Any kind of subsidies granted by EU Member States is subject to thorough scrutiny under comprehensive EU State aid rules. So far, there were no such rules for foreign subsidies. According to the EU legislator, this gave non‑European companies an unfair advantage over their European competitors when acquiring EU companies, participating in EU public procurements or making other investments in the EU.
The EU responded to this and adopted the new Foreign Subsidies Regulation (FSR). After the adoption of the Implementing Regulation (IR) on 10 July 2023, the FSR started to apply partially on 12 July 2023. As of 12 October 2023, when the notification obligations came into force, the FSR is fully applicable. Until then, only the provisions of the FSR on the general or ex officio tool (see below) were applicable.
The FSR is intended to create a level playing field for all companies operating in the EU. It provides the Commission with three tools to investigate financial contributions granted by non‑EU authorities to companies active in the EU:
A notification‑based tool to investigate M&A transactions – where
A notification‑based tool to investigate bids in public procurements – where
A general tool to investigate all other market situations – where
The Commission will not consider subsidies not exceeding EUR 200 000 per third country over any consecutive period of three years as distorting the internal market (de minimis threshold). For subsidies exceeding this amount, if the Commission finds that such foreign subsidy distorts the internal market, it will balance the negative effects of the subsidy against the positive effects it may have (the so‑called ‘balancing test’).
Following this in‑depth investigation, depending on the tool applied, the Commission can adopt one of the following decisions:
To ensure effective enforcement of obligations and due process, the Commission has provided itself with the ability to impose fines and periodic penalty payments. These are very high: up to 10 % of the aggregate turnover of the undertaking concerned in the preceding financial year.
Companies involved in certain M&A transactions should be particularly aware of the new obligations. As of 12 October 2023, they have to comply with notification obligations if:
A concentration under the FSR is defined similar to EU merger control, including mergers, acquisitions of control and the creation of a full function joint venture.
However, the notification obligations are partially mitigated by the IR adopted by the Commission on 10 July 2023. As regards M&A, the full notification obligation generally applies only to financial contributions exceeding EUR 1 million individually and only, with exceptions, in relation to countries that have provided financial contributions totalling at least EUR 45 million in the past three years. Additionally, certain types of financial contributions are excluded from the full notification obligation (e. g., deferrals of payment of taxes or of social security contributions).
The IR includes in its annex a notification form (Form FS‑CO). To facilitate the submission of notifications, companies are encouraged to engage in pre‑notification contacts with the Commission based on the principle of good faith. In merger control proceedings pre‑notification contacts are usual and established practice. It remains to be seen how efficient and pragmatic pre‑filing contacts will be in FSR matters.
In merger control proceedings, the notifying parties are required to indicate whether they have already filed or intend to file a notification under the FSR both in the Form CO and the Short Form CO as well as in the case team allocation request.
The financial contribution does not have to relate to a specific transaction. Any financial contribution granted to any of the undertakings that are the subject of an M&A transaction in the past three years counts towards the threshold. Those granted to date also count: up to three years before 12 July 2023.
If the threshold is exceeded, the undertakings subject to the M&A transaction (or the undertaking acquiring control in cases other than a merger or acquisition of joint control), must notify the M&A transaction to the Commission. This must be done prior to the implementation of the transaction and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
Once the filing is made, the Commission reviews the notification, and the M&A transaction may not be implemented. The Commission has 25 working days to conduct a preliminary review, and then 90 working days more to conduct an in‑depth investigation. The aforementioned deadlines may be extended under certain circumstances, but they are also binding on the Commission: if it does not complete the proceedings within the original or extended deadlines, the undertakings concerned may implement the M&A transaction.
As a result of the proceedings, the Commission may adopt:
A similar notification obligation applies to public procurements organized in the Member States. Here, thresholds are even lower that in the case of M&A transaction:
Again, the notification obligations are partially mitigated by the IR. The full notification obligation generally applies only to contributions exceeding EUR 1 million and in relation to countries where the total amount of financial contributions in the three years preceding the notification is at least EUR 4 million. Contributions not subject to the full notification obligation are included only in a simplified table. Additionally, certain types of financial contributions are excluded from the full notification obligation (e. g., deferrals of payment of taxes or of social security contributions).
Moreover, the FSR introduces a supplementing obligation: a declaration obligation which applies irrespective of meeting the thresholds. Such a declaration should list all foreign financial contributions received and confirm that they are not notifiable because of not meeting thresholds.
Under the discussed tool, obligations are imposed both on economic operators and on contracting authorities or entities organizing public procurements.
The economic operator (or the main contractor in case of cooperation with a main subcontractor and/or a main supplier) submits the notification or declaration to the contracting authority which then, without delay, transfers it to the Commission. The contracting authority is obliged to make sure that the economic operators submit the required documents. It must also ensure that corresponding information is included in the contract notice or in the procurement documents.
The Commission is only required to examine the notifications (and not the declarations which, however, may be used, for example, as a source of information for using its ex officio powers, see below). It shall carry out a preliminary review no later than 20 working days after it receives a complete notification (extendable once by 10 working days in duly justified cases). If the Commission decides to initiate an in‑depth investigation within this time limit, it must close that in‑depth investigation no later than 110 working days after it has received the complete notification with one of the following decisions:
The Commission also has new powers outside M&A transactions and public procurement procedures. It is entitled to conduct ex‑officio investigations on any foreign subsidies. All companies that receive foreign subsidies or do business with companies receiving such subsidies should be familiar with the new regulations.
The Commission may, on its own initiative, examine information from any source regarding alleged foreign subsidies distorting the internal market. If the Commission considers that the information indicates the possibility that a foreign subsidy distorts the internal market, it shall request such further information as it deems necessary to make a preliminary assessment. For this purpose, the Commission may request information from EU Member States, the undertaking concerned and other undertakings, as well as conduct inspections inside and outside the Union (where the third country does not raise objection). Depending on the outcome of the preliminary review, the Commission may adopt a decision to initiate an in‑depth investigation or close the preliminary review.
As a result of an in‑depth investigation, the following types of decisions can be adopted:
The investigation may also cover foreign subsidies granted in the past: up to five years before 12 July 2023. It is therefore crucial to correctly identify foreign subsidies granted to date. Otherwise, companies run the risk of fines or penalties for failing to comply with their obligations during investigation (of 1% of annual aggregate turnover or 5% of daily aggregate turnover per day).
The Commission may even request notification of any M&A transaction, or any public procurement bid below the relevant thresholds (see above specific M&A and public procurement tools).
For further clarification, on 10 July 2023, the Commission adopted the IR that contains important information on the procedural steps and practical implementation of the FSR system. In particular, the IR sets out:
The IR is complemented by two annexes – one for M&A and one for public procurements – that contain standard notification forms detailing the extensive information that companies need to provide in the notification.
As was already mentioned, the IR partially mitigates the notification obligations (see above notification‑based tools) by providing thresholds below which foreign financial contributions will not have to be disclosed or will have to be disclosed only in a simplified table. Nevertheless, companies will still need to keep record of all financial contributions in case of ex‑officio investigations.
The FSR comes with extensive documentation duties. Fines and periodic penalty payments can be imposed for incomplete or wrongful provision of information. Companies should therefore systematically keep record of all financial contributions granted from abroad, even if they have not been declared a subsidy by the granting authority.
The IR provides for an informal pre‑notification phase in which uncertainties on the scope of the required information can be addressed and waivers may be granted.
The Commission has already published Q&A on its website, which, while not binding, set out its views on the application of the FSR. Within the course of the next three years, the Commission will also publish detailed guidelines, notably for the criteria for determining a distortion, the balancing test and criteria to request an ad‑hoc notification. First clarifications on the Commission’s understanding of ‘trade distortions’ and on the content of the balancing test are expected to be published by January 2024.
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