Additional information on unresolved issues in the Foreign Subsidies Regulation

On 6 June 2023, the European Commission (“Commission”) published non-binding questions and answers (“Q&As”) on EU Regulation 2022/2560, which governs the Commission’s control of foreign subsidies (Foreign Subsidies Regulation – “FSR”) and will enter into force from 12 July 2023. The Q&A also addresses some issues of the draft FSR Implementing Regulation which the Commission will finalize before July. The FSR is of particular relevance to companies engaged in mergers and acquisitions and public tenders, for which the Q&As summarised below are likely to be of particular interest.

Pursuant to Article 21 FSR, a notification is required for all transactions signed between 12 July 2023 and 12 October 2023 (and closed on or after 12 October 2023) that constitute concentrations within the meaning of Article 20 FSR (mergers, acquisitions and joint ventures (“JVs”)). The prohibition to close (standstill obligation) pursuant to Article 24 FSR also applies to such transactions. In contrast, the notification obligation applies neither to transactions signed before 12 July 2023 nor to those that are agreed on 12 July 2023 or later but are closed before 12 October 2023.

Companies impacted by this regulation are now explicitly advised by the Commission to contact it in good time before making notifications, as is usual and established practice in merger control proceedings. How efficient and pragmatic pre-filing contacts will be in FSR matters remains to be seen.

The notification thresholds pursuant to Article 20(3)(b) FSR are to be calculated based only on financial contributions by third countries granted in the three years preceding the signing of the agreement, the announcement of the public takeover bid or the acquisition of a controlling interest. Importantly: whether or not the financial contributions were granted at market conditions is not relevant – all financial contributions count towards the notification thresholds.

Proceeds from sales of goods and services to companies attributable to a third country and tax relief granted to companies of third countries may also be considered financial contributions.

A financial contribution is deemed to have been granted from the moment the recipient acquires a legal right to receive it. Thus, the relevant date is not necessarily that of the actual disbursement.

Further clarification has been given on some previously unresolved issues regarding turnover calculation in connection with establishing a JV:

The FSR applies only to “full-function joint ventures” (i.e. those that perform all the functions of an independent economic entity on a permanent basis). When a JV is established, the FSR’s turnover threshold is met if (i) the JV is established in the EU and (ii) the total turnover of the joint venture itself in the EU is at least EUR 500 million.

It has now been clarified that newly established JVs (greenfield JVs) are definitely excluded from the scope of application of the FSR because they do not meet the turnover threshold on a stand-alone basis. Thus, unlike in EU merger control, the decisive factor is the stand-alone turnover of a JV – not the turnover of the parent companies, even in the case of a change from sole to joint control.

The final Implementing Regulation, including the notification forms in the annex, will be published in a timely manner before the FSR becomes applicable on 12 July 2023. The Implementing Regulation will clarify practical and procedural aspects of the application of the FSR and contains important guidance on required notification of M&A transactions.

More about the FSR

This News Alert is one of a series of articles on the FSR. We will discuss the FSR in further detail in upcoming News Alerts, specifically highlighting its impact on merger control, government procurement, foreign trade law, and more regarding recent developments. Sign up here to receive all our News Alerts on the FSR.