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Freshfields Risk & Compliance

| 4 minutes read

It’s official: EU’s foreign subsidies regime on its way to become law

On 30 June 2022, the three institutions of the European Union (the Commission, the Parliament and the Council) announced their political agreement on the text of the proposed regulation on foreign subsidies distorting the internal market (see their respective press releases here, here, and here). This marks a decisive step towards the formal adoption of this novel and far-reaching legislative tool. The draft legal text must now be approved by both the Parliament and the Council. This will likely still occur in 2022, with the regulation coming into effect around mid-2023.

Following political impetus from both the Council and the Parliament, the Commission launched the foreign subsidies process in June 2020 with the publication of a white paper. This text highlighted perceived distortions to the EU’s internal market caused by foreign subsidies, and a need to redress these through new legislation. Existing legal instruments were considered insufficient to tackle the problem – the Commission spoke of a “regulatory gap” and the need to ensure a "level playing field" in relation to support received from non-EU Member States, when compared to the EU State aid regime.

The white paper served as a basis for a proposed regulation tabled by the Commission in May 2021. In line with the EU’s ordinary legislative procedure, the Parliament and the Council each proposed several amendments to the proposal. These were made public in May 2022 (see here and here).

Where did the Parliament and the Council finally land?

The Commission’s initially proposed three-module structure of reviewing foreign subsidies in ex officio investigations, in concentration scenarios (i.e. mergers, acquisitions or joint ventures), and as part of public procurement procedures remains applicable. The latest publications do, however, reveal three noteworthy substantive changes to the Commission’s proposal:

  • In respect of concentrations and joint ventures specifically, both the Parliament and the Council agreed to limit the EU turnover-based notification threshold to the joint venture itself. In joint control scenarios, this will significantly reduce the number of likely notifications compared to the Commission’s initial proposal. That original proposal provided that the EU turnover of at least one of the joint venture’s parents would have been sufficient to trigger a filing obligation, irrespective of the EU turnover of the joint venture.
  • In respect of public procurement procedures, the notification obligation (which originally applied to all bidders participating in tenders with a contract value of €250m or more) has now been narrowed down to bidders that received aggregate financial contributions of at least €4m per third country over a three-year period.
  • Finally, the Commission will be empowered to investigate subsidies granted up to five years before the entry into force of the regulation (down from the ten-year period originally envisaged by the Commission).

Final thresholds regarding concentrations and public procurement procedures

Concentrations

Under the final agreement, a concentration will need to be notified to the Commission if:

  • one of the merging undertakings, the acquired undertaking or the joint venture is (i) established in the Union, and (ii) generates an aggregate turnover in the Union of at least €500m; and
  • all undertakings involved in the concentration were granted from third countries combined aggregate financial contributions in the three calendar years prior to notification of more than €50m.

Public procurement procedures

A notification obligation will arise in EU public procurement procedures where:

  • the estimated contract value is equal to or greater than €250m; and
  • the economic operator participating in the tender was granted aggregate financial contributions in the three calendar years prior to the notification equal to or greater than €4m per third country.

How to prepare for the regulation’s entry into force

Given the overall alignment of the co-legislators’ positions, the political agreement is expected to be worked into a final text swiftly. Once the Parliament and the Council formally adopt the final regulation, it will be published in the EU’s Official Journal, and enter into force twenty days after that.

Notification obligations for concentrations and public procurement procedures will need to be made nine months after the entry into force of the regulation, so likely around mid-2023.

In the meantime, businesses that have direct or indirect commercial or other links with third countries (i.e. non-EU states), irrespective of whether they are based in or outside the EU, are recommended to:

  • Compile a record of “financial contributions” received from non-EU states over at least the last three financial years. This would serve to assess whether future M&A activity, or participations in public tenders in the EU, may be subject to notification obligations under the regulation. “Financial contribution” is an extremely broad term under the regulation and covers any transfer of funds or liabilities, the foregoing of revenue (including tax exemptions), and the provision or purchase of goods or services to or from non-EU states. Crucially, a “financial contribution” does not require an advantage for the recipient – whether the contribution results in a distortive “foreign subsidy” is assessed only after the notification has been made. This is quite different from the approach taken under EU State aid law.
  • Ascertain whether these identified financial contributions were received on market terms – if thresholds are met, this will not do away with the notification obligation, but it is important to avoid financial contributions being qualified as foreign subsidies, which the regulation targets and which may lead to the Commission requiring remedies or prohibiting a transaction or tender.
  • Where there is doubt on whether financial contributions could amount to foreign subsidies or whether foreign subsidies have distortive effects, consider the impact of these contributions on any activities in the EU, the underlying policy aims of the non-EU granting state, and whether such policies also enjoy support in the EU and could thus be used as a justification.

The regulation will add to regulatory burdens when it enters into force. Taking the above steps proactively now will help frontload some of the work for businesses. However, it will ultimately be the Commission’s task to identify any foreign subsidies received by undertakings, and whether these distort the EU internal market. If, on balance, a foreign subsidy’s distortive effects outweigh any positive effects, the Commission will be entitled to take redressive measures going as far as prohibition of a concentration or public procurement award.

Please get in touch with us or your usual contact in our Antitrust, Competition and Trade team if you have additional questions or would like to discuss what your business can do to prepare for the regulation entering into force. To read more about antitrust developments globally, refer also to our Global antitrust in 2022: 10 key themes report.

Tags

antitrust and competition, foreign investment, regulatory, europe, mergers and acquisitions, merger control, public procurement, state aid