Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, or in its short name the Foreign Subsidies Regulation ("FSR") has entered into force on January 12, 2023. The main purpose of the FSR is to address distortions caused by foreign subsidies in the Single Market and to ensure a level playing field for all companies operating within it.
The FSR was proposed by the European Commission (the "Commission") on May 5, 2021 and its final text was adopted on November 10, 2022 by the European Parliament and on November 28, 2022 by the European Council.
Article 3/1 of the FSR stipulates that "a foreign subsidy shall be deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on 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."
Therefore, a foreign subsidy can be defined as a direct or indirect financial contribution such as a loan guarantee which is granted by a non-EU entity (could be private or public entities), that confers a benefit that would ordinarily not be available to a company active in the EU and is selective, in the sense that it is only made available to a specific number of companies/industries.
The main purpose behind the adoption of the FSR stems from the concern that foreign subsidies, as defined above, may be/are distorting the European Union's ("EU") internal market. This is said to have done by acts, such as providing companies with an unfair advantage to acquire other companies or to obtain public procurement contracts in the EU to the detriment of fair competition.
The FSR seeks to address distortions such as the ones exemplified above. Before its adoption there were several legal instruments, such as the International Procurement Instrument Regulation, which regulated certain aspects of the operations of the companies active in the Single Market. However, these were not, in most cases, suitable for addressing the effects foreign subsidies had in the Single Market as set out below:
The FSR seeks to fill in the regulatory gap described above and control subsidies originating from non-EU governments, in a legal environment where subsidies originating from within the EU are already kept under check, thereby creating a level playing field for all the actors within the Single Market.
Along with the entry into force of the FSR, three new tools to be enforced by the Commission have been introduced to address foreign subsidies. These can be listed under three headings: (i) ex-ante notification obligation for concentrations, (ii) ex-ante notification obligation for public procurement procedures and (iii) ex officio investigations and general investigative powers.
An ex-ante notification obligation has been introduced for concentrations where (a) the EU turnover of the company to be acquired, of at least one of the merging parties or of the joint venture is of at least €500 million and (b) the involved aggregate foreign financial contribution is more than €50 million. If such a notification is required due to the fact that the said thresholds are met, the acquirer will have to notify ex-ante the financial contributions it has received from non-EU bodies to the Commission. The concentration under the review of the Commission cannot be completed until the Commission approves the said concentration1. This is labelled as a "standstill obligation", which has the effect that a concentration "with a Community dimension (...) shall not be implemented either before its notification or until it has been declared compatible with the common market (...)" as per in Article 7/ (1) of the EC Merger Regulation.
An ex-ante notification obligation has been introduced for public procurement procedures, where (a) the estimated contract value is at least €250 million and (b) the bid involves a foreign financial contribution of at least €4 million per non-EU country. Similar to the case in concentration notifications described above, if the above-listed thresholds are met, the bidder will have to notify ex-ante the financial contributions it has received from non-EU bodies to the Commission. The standstill obligation is applicable for public procurements as well, which means that the bidder under investigation cannot be awarded the public procurement until the Commission gives its approval or the time limit for issuing such an approval expires as per Article 7/(1) of the EC Merger Regulation.
A catch all tool for all other cases which are not covered by the above tools has also been introduced by the FSR in the form of ex officio investigations to be launched by the Commission. A reflection of this authority is the Commission's authority to request "ad-hoc notifications" in relation to smaller concentrations and public procurement procedures, which do not fall within the scope of the two above-listed scenarios, in cases where the transaction in question has not been concluded.
Additionally, if the new facts and/or information come into the attention of the Commission pertaining to a public procurement procedure, it may request an ad hoc notification.2
In cases where companies do not comply with their obligation to notify the Commission under the above-described circumstances, in the context of a concentration or in a public procurement procedure, meeting the relevant thresholds, the Commission will be able to impose fines of up to 10% of the company's annual aggregated turnover. The Commission is also empowered to review (and prohibit) a transaction which should have been notified, but was not, as if it had been notified in the first place.
For these mechanisms to work efficiently and effectively, information pertaining to the parties to the transaction and the thresholds need to be collected, which is why parallel to the EU merger control regime, deterrent sanctions have been put into place for negligently or intentionally providing false, insufficient, or misleading information to the Commission.
The FSR will not apply to concentrations and public procurement contracts initiated before July 12, 2023 and the notification obligations envisaged under the FSR will start to apply as of 12 October 2023. That said, the Commission will have the authority to launch an ex officio investigation regarding financial contributions to the companies active in the EU, originating from outside the EU, granted up to five years prior to July 12, 2023.
It is anticipated that the FSR will impose potentially burdensome financial and administrative obligations on companies which benefit from foreign subsidies. This will most likely prove to be true for small and medium sized companies and start-ups, especially in the technology sector as these types of companies in many cases depend on foreign subsidies, to thrive or even survive.
As per the impact assessment document accompanying the initial proposal for the FSR, the Commission anticipates more than 30 public procurement bids, mergers, acquisitions and joint ventures to be notified once the FSR comes fully into force.
Therefore, companies operating or active in the Single Market will have to kick-off an internal procedure to determine whether they have benefitted from non-EU financial contributions (monetary and/or otherwise) in the recent years and identify if these fall within the scope of the term "foreign subsidy" in the sense described under the SR; and finally evaluate whether these can be considered as distortive, before the Commission makes its own assessment.
Footnotes
1. or until the time limit for the Commission to issue a decision expires as per Article 10/(6) of the Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the "EC Merger Regulation")
2. Please note that the Commission is authorized to conduct on-site inspections (in and out of the EU, if the relevant non-EU country does not raise concerns as to the inspection)
