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New regulation on foreign subsidies

In recent years, foreign subsidies appear to have distorted the EU’s internal market, including by providing their recipients with an unfair advantage to acquire companies or obtain public procurement contracts in the EU to the detriment of fair competition.
European Union flags in front of the Berlaymont

The FSR addresses such distortions and closes a regulatory gap. Subsidies granted by non-EU governments (so called third states) currently go largely unchecked, while subsidies granted by Member States are subject to scrutiny under EU State aid rules. The FSR includes new tools to effectively tackle foreign subsidies that cause distortions and undermine the level playing field in the internal market.

New regulation on foreign subsidies

On 12 January 2023, the EU Foreign Subsidies Regulation (‘FSR’) entered into force (Regulation (EU) 2022/2560 of 14 December 2022). This new set of rules for addressing distortions caused by foreign subsidies will allow the EU to remain open to trade and investment, while ensuring a level playing field for all companies operating in the Single Market.

Depending on EEA relevance and the position of the Norwegian government, the FSR may have a significant impact on Norwegian companies, particularly in connection with business transactions and public tenders, where new notification obligations are introduced. In all events the regulation is relevant for Norwegian companies operating in the internal market. The FSR may also impact Norwegian public procurers.

Background

In recent years, foreign subsidies appear to have distorted the EU’s internal market, including by providing their recipients with an unfair advantage to acquire companies or obtain public procurement contracts in the EU to the detriment of fair competition

The FSR addresses such distortions and closes a regulatory gap. Subsidies granted by non-EU governments (so called third states) currently go largely unchecked, while subsidies granted by Member States are subject to scrutiny under EU State aid rules. The FSR includes new tools to effectively tackle foreign subsidies that cause distortions and undermine the level playing field in the internal market.

General remarks

The Commission is trusted with three new tools to deal with foreign subsidies that can distort competition in the internal market:

  • FSR has introduced a notification obligation to the Commission of corporate transactions above certain thresholds.
  • FSR has introduced a notification obligation to the Commission of financial contributions in connection with public tenders above certain thresholds.
  • The Commission has been given the right to investigate other situations where foreign subsidies occur on its own initiative.

Definition of foreign subsidies

Foreign subsidies are considered to exist when “a third country directly or indirectly makes an economic contribution that results in an advantage for an undertaking that carries out an economic activity in the internal market, and when this contribution is legally or de facto limited to one or more companies or industries”.

The definition of foreign subsidies thus corresponds in general to the definition of state aid according to EU state aid rules. It must therefore be (i) a financial contribution, (ii) provided by a third country, (iii) which provide the recipient with a benefit and (iv) be allocated selectively to one or more companies or industries.

The FSR contains a non-exhaustive listing of types of financial contributions. The financial contribution must have been made by a third country. It includes both financial contributions made by states and public authorities as well as public and private companies if their actions can be attributed (imputable) to a third country.

The financial contribution must lead to an advantage for one or more companies that carry out an economic activity in the internal market. A financial contribution is considered to result in an advantage if it could not have been obtained under normal market conditions. The financial contribution must be selective to the companies or industries concerned.

Assessment of foreign subsidies

The Commission must assess on a case-by-case basis whether the foreign subsidies are distortive to competition in the internal market.

A distortion is considered to exist when it is likely that foreign subsidies can improve a company’sit competitive position in the internal market, and when the subsidies thereby actually or potentially have a negative effect on competition in the internal market.
The FSR contains a non- exhaustive list of factors that must be considered when assessing whether there is a distortion of the competition. It includes i.e. the size of the foreign subsidies, the nature of the foreign subsidies, the company concerned, and the situation of the company concerned activity level and stage of development in the internal market and the purpose and conditions of the foreign subsidies.

To facilitate the economic assessment the FSR distinguishes between subsidies that are presumed to distort competition and subsidies that are unlikely to distort competition.
Hence, as a rule of presumption, if the total amount does not exceed EUR 4 million in a continuous period of three financial years it is considered unlikely that the foreign subsidy will distort competition in the internal market. In addition, foreign subsidies are generally not considered distortive to competition in the internal market if their total amount does not exceed de minimis aid, i.e. that the foreign subsidies do not exceed EUR 200,000 per third country over a continuous period of three financial years.

The FSR also lists several foreign subsidies, which are most likely to distort competition in the internal market. This includes (1) Unlimited guarantees, (2) Subsidies to an ailing company without a restructuring plan, (3) Subsidies directly facilitating a concentration, (4) Subsidies enabling an unduly advantageous tender and (5) Export financing not in line with OECD Arrangement on officially supported export credits.

In other cases, the Commission must carry out a so-called ” balancing test “, i.e. balance the negative effects of the foreign subsidies in the form of distortion of competition in the internal market in relation to their positive effects on how the subsidised economic activity develops in the internal market. There are identified some indicators of distortion which are; (1) Amount and nature of subsidy, (2) Situation of the company, including its size, and the market or sectors concerned, (3) Level and evolution of economic activity on the internal market and (4) Purpose, conditions and use of the subsidy.

Provided that the Commission finds that foreign subsidies distort competition in the internal market, the Commission can impose the recipient of the subsidies remedies or accept commitments.

Reporting obligation of certain corporate transactions

The FSR introduces a notification obligation of certain corporate transactions. The reporting obligation implies that certain business transactions must in the future be reported to and approved of by the Commission before the transaction can be closed.

Violation of the notification obligation is subject to an administrative fine. The Commission can impose on the participating companies fines of up to 10 % of their total turnover in the preceding period financial year, if a notifiable transaction be carried out without prior approval.

Business transactions are defined in the same way as within the European competition law, i.e. transactions, whereby (i) two or more independent companies merge into one company, (ii) one or more companies acquires the direct or indirect control over all or parts of one or more other companies, as well as (iii) a joint venture is established, which on a permanent basis fulfill all functions of the business (full- functioning joint venture).

  • An ex-ante notification obligation for concentrations involving a financial contribution by a non-EU government, where (i) the EU turnover of the company to be acquired, at least one of the merging parties or the joint venture is of at least €500 million and (ii) the foreign financial contribution reaches at least €50 million.

The Commission can also require notification of business transactions, where the threshold values have not been exceeded, if the transaction has not yet been implemented, and the Commission suspects that foreign subsidies have been awarded to the participating companies in the three years preceding the merger.

The deadlines for the Commission’s assessment of notified business transactions correspond to the deadlines within merger control. The Commission has from receipt of a complete notification 25 working days to make an initial assessment of the notified transaction. If the Commission before expiry of the 25 working days estimates that further investigations are required, the Commission has the competence to initiate a Phase II investigation (in depth investigation).

The Commission has 90 working days to assess the transaction. However, this period can be extended by 15 working days if the participating companies makes a commitment. The Commission may, in addition, by agreement with the participating companies extend the period by a further 15 working days.

If the Commission finds that the foreign subsidies are distorting competition in the internal market, and the balancing test demonstrates that the negative effects do not offset of positive effects, the Commission can impose remedies (structural or behavioral), accept commitments or if the distortion of competition cannot be remedied at all, prohibit the transaction.

Notification in connection with public tender procedures

The FSR also introduces an obligation to notify in connection with certain public procurement procedures. The reporting obligation implies that financial contributions received from third countries in connection with public tenders must be reported to and approved by the Commission before the contract can be awarded.

Violation of the notification obligation is subject to an administrative fine. The Commission can impose fines on the economic operators concerned of up to 10% of their total turnover in the previous financial year if a financial contribution is not reported.

A reportable financial contribution in connection with a public tender is deemed to exist when the following threshold values are exceeded:

An ex-ante notification obligation for public procurement procedures where (i) the contract value is at least €250 million and (ii) the bid involves a foreign financial contribution of at least €4 million per non-EU country.

If the conditions for reporting are met, the economic operator must report all financial contributions received within the past three years to the contracting authority, which then forwards the notification to the Commission. If the conditions for notification are not met, the economic operator must in a statement to the contracting authority list the financial contributions received and confirm that they are not subject to notification.

In an open procedure, the notification shall be submitted together with the bid. For limited tenders and other two-phase tender procedures, the application must be submitted together with the application for prequalification or together with the bid.

If the Commission finds that the notification is incomplete, the Commission requests the economic operator to complete the notification within 10 working days. If the economic operator does not complete the notification within this period, the Commission shall adopt a decision by which the economic operator’s offer is declared incorrect, which has the consequence that the contracting authority must reject the offer.

Once the Commission has received a complete notification, the Commission has 20 working days to assess the financial contributions. The Commission may in duly justified cases extend the deadline by 10 working days. If the Commission before expiry of the 20/30 working days estimates that further investigations are required, the Commission may initiate an in-depth investigation. In that case, the Commission has 110 working days calculated from receipt of the full report to conduct an in-depth investigation. The Commission may in duly justified cases extend the deadline by 20 working days.

The award of the contract must await the Commission investigation.

If the Commission finds that the foreign subsidies are distorting competition in the internal market, and the balancing test shows that the negative effects is not offset by the positive effects, the Commission can accept commitments from the economic operator, or if the distortion of competition cannot be remedied at all, prohibit the economic operator from being awarded the contract.

Own initiative

The general investigation tool (ex-officio) will allow the Commission to investigate on its own initiative any type of economic activities and market situations, such as greenfield investment or the provision of services, when it suspects that a foreign subsidy may be involved.

Entry into force

On 12 July 2023, the FSR will start to apply. As of this date the Commission can start ex officio investigations. On 12 October 2023, the notification obligation for concentrations and public procurement above certain thresholds starts to apply. However, already closed financial years can be part of the documentation requirements given that all subsidies received in the last three years prior to call for tenders are reportable. The Implementing Regulation is currently on a public hearing. Moreover, the Commission has issued a Q&A page, for undertakings and other interested parties to find answers to the practical implementation of the FSR.

Practical considerations

The FSR gives rise to a few practical considerations, in connection with business transactions and public tenders.

Corporate Transactions

The FSR will clearly cause greater complexity in transaction processes, as it introduces an additional notification obligation for certain transactions. The FSR applies in addition to the merger control rules and foreign direct investment (FDI) rules. A transaction may thus be subject to notification to both (i) the Commission according to the FSR, (ii) the Commission and/or one or more national competition authorities under the merger control rules, and (iii) one or more national authorities according to the FDI rules. The FSR could also lead to new considerations in relation to transactions, if e.g., certain bidders in an auction process can be expected to need approval from the Commission, while this is not the case for others.

Public procurement procedures

The FSR will also cause greater complexity in public tenders, as it introduces a notification obligation in connection with certain tender procedures. The FSR will thus have significant impact on both contracting authorities and bidders. For bidders, it is essential to be aware of whether they have received financial contributions from third countries within the last three years, or whether their main subcontractors or suppliers have received such contributions. For contracting authorities, it is essential to require and to submit the relevant information and to conduct the procedure according to the timeline with the necessary assessments from the Commission.