EU on the verge of imposing controls on foreign subsidies

Companies should prepare for comprehensive new regulatory requirements

There have long been concerns in the EU that subsidies granted by non-EU Member States to companies operating in the EU (“foreign subsidies”) affect the level playing field in the internal market. This is because investments by third-country companies (including those controlled by third countries) in the EU have increased rapidly in recent years. These companies may be able to benefit from advantages in terms of state support that EU Member States cannot give to “their” companies as a result of stricter requirements under EU State aid law. At the same time, the European Commission (“Commission”) believes that foreign subsidies cannot be adequately regulated by the existing tools of EU State aid, merger control, public procurement and foreign trade law,.

In May 2021, the Commission therefore published a proposal for a regulation on the basis of which such foreign subsidies could be regulated (“Proposal”) (see our article on the Proposal here). The aim of the Proposal is to create a level playing field between all companies operating in the EU’s internal market.

Status of developments - what is imminent?

The Proposal was discussed in the European Parliament and the Council of the European Union (“Council”) after its publication. At the beginning of May 2022, both institutions adopted their positions for the upcoming trilogue negotiations with the Commission. Both the European Parliament and the Council support the Proposal for the regulation and only expressed a desire for coordination and negotiation on specific aspects (such as the applicable turnover thresholds for a notification requirement for a foreign subsidy and also the applicable deadlines).

On 30 June 2022, the Council of the EU has now made public a provisional political agreement with the European Parliament. According to the agreement, the thresholds proposed by the Commission in the Proposal were unanimously adopted. However, the period for the retrospective review of foreign subsidies is set at five years. The Commission had originally envisaged ten years.

The provisional agreement reached must now be formally approved by the Council and the European Parliament. Provided that the regulation is formally adopted before the end of the year, it could enter into force in the next few months.

What are the key points of the draft?

The existing draft regulation provides for three tools to review the compatibility of foreign subsidies with the internal market:

• A notification-based investigation tool for transactions – Mergers and the establishment of joint ventures will now be able to be examined for possible influence by foreign subsidies. To this end, EU-based companies will be obliged to notify such transactions to the Commission under the following conditions:
  
  1) The undertakings concerned exceed an aggregate turnover threshold of €500 million; and
  
  2) The companies have together received more than €50 million in financial contributions from third countries in the three previous years.

• A notification-based investigation tool for bids for large public contracts
  
  
• A general investigation tool – Even in other situations where there is no formal obligation to notify, the Commission will be able to investigate ex officio whether there are potentially distorting foreign subsidies. Information on potential distortions can come from any source, meaning that complaints from competitors in particular will in all likelihood become a crucial feature.

In both a notification and an ex officio investigation, the draft regulation then requires the Commission to examine the extent to which the foreign subsidies in question distort competition in the internal market. In doing so, it can examine subsidies granted up to five years before the regulation enters into force and which still cause distortions in the internal market after its entry into force. To this end, the draft regulation provides the Commission with far-reaching investigative tools (including requests for information and even inspections of the companies concerned) and the power to impose redressive measures, with infringements being punishable by fines.

At the end of a possible in-depth investigation, the Commission is to take a decision on the compatibility of the foreign subsidy with a level playing field on the internal market, which may include steps such as the prohibition of a planned transaction or also redressive measures.

Failure to comply with the requirements of the regulation may have serious consequences. If companies do not adhere to the requirements, they can be fined up to 10% of their annual worldwide turnover. If a distortion of the internal market is established, this can lead to a completed transaction being prohibited or an order to reverse it being issued.

Outlook

The planned regulation should be of great interest to all companies operating in the EU. In particular, companies possibly receiving some form of foreign support should familiarise themselves with the draft regulation and the associated regulatory requirements. A key task for companies when preparing for the regulation’s entry into force will be to make information on financial contributions received from government bodies centrally accessible in internal lists or databases. Another reason for companies to familiarise themselves with the Proposal is the possibility to use the regulation against competitors who may have been unduly advantaged by foreign subsidies. This is because the Commission will be dependent on information from the business community when enforcing the planned regulation.

The planned regulation will also have a considerable impact on transactions and transaction management. This is because, in addition to possible notifications for merger and investment control purposes, and where applicable under State aid law, capacities and above all time must be allocated for possible notifications of foreign subsidies in the future. The effort involved in coordinating this is likely to be considerable.

Against the backdrop of the current status of the legislative process, companies should now adapt very quickly. With the political compromise that has now been reached, the EU has made it clear that controls on foreign subsidies is not far off. The Commission intends to enforce these controls rigorously – it has announced that more staff are planned for overseeing the enforcement of the Foreign Subsidies Regulation than for the application of the much-discussed Digital Markets Act.