On 28 November 2022, the EU institutions formally adopted a Regulation on foreign subsidies distorting the internal market (“Regulation“). The new rules will have a major impact on M&A transactions and will significantly increase the administrative burden facing many EU and non-EU companies doing business in Europe.
The Regulation is part of a broader effort to protect the EU’s geopolitical “open strategic autonomy“. It aims to level the playing field by allowing the European Commission (“Commission“) to intervene where foreign subsidies granted directly or indirectly by third countries threaten to distort the EU internal market.
Where companies have benefitted from foreign subsidies above specific thresholds, the Regulation confers exclusive powers on the Commission to conduct an ex ante assessment of:
1. concentrations (mergers, acquisitions and full function joint ventures, and
2. the award of large public contracts.
It will also enable the Commission to examine on its own initiative, ex post, any economic activity benefiting from a third country subsidy that may have distortive effects, conferring on it broad investigative powers, including the adoption of interim measures and the launch of sector inquiries.
If a distortion is established, the Commission can impose proportionate redressive measures, including structural and non-structural remedies, and a requirement to repay the subsidy together with interest.
The Foreign Subsidies Regulation casts a broad net given the expansive notion of what amounts to a foreign subsidy, the ability to look back over multiple years, and the relatively low notification thresholds for financial contributions.
It will not only capture State-owned enterprises, but many large multinationals operating in Europe, regardless of whether their headquarters are domiciled within or outside the EU. The Regulation imposes a significant administrative burden on recipients of third country financial contributions, even where these contributions do not qualify as “subsidies”.
It is key to understand and anticipate your company’s exposure to the new rules and to start building the underlying data repository in order to avoid potential disruption to business once the Regulation enters into force.
Contact us for a more in-depth overview on the new regime and a conversation about how Baker McKenzie’s new foreign subsidies tool can help your organisation prepare to identify and track relevant third country contributions.
Overview of the Foreign Subsidies Regulation
1. What is a foreign subsidy?
(1) A financial contribution is a broad notion including…
- the transfer of funds or liabilities
- the foregoing of revenue that is otherwise due
- the provision or purchase of goods or services
(2) …provided directly or indirectly by a third country…
Financial contributions must be granted by the public authorities of a non-EU country. This is interpreted broadly to include all direct and indirect support that can be attributed to a third country public body.
(3) …which confers a benefit…
A financial contribution is considered to confer a “benefit” if it could not have been obtained under normal market conditions.
(4) … to one undertaking or to a limited group of undertakings operating in the EU
The financial contribution must be ‘selective’. A financial contribution open to all economic operators does not qualify as a foreign subsidy.
2. When is a foreign subsidy distortive?
Only if the foreign subsidy has a distortive effect on the EU internal market can the Commission prohibit the transaction or tender award, or otherwise intervene to impose remedies. A distortive effect will be deemed to exist where a foreign subsidy is liable to improve the competitive position of the recipient and, in doing so, it actually or potentially negatively affects competition on the EU internal market.
3. Suspensory notification regime for concentrations
Many of the concepts and mechanics inherent in this new mechanism reflect the provisions of the EU Merger Control Regulation, including the concept of a concentration. Proposed concentrations must be notified separately to the Commission for prior foreign subsidy approval if:
- the target company, the planned full-function JV, or at least one of the merging companies is established in the EU and has an aggregate EU-wide turnover of at least EUR 500 million, and
- the aggregate of all third country financial contributions received by the companies involved in the prior three financial years exceeds EUR 50 million.
The Commission can request the notification of concentrations ex officio where these thresholds are not met in which case the time limits laid down in the Regulation apply. Where parties fail to notify, the Commission may review the concentration on its own initiative but in this scenario is not bound by the time limits.
4. Suspensory notification regime for large public tenders
Tenders falling within EU public procurement rules (with the sole exception of defence and security contracts) must be notified if:
- the contract value exceeds EUR 250 million and, where the tender is divided into lots, the aggregate value of the lots applied for exceeds EUR 125 million, and
- all financial contributions received by the bidder (and by ‘related undertakings’) during the last three financial years exceed EUR 4 million per third country.
The concept of ‘related undertakings’ includes not only subsidiaries and holding companies within a corporate group, but also any involved ‘main’ subcontractors and suppliers of the bidder known at the time of submission of the complete tender documentation.
The public contract cannot be awarded to the bidder in question before the end of the Commission’s review. If the EUR 4 million threshold is not met, the bidder must nonetheless provide a declaration of all the third country financial contributions it has received and confirm that these are not notifiable to be able to participate in the tender.
5. Ex-officio review of foreign subsidies in all other cases
The Commission can proactively examine the impact of any given operator having received third country financial contributions in any sector. This includes financial contributions in the context of defence projects excluded from the procurement review tool, as well as concentrations and public contracts under the thresholds of the notification-based tools. Ex officio reviews of public contracts are limited to awarded contracts and may not result in the annulment of the award decision or the termination of contract. Any ex officio investigation does not trigger a standstill obligation.
The Commission is able to examine subsidies granted up to 10 years prior to the investigation, including in the five years prior to the Regulation entering into force (i.e., as far back as 2018), with the exception of public procurement procedures where the Commission can look back three years.
The new regime will have teeth. Fines for non-compliance mirror the competition law fines:
- up to 10% of global annual revenue for substantive infringements (failure to notify/gun-jumping/circumvention)
- up to 1% of global revenue for procedural infringements (intentionally/negligently supplying incorrect or misleading information), and daily fines for failure to cooperate or for non-compliance with a decision.
It is important for multinationals to engage in the coming months to ensure that the draft implementing rules and guidance, that the Commission is expected to consult on shortly, are as workable as possible in the real world. It is in everyone’s best interests to ensure that only those foreign subsidies most likely to have a detrimental impact are screened and that business is not burdened with unnecessarily cumbersome bureaucracy. Baker McKenzie has developed an interactive tool to help companies define, categorise and map financial contributions. Contact the individuals below or your usual Firm relationship contacts to find out more.