Brussels, 28 November 2022
On 28th of November 2022, the Council of the European Union adopted the Foreign Subsidies Regulation (“FSR”), aimed at preventing foreign subsidies from distorting competition in the internal market. This was the last legislative step following the European Parliament’s adoption of the FSR on 10 November 2022.
The purpose of the FSR is to address the distortions to the EU’s internal market caused by subsidies granted by non-EU countries (“foreign subsidies”) to companies active in the EU. According to the Commission, the FSR closes an important enforcement gap in its toolbox, as these foreign subsidies have so far been escaping its control, unlike the subsidies given by EU Member States, which are subject to stringent EU State aid rules.
Under the FSR, the Commission has the exclusive competence to investigate and assess if the businesses operating in the EU have been backed by foreign subsidies, and whether these distort competition in the internal market. In case of distortion, the Commission has wide-ranging powers to impose redressive measures, block deals / public awards and even dissolve concentrations already concluded.
The FSR is expected to be published in the Official Journal in January 2023 and will enter into force 20 days after that. It will only apply six months after its entry into force.
The notification obligation for M&A deals and public tenders will apply nine months after its entry into force. An implementing regulation is expected to be adopted before summer 2023 (and after a public consultation, which will take place in the coming months).
The FSR targets all companies that are active in the EU and have received any form of direct or indirect financial contribution from a non-EU country (“foreign financial contributions”), and in particular, those that engage in M&A transactions or public tenders in the EU. Financial contributions are defined very broadly and include, inter alia:
- Any transfer of State funds: such as capital injections, grants, fiscal incentives, loans, guarantees, contracts given below-market terms, debt to equity swaps or rescheduling, etc.; and;
- Any foregoing of State revenue: such as tax exemptions or granting of special/exclusive rights without adequate remuneration.
The financial contributions may come from the central government, but also any public or private entity whose actions can be attributed to a third country. As things stand, all financial contributions will count, regardless of their size, or whether they qualify as “foreign subsidies” or have an EU nexus.
The FSR applies to private and public companies, including Sovereign Funds. It catches not only foreign companies operating in the EU but also EU-based multinational companies that have received foreign financial contributions.
In general, a subsidy would be considered distortive if it could improve the business’s competitive position in the EU and in doing so, negatively affects competition on the internal market. To ease the Commission’s review, the FSR includes a few legal presumptions to determine the existence of distortion or lack thereof:
- Subsidies likely to be distortive: (i) supporting failing business (without a long-term plan to restructure); (ii) unlimited guarantees; (iii) facilitating a concentration; (iv) an export financing measure that is not in line with the OECD Arrangement on officially supported export credits; and (v) enabling a company to submit an unduly advantageous tender;
- Subsidies unlikely to be distortive: if lower than €4 million in the past three years; or if aimed at repairing damage caused by natural disasters or exceptional circumstances; and
- Non-distortive subsidies (de minimis): below €200,000 per the third country in the previous three years.
If there is a distortion, the Commission will conduct a balancing test before deciding whether to block the deal/award, impose redressive measures or accept commitments. In this regard, the Commission will take into account the positive effects of the subsidy on either the development of the subsidised economic activity on the internal market or to support a broader EU policy objective, such as environmental protection and social standards, and the promotion of R&D.