declare that they did not receive any foreign financial contributions shall not be awarded the contract. Upon receipt of the notification, the Commission investigates, again in a two-phase proceeding, which can take up to 200 days, whether the company benefitted from a foreign subsidy which distorts the internal market.

The outcome of an in-depth investigation can be a “no-objection” decision, a commitments decision or a “decision prohibiting the award of the contract”. During the time of the investigation, the procurement process shall continue, but the contract cannot be awarded to a participant who notified a foreign financial contribution until a favourable Commission decision or the expiry of the time limits.

The chilling effect of these rules on the participation in EU public procurement processes may go beyond non-EU participants. The notification obligations extend to main suppliers and sub-contractors, and the party responsible for the notification may not know the financing arrangements of such suppliers and sub-contractors. Any – even negligent – failure to comply with the notification obligations can lead to fines up to 10 per cent of aggregate annual turnover.

What this means…

Once in force, the Foreign Subsidies Regulation will increase procedural red tape for concentrations in which publicly funded investors from outside the EU are seeking to acquire EU companies or setting up joint ventures. Reportable transactions will require an additional mandatory notification to the Commission before closing.

Even outside of any transaction context, it will be possible for the Commission to pick up cases under its ex officio review regime or launch market investigations into foreign subsidies. It remains to be seen, however, how extensive the Commission will make use of these new investigation tools.

The Proposal is likely to lead to an increased duration and complexity of public procurement proceedings and, potentially, fewer participants.

The Proposal does not include any “white list” or exemption regime for state-owned or state-financed investors from outside the EU who are not susceptible of using their state funding in a way that distorts the internal market. Those investors will be caught by the regime and their activities will be assessed on a case by case basis.

If the Proposal becomes law, foreign investors will be faced with considerable uncertainty as to the enforcement principles and the substantive test to be applied by the Commission. On Day 1, no one will know how the Commission will handle the balancing test, what metrics will apply, and how redress will be handled. Therefore, the exact impact of the new tool on foreign state-funded companies to do business in the EU will depend on how the Commission chooses to exercise these new powers over time. Conclusions may be drawn from the intention of the Commission to add more than 140 FTEs to enforce the new regime (this would be about 15 per cent of DG Competition’s staff). A chilling effect on foreign investment in the EU may set in earlier.


europe, antitrust and competition