On 12 January 2023, the Regulation on foreign subsidies distorting the internal market came into force. This gives the European Commission new powers to investigate undertakings that benefit from foreign subsidies and, where appropriate, to redress the distortive effects on the internal market by imposing measures on the recipient undertakings.
The concept of foreign subsidy
The Regulation on foreign subsidies distorting the internal market (FSR) has a wide scope. It allows the European Commission (Commission) to investigate all kinds of economic sector, as long as it involves a foreign subsidy granted to an undertaking engaging in an economic activity in the internal market.
In the context of the FSR, a foreign subsidy is defined as a financial contribution which is provided directly or indirectly by a third country, which confers a benefit (including the granting of special rights – as fiscal incentives, loans or guarantees – without adequate remuneration in line with normal market conditions) and which is limited, in law or in fact, to one or more undertakings or industries.
The financial contribution can be granted through public or private entities, provided the actions of that private entity can be attributed to the third country.
The FSR’s investigation tools
Under the FSR, three investigation tools are at the disposal of the Commission.
The FSR sets out two ex-ante tools, which consist of:
- The prior notification of concentrations, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least EUR 500 million and the transaction involves a foreign financial contribution of at least EUR 50 million
- The prior notification of bids in public procurements, where the estimated contract value is at least EUR 250 million and the bid involves a foreign financial contribution of at least EUR 4 million for each third country
In addition, the FSR provides the Commission with a general investigation tool that allows the Commission to start investigations of its own motion into alleged distortive foreign subsidies (the so-called “ex officio review”). In the context of such review, the Commission can also request ad hoc notifications for smaller concentrations and public procurement procedures.
In-depth investigation
Where it suspects that distortive effects are occurring from a notified concentration or public procurement, as well as from financial contributions that have been found relevant by a preliminary review (within the context of an ex officio procedure), the Commission is enabled to conduct “in-depth investigations”. To this end, the Commission may also request that the third country concerned by the subsidy supplies information or even conducts an inspection in its territory. In this respect, the non-cooperation of an undertaking outside the Union can be taken into account in the final decision.
Following such an investigation, the Commission assesses whether the foreign subsidy distorts the internal market. Pending the Commission’s review, no concentration under investigation can be implemented, and the bidder cannot be awarded the public contract.
Assessment of the distortive effects of foreign subsidies
The methodology for the assessment of distortive effects is globally modelled on verifying the compatibility of state aid. The Commission will proceed in two steps.
Firstly, a distortion is deemed to exist where the foreign subsidy is to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market. A list of categories of foreign subsidy that are “most likely to distort the internal market” has also been drawn up and includes foreign subsidies granted to an ailing undertaking, directly facilitating a concentration or enabling an undertaking to submit an unduly advantageous tender in relation to public procurement.
Where it is found that a foreign subsidy is distortive, the Commission will then take into account the balance between the negative effects of the foreign subsidy under review against its positive effects. On this basis, it will decide whether to impose redressive measures or to accept commitments and, if applicable, the nature and level of those measures or commitments.
Possible outcomes and decisions of the Commission
After companies have been given the opportunity to submit their observations in respect of the exercise of their right of defence, the Commission will take a decision.
It can adopt a “decision to raise no objection” to the subsidy, a “decision with commitments” (in this case, the Commission agrees to make binding commitments that have been deemed appropriate for the undertaking) or a “decision with redressive measures”. These may consist, among other things, of the repayment of the foreign subsidy, offering access to facilities, reducing market presence or requiring undertakings to dissolve a concentration. Commitments and redressive measures have to be proportionate. The Commission must, in this respect, take into account its balancing test when adopting measures or binding commitments.
Last but not least, where an undertaking does not comply with a decision, the Commission can impose a fine that can amount to a maximum of 10% of the aggregate turnover of the undertaking concerned for the preceding financial year.
Next steps
With its entry into force, the FSR will move into its crucial implementation phase and start to be applicable in six months, starting on 12 July 2023. As of this date, the Commission will be able to launch ex-officio investigations. The notification obligations for companies will be effective as of 12 October 2023.
It should, however, be noted that, with a few exceptions, the Commission is empowered to investigate foreign subsidies granted up to five years prior to the entry into force of the FSR.
Please contact Raluca Gherghinaru, Pierre de Bandt or Jeroen Dewispelaere for further information about the FSR and/or for general legal advice relating to state aid law.