EU Reaches Agreement on Foreign Subsidies Regulation – New Regime to Enter into Force Next Year

The EU has reached political agreement in relation to the much-anticipated foreign subsidies regulation (the "Regulation"), which should become operational next year. The Regulation essentially creates a new subsidy control regime for third country subsidies affecting the EU market and has the potential to significantly increase the regulatory risk and burdens for foreign companies operating or investing in the EU. Companies would be well-advised already now to take steps to develop and implement the new systems required in order to ensure compliance with the Regulation.

Three intervention tools

The Regulation is intended to "level the playing field" between EU operators and their competitors from non-EU Member States which are not subject to the same kind of strict subsidies disciplines as EU Member States are under the EU State aid rules. It seeks to do this by creating three new subsidy control tools for the European Commission ("Commission") to address foreign subsidies:

1. A general ex-officio tool for the Commission to investigate allegedly distortive foreign subsidies.  This tool is wide-ranging and covers all and any foreign subsidies granted during a prior five-year period, including those falling below the notification thresholds for the two notification-based tools in relation to concentrations and public procurements (see below).  Subsidies of less than €4 million over any consecutive period of three fiscal years however, are considered as "unlikely" to be distortive, effectively providing a limited "safe harbour".
2. A notification-based tool in relation to potentially subsidised mergers and acquisitions (so-called "concentrations"), with suspensory effect.  Concentrations would need to be notified to the Commission where: (i) the undertaking to be acquired, one of the merging undertakings, or once created, the joint venture, is established in the EU and has aggregate EU turnover of €500 million or more; and (ii) the aggregate amount of the foreign financial contribution received by the undertakings concerned is more than €50 million over the three years prior to notification.

The Commission however, would also be able to require notification of concentrations not meeting these thresholds where it suspects that the undertakings concerned may have benefitted from foreign subsidies during the past three years.

3. A notification-based tool in relation to potentially subsidised public procurement bids, with suspensory effect. Bidders would need to notify to the contracting authority all foreign financial contributions where the estimated value of the public procurement at issue is €250 million or more and the bidder has received financial contributions amounting to at least €4 million from a third country.

However, as with the notification tool for concentrations, the Commission would also be able to require notification where it suspects that the bidder may have benefitted from foreign subsidies during the past three years.

Commission assessment

While each of the three tools have different areas of application and varying procedural frameworks, the substantive components that the Commission would be examining in each case are the same and are as follows:

• The existence of a "foreign subsidy". A "foreign subsidy" is defined under the Regulation as: (i) a "financial contribution" provided by foreign public authorities or public and private entities whose actions can be attributed to the authorities; (ii) which confers a benefit; and (iii) that is limited in law or in fact to one or more undertakings or industries, i.e. it is "selective" or "specific".
• Whether the subsidy causes a "distortion" in the EU market. This is to be determined on the basis of a non-exhaustive series of indicators set out in the Regulation, which relate mainly to the characteristics of the subsidy and the recipient undertaking as well as the markets concerned. Certain specific types of subsidies are, however, to be considered as effectively distortive by nature and will therefore be presumed to be problematic without any detailed assessment being required.
• Whether the negative effects in the EU market may be balanced by any positive effects of the subsidy.
• The determination of appropriate commitments or redressive measures required to address the distortions, including possible structural and behavioural measures, and in the case of the concentrations and public procurement tools, the possible prohibition of the concentration or contract award to the subsidised bidder.

The concepts in these assessment stages appear to be inspired by EU State aid law and WTO subsidy law and the Commission is likely to have regard to practice and precedent in these areas in applying the provisions of the new Regulation.

Wide-ranging notification obligations – "financial contribution" is a wider notion compared to "subsidy" and the tests will be met in more situations

Although the Regulation is aimed at foreign "subsidies", it is important to appreciate that the notification obligations under the concentrations and public procurements tools are not triggered by the receipt of foreign "subsidies" but rather foreign "financial contributions".

The notion of a "financial contribution" is wider than that of a "subsidy", and essentially may include any transfer or use of financial resources that is directed by foreign public authorities, including for example, remuneration by the foreign State for goods and services provided, even if this is in line with the market and therefore there is no "benefit" in economic terms. The result is that the notification obligations may be very wide-ranging and therefore onerous in practice.

At the same time, failure to comply with the notification obligations under the Regulation could carry significant penalties in terms of fines of up to 10% aggregate turnover and in the case of completed concentrations, possible dissolution of the concentration.

The concept of a foreign "financial contribution" for the purposes of the Regulation does not correspond to any existing concept used in typical accounting practice. This means that companies may need to undertake significant new due diligence and develop new systems in order to comply with the notification obligations under the Regulation and avoid possible penalties.

Next Steps

The text of the Regulation will now be finalised by the EU Institutions and will likely be adopted and enter into force before the end of the year. The Regulation will become directly applicable 6 months after its entry into force (possibly the second quarter of 2023), with the notification obligations becoming applicable 9 months after entry into force (possibly the third quarter of 2023).

Companies operating and investing in the EU would be well-advised to use this time to undertake the necessary due diligence and develop the new systems required in order to comply with the notification obligations under the Regulation. This entails looking back over the past three years, which is the reporting period for foreign financial contributions under the Regulation and putting in place monitoring systems in order ensure that foreign financial contributions going forward are picked up.

At the same time, companies can also consider the extent to which these financial contributions could amount to "subsidies" within the meaning of the Regulation, which will help them gauge the potential risks in practice under the Regulation to their activities and planned investments in the EU.

Further information in relation to the operation of the new regime will emerge during the coming months as the text of the Regulation is finalised and the Commission begins to adopt implementing acts setting out more details on procedural matters, including the required form and content of notifications under the two notification-based tools. We will continue to monitor progress and provide updates in relation to key developments.