European Commission Seeks Stakeholders’ Views on Draft Foreign Subsidies Implementing Regulation

Last year, the European Union (EU) legislature adopted a far-reaching regulation aimed at tackling the distortive effects on EU markets of financial support provided by non-EU countries to undertakings active in the EU (Foreign Subsidies Regulation or FSR). However, the FSR left many procedural details to be hammered out by the European Commission (EC) in an Implementing Regulation, to be adopted before the FSR itself starts to apply in July 2023. On 6 February 2023, the EC launched a much-anticipated public consultation regarding its draft Implementing Regulation, including two annexes containing notification forms for concentrations and public procurements. Stakeholders have until 6 March 2023 to submit comments.

Quick recap of the FSR

As we have outlined in previous client alerts (available here and here), the FSR aims to fill a perceived regulatory gap: although Member State support to undertakings has for decades been subject to strict State aid controls, the impact on EU markets of third-country support has until now escaped scrutiny. To address this, the FSR adds three new tools to the EC’s toolbox: two notification-based tools for large M&A deals (concentrations) and government contracts (public procurements), and a general investigation tool for any market situation that might involve foreign subsidies, including below-threshold concentrations and public procurements.

The notification thresholds are based on the financial contributions received, namely:

• For concentrations: the acquisition target, at least one of the merging undertakings, or the joint venture must be established in the EU and have an aggregate EU-wide turnover of at least 500 million euros, and the undertakings involved must have received aggregate financial contributions from non-EU countries of at least 50 million euros over the three years preceding the deal.
• For public procurements: the estimated value of the contract must be at least 250 million euros, and the economic operator and its main subcontractors and suppliers must have received aggregate financial contributions in the three preceding years of at least 4 million euros per third country.

The notion of “financial contribution” covers a wide range of government support measures, including transfers of funds or liabilities (such as capital injections, loans, loan guarantees, debt forgiveness, etc.), foregoing of revenue otherwise due (such as tax exemptions or granting of special or exclusive rights without adequate remuneration) and even the provision or purchase of goods or services. 

While a foreign subsidy is a financial contribution granted by a third country (i.e., by any level of government, and by public and private entities whose actions are attributable to the State) which confers a selective benefit (i.e., which is not in line with normal market conditions and is limited, in law or fact, to specific undertakings, groups of undertakings or industries), the notion of “financial contribution” does not require such selective benefit. This is crucial, as it means that all government financial contributions count towards the calculation of the thresholds, even those made under arms’ length conditions.

If the EC finds, after a substantive assessment, that third-country financial contributions to undertakings constitute foreign subsidies and distort competition in EU markets, it has to carry out a balancing test, weighing the negative effects on competition against any positive effects on the development of the subsidized activity or broader positive effects in relation to the relevant policy objectives, and in particular those of the EU itself.

The FSR empowers the EC to impose remedies (called redressive measures in the text) or accept commitments offered by the undertakings involved to mitigate market distortions, as well as to fine companies for gun jumping, failure to notify, obstructing investigations or providing incorrect or misleading information.

The FSR entered into force on 12 January 2023 and will apply as from 12 July 2023. From that date, the EC will be able to launch ex officio investigations, although the notification obligations for concentrations and public procurements will apply only as from 12 October 2023.

The Implementing Regulation

The draft Implementing Regulation sets out detailed procedural rules, among others regarding the following aspects of the FSR:

• The notification procedures and the content of notifications;
• Rules regarding the calculation of time limits (e.g., the start date, the definition of “working day”, etc.);
• Procedural rules on preliminary reviews and in-depth investigations in cases of suspected distortive foreign subsidies.

Hereafter, we will discuss the first and last topic. 

Notifications

As regards the notification requirements, the EC has made a significant effort in the draft Implementing Regulation to reduce the burden on companies related to notifying the financial contributions they have received from non-EU countries.

In the case of concentrations, financial contributions from third countries only need to be reported if they amount to at least 200,000 euros individually and to at least 4 million euros in total per country per year. In addition, certain detailed information need only be provided for financial contributions most likely to distort competition according to the FSR, namely aid to ailing undertakings, unlimited guarantees, export financing not in line with applicable OECD rules, and direct facilitation of concentrations.

In the case of public procurements, only aggregate foreign financial contributions of at least 4 million euros per third country in the three years prior to the notification need be reported. Moreover, only foreign financial contributions identified as most likely to distort competition have to be reported, namely aid to ailing undertakings, unlimited guarantees, export financing not in line with applicable OECD rules, direct facilitation of unduly advantageous tenders, and contributions relating to operating costs. This requires a pre-notification substantive assessment by the tenderer as to which financial contributions may amount to market-distorting subsidies.

As a result of these thresholds, the draft Implementing Regulation seems at first sight to go further in lightening the burden on notifying parties with respect to public procurements than with respect to concentrations. However, Article 29(1) FSR provides that, even if the notification thresholds for public procurements are not met, economic operators shall nevertheless “list in a declaration all foreign financial contributions” received in the three preceding years and confirm that they are below 4 million euros per third country. It has been suggested by some commentators that this “declaration” would only be required if the first notification threshold (i.e., estimated contract value of at least 250 million euros) is met, but not the second. 

Unfortunately, neither the draft Implementing Regulation nor the annexed notification form provide full clarification on this issue, despite its practical importance. The form states that, where no notifiable foreign financial contributions have been granted to the notifying party(ies) in the last three years, the sections of the form concerning detailed information about the foreign financial contributions received, the justifications for the absence of undue advantage, and the potential positive effects of the contributions need not be completed. Nevertheless, the form repeats that in accordance with Article 29(1) FSR, the notifying party(ies) must list “all foreign financial contributions received”. This still leaves open the question whether such “non-reportable” contributions should be “listed” or “declared” in case the estimated contract value is below 250 million euros.

The draft Implementing Regulation allows notifying parties to request a waiver from the EC, i.e., to exempt them from providing information otherwise required as part of the notification. However, no further guidance on the circumstances in which the EC may might grant such waivers is provided. It therefore remains to be seen how liberally or sparingly the EC will use this tool in practice. Furthermore, the draft Implementation Regulation does not provide for a simplified notification procedure (or “short form” notification) similar to the one available under the EU Merger Control Regulation. This seems like a missed opportunity.

In order for companies to know whether they meet any of the reporting thresholds, they must draw up a complete inventory of any and all financial contributions that they receive from non-EU countries, including relatively insignificant ones: for instance, a company cannot be sure if it has received aggregate contributions of 4 million euros or more in the prior three years unless it keeps track of all of them (and keeps this information constantly up-to-date). In addition, the limitation of the reporting requirements to financial contributions belonging to certain categories considered as high-risk requires companies to assess whether any of the foreign financial contributions they receive fall within these categories. Thus, while the draft Implementing Regulation certainly reduces the burden as regards reporting to the EC, it still requires companies participating in high-value M&A deals or public tenders to set up an entirely new internal reporting/monitoring system to keep track of all the foreign financial contributions they receive. Especially for large multinational companies – i.e., precisely the type of companies likely to be involved in such transactions – this is likely to be a complex and burdensome exercise, especially considering the extremely wide definition of “financial contributions”.

Procedural rules for investigations 

Time limits for the submission of observations

The Implementing Regulation sets a time limit of only one month from the opening of an in-depth investigation for the undertaking under investigation to submit comments, although this may be extended by the EC if duly justified. 

However, it is left up to the EC to determine the time limit for making observations relating to the grounds on which it is planning to adopt its decision (similar to a “statement of objections” in antitrust or merger proceedings). Again, the EC may extend this time limit upon request. 

Commitments and redressive measures 

The proposal determines the procedure for offering commitments both in concentrations and public procurement procedures. 

For concentrations, notifying parties should normally offer commitments no later than 65 working days from the opening of an in-depth investigation, however the time limit will be automatically extended if the deadline for adopting an EC decision was previously extended. Even after the expiry of the 65-day period, the EC may consider commitments in exceptional situations. 

For public procurement procedures, the proposed deadline is 50 working days from the opening of the in-depth investigation, although, as is the case of concentrations, commitments proposed after the deadline may also be taken into account. 

If redressive measures are adopted, the EC may require the appointment of at least one independent trustee, to be paid by the undertaking, to help it monitor compliance with the remedial measures. It is the EC who supervises these trustees, but an undertaking may make the appointment, with the EC’s approval. 

Redressive measures that may be imposed by the EC include transparency and reporting obligations. In these situations, the undertaking has to report for a determined period of time on what foreign financial contributions it receives, or whether it participates in concentrations or public procurement procedures, or how it is implementing the EC’s decisions. 

Access to file and treatment of confidential information

After the undertaking is notified of the grounds on which the EC intends to adopt a decision, it may request access to the EC’s file, excluding internal documents of the EC and authorities of Member States or third countries, and correspondence between them. The proposal allows undertakings to request a non-confidential version of all documents mentioned in the grounds, as well as a list of all documents on the EC’s file. 

Additionally, the EC may provide access to all documents in its file to a limited number of specified legal and economic counsel and technical experts under specific conditions, which are intended to ensure the protection of business secrets and other confidential information (similar to a data room procedure in antitrust or merger proceedings). If the EC decides that the harm of such disclosure outweighs the disclosure value for the rights of defense, it may either refuse access to the file or partially redact information.

Next steps

As already mentioned, the public consultation on the draft Implementing Regulation runs until 6 March 2023. The EC plans to adopt the final Implementing Regulation in the second quarter of 2023, and it is in any event obliged to do so before the application date of the FSR, i.e., 12 July 2023. The notification obligations will only start to apply three months later, on 12 October 2023. The FSR also mandates the EC to adopt guidelines on, among others, the criteria to assess market distortions and the application of the balancing test, at the latest by 12 January 2026.

The authors thank Mr Oleksii Yuzko for his assistance in preparing this alert.