The EU has adopted a final text for a new Regulation on foreign subsidies distorting the Internal Market (“Regulation”). The Regulation will empower, from 12 July 2023, the European Commission (“EC”) to take measures against subsidies granted by non-EU countries to any undertaking within the meaning of EU competition rules, engaging in economic activities in the EU (in particular those involved in public tender proceedings and concentration). It remains to be seen whether the entry into force of the Regulation will also eventually open the gates for private enforcement before national courts, which is fairly limited when it comes to the application of internal EU State aid rules.
The Regulation clearly aims at creating some sort of common level playing field between the principles applicable to EU Member State aid, as set by Article 107 (1) TFEU and interpreted by the EU courts and the EC, and foreign State support. Hence, the adoption of the Regulation constitutes a major turning point in the EU policy vis à vis foreign State aid.
So far the EU has relied only on the World Trade Organization Agreement on Subsidies and Countervailing Measures (“WTO ASCM”) which regulates the use of subsidies and the actions that countries can take to counter the effects of subsidies. The scope of application of the WTO ASCM is however mainly limited to trade in imported goods through the application of countervailing duties and does not address subsidies in services, investment or other financial flows in relation to the establishment and operation of companies in the EU.
Through the new Regulation, not only does the EU probably want to fill this gap but it also probably wishes to have at its disposal more efficient and quicker defence tools in an economic world that is becoming less and less globalized.
While at this point, it may be difficult to predict how harshly the Regulation will be applied, it appears more than reasonable to think that it will be given a far reaching interpretation. Indeed, this would be equivalent to the way Article 107 (1) TFEU has been interpreted and applied by the EC and the European courts, to the extent that the purpose of the Regulation is to create some kind of balance in the Internal Market between the EU internal State aid rules and the rules applicable to foreign subsidies from which undertakings active in the EU may benefit. The various guidelines and implementing acts that the EC will adopt should provide a clearer view as to how the EC will implement the Regulation.
The Regulation provides the EC with three tools to control foreign subsidies that distort competition in the Internal Market in the context of merger control and public tender proceedings:
- The ex officio ability to investigate any undertaking active in the EU that has received financial support from a non-EU country in the last 10 years irrespective of the kind of economic activities they conduct;
- A specific mandatory notification regime for certain M&A/JV deals; and
- A specific mandatory notification regime in the context of public procurement.
Target of the Regulation: “foreign subsidies” that “distort” the Internal Market
The Regulation aims at reviewing “foreign subsidies” which are deemed to exist where a non-EU country provides, directly or indirectly, any form of financial contribution which confers a benefit on undertakings engaging in economic activities in the EU. The financial contribution notion shall cover the transfer of funds or liabilities, foregone revenue that is otherwise due or even the provision or purchase of goods or services. Thus the definition of “financial contribution” in the Regulation looks pretty wide. Even if there were any gaps left, one can reasonably expect that the EC various regulations, guidelines and decisions as well as the European courts’ case law relating to Article 107 (1) TFEU will mutatis mutandis be reflected in the guidelines and implementing acts that the EC plans to adopt in the context of the Regulation.
Unlike State aid granted by a Member State (falling within the ambit of Article 107(1) TFEU), foreign subsidies are not in principle deemed to violate the new Regulation since it will have to be demonstrated that they have an effect in the Internal Market, which is more or less presumed when it comes to EU Member State aid. To check whether there is an effect in the Internal Market, the EC will be able to rely on a set of non-exhaustive indicators (including the amount of the foreign subsidy, the nature of the foreign subsidy, the situation of the company including its size and the markets or sectors, etc.).
The Regulation, however, already identifies certain foreign subsidies that are likely to create distortions in the Internal Market: foreign subsidies granted to ailing undertakings, unlimited guarantees for debts or liabilities, foreign subsidies directly facilitating “a concentration”, or a foreign subsidy enabling an undertaking to submit an unduly advantageous tender. Foreign subsidies valued at less than EUR 4 million will not likely be able to distort the Internal Market and subsidies valued at less than EUR 0.2 million over any consecutive period of three years will be considered de minimis. However, there seems to be little doubt that the EC will adopt a far reaching approach. In this regard, the mere fact that the Regulation refers to foreign subsidies to “undertakings” (not to companies) is revealing. To give but a few examples: company A, which is part of the same undertaking as company B, engages in R&D for which it benefits from direct or indirect foreign State subsidies. Company B benefits from the R&D support of company A for its activities in the EU. This should fall within the ambit of the Regulation. In another situation, the controlling company enjoys a specific favourable tax treatment in its home jurisdiction which may be leveraged for an M&A deal in the EU by a company it controls – here again the Regulation should apply.
In assessing the distortive nature of foreign subsidies, the EC may balance the positive effects of the foreign subsidy on the development of the relevant subsidized economic activity and the negative impacts of the foreign subsidy on the competitive position of the other undertakings. This draws from tests used in the context of Trade Defence Investigations (“TDI”) and State aid investigations. Of note, the Regulation specifies that Member States, as well as any natural or legal persons, will be able to submit information on the positive effects of a foreign subsidy which the EC should take into account when carrying out the balancing test.
The three investigative tools
Ex-officio review by the EC
The EC can investigate on its own initiative any suspicion based on information from any source that foreign subsidies distort the Internal Market (i.e. including undertakings wishing to provide information about foreign subsidies received by their competitors). This ex officio review covers any economic activity and, contrary to the ex-ante notifications for concentrations and participations in EU tenders, is not subject to economic thresholds or strict procedural deadlines. Foreign subsidies that were granted up to five years preceding the review fall in the scope of the EC’s assessment.
The review process involves two steps:
- Preliminary review during which the EC may request information from or conduct inspections at the premises of undertakings (both inside and outside the EU – with regard to inspections conducted outside the EU, the question arises as to whether the EC might consider the hurdles raised by foreign States and undertakings as evidence demonstrating that foreign subsidies have been granted). The EC will conclude its preliminary review by publishing a notice in the Official Journal informing interested parties of its decision and inviting interested parties to express their view (akin to Article 108 TFEU for EU Member States aid).
- Where the EC has sufficient indications that an undertaking has been granted a foreign subsidy that distorts the Internal Market, it will open an in-depth investigation to further assess the foreign subsidy by requesting additional information.
Before adopting a decision, as well as in other scenarios listed in the Regulation, the EC will give the investigated undertakings the opportunity to exercise their rights of defence and submit observations on the grounds on which the EC intends to adopt its decision. Contrary to what happens when it comes to EU Member States aid, the investigated undertakings will thereafter be considered as defendants and should, as such, be provided access to relevant material on the EC’s file in order to exercise their rights of defence.
Where the EC finds that a foreign subsidy affects the Internal Market, it may impose redressive measures such as repayment of the foreign subsidy to the donor State, behavioural remedies, divestments, or requirements for companies to adapt their governance structure. The EC may also accept commitments offered by a company to fully and effectively remedy the distortion. Once accepted by the EC, these commitments will be binding on the company. Where a company does not comply with these measures or commitments, the EC may impose fines up to 10% of the worldwide turnover of the undertaking. In such situation, the EU will, indirectly, recover the State aid granted by foreign States.
The EC powers include imposing periodic penalty payments for failure to supply in a timely manner the requested information or for supplying incomplete, incorrect or misleading information and to adopt interim measures to restore competition in the Internal Market and to prevent irreparable harm.
Notification regime for M&A deals
The Regulation also creates a mandatory pre-closing notification and approval regime for “concentrations” within the meaning of the EU Merger Regulation (mergers, acquisitions or creation of full function JVs) involving foreign subsidies directly or indirectly granted in the three years prior to the transaction. This regime will apply in parallel to the EU merger control review of deals as well as any Foreign Direct Investment (“FDI”) review processes. It may be used by competitors to derail a deal.
A concentration will need pre-closing EC approval under the Regulation:
- The target in an acquisition, one of the merging businesses, or the JV (once created), is established in the EU and generated aggregate revenues of more than EUR 500 million in the EU; and
- Either the merging companies, buyer and target in an acquisition or the companies establishing a JV and the JV received financial contributions from non-EU countries totalling more than EUR 50 million in the three years prior to the notification.
Note that the EC will also be able to call-in deals that fall below these thresholds where it suspects that one of the undertakings involved has benefitted from foreign subsidies in the last three years.
The broad concept of “financial contributions” implies that many concentrations within the meaning of the EU merger control regulation may be captured by the regime. Indeed, this concept will cover foreign public grants, loans, tax incentives and even contracts with enterprises. In this regard, contracts entered into by foreign States with foreign headquartered undertakings, from which EU headquartered undertakings would be “per se” excluded, could possibly be considered as falling within the ambit of the Regulation.
The only limiting factor though is that unlike under the EU merger control regime, the JV, target in acquisitions or one of the merging parties must be established in the EU. We note, however, that this concept is not defined in the Regulation but one may expect that it will be defined in the coming EC implementing act or guidelines.
When reviewing M&A deals, the EC will consider whether a deal is being facilitated by foreign subsidies insofar as these foreign subsidies may negatively impact competition in the Internal Market. In such a case, the EC will be able to prohibit the transaction or, at least, require the parties to provide commitments to resolve concerns. No wonder that this notion can and will be applied extensively by the EC.
In terms of procedure, the Regulation foresees review periods which broadly align with those of the EU Merger Regulation: a 25 working day preliminary review from receipt of the notification, which can be followed by another 90 working day in-depth investigation (in each case lengthened should commitments be provided by the companies). Similar to the EU merger control regime, failure to notify or implementation of M&A deals prior to clearance under the Regulation will be subject to significant fines and risk the transaction being unwound.
Notification regime in the context of public procurement
The notification obligation in the context of public procurement will be triggered if:
- The estimated value of public contracts in question is more than EUR 250 million; and
- Bidders have received foreign subsidies of more than EUR 4 million per non-EU country in the last three years. This includes not only subsidies received by the bidding company itself but also those received by all of its affiliated companies, and those received by their main subcontractors and suppliers involved in the same public procurement procedure.
The EC must carry out its preliminary review within 20 working days after it has received a complete notification (which may be extended by 10 working days once) and, if it decides to initiate an in-depth investigation, must close such an investigation no later than 110 working days after the notification which may be extended once by an additional 20 working days. As for EU State aid, one might expect that the EC will consider that the starting point of this period to be the day the EC considers the notification complete. The contracting authority cannot award the contract to an undertaking notifying receipt of a foreign subsidy until the EC has concluded its review or until the procedural time limit has lapsed.
The EC may prohibit the award where the advantageous nature of the tender benefitting from a foreign subsidy cannot be justified or the undertaking in question does not offer appropriate and sufficient commitments to fully and effectively remove the distortion of competition.
Timeline for the entry into force of the Regulation
The European Parliament adopted the legislative act on 10 November 2022. The Council gave its final approval on 28 November 2022. The Regulation was published in the Official Journal on 23 December 2022, and entered into force on 12 January 2023. Six months from the date of its entry into force, on 12 July 2023, the Regulation will be directly applicable throughout the EU. Another three months later, on 12 October 2023, the notification requirements will become operational.
It is expected that the EC will issue implementing acts and specific guidelines to give further interpretation to certain concepts in the Regulation. As previously mentioned, it would be somewhat surprising if such guidelines did not reflect the EC guidelines applicable in the context of internal EU State aid and the European courts’ case law.
Practical implications for companies active in the EU
The Regulation will add further levels of scrutiny for companies active in the EU.
The ex-ante filing obligations will also create additional administrative processes for companies to factor into their deal and commercial timelines – inevitably increasing the complexity of commercial transactions targeted by these ex-ante obligations .
We advise companies with economic activities in the EU to:
- Brief their internal commercial, BD and procurement teams about this Regulation;
- Start putting internal mechanisms in place to identify financial contributions received on a group-wide basis from non-EU governments/State-owned enterprises (in particular, since 2020);
- Consider the implications of the Regulation on the timeline of their M&A or bidding projects;
- At the same time, undertakings may want to identify if and to what extent competitors active in the EU may have benefitted from foreign subsidies which could distort competition. In practice, it is likely that the EC will extend its whistleblowing tool for this purpose, considering that it already opened it on 9 January 2023 to alert about merger breaches and illegal State aids.
Clearly given the important similarities between the Regulation and the EU State aid rules, EU State aid specialists will need to be involved, even (i) if the coming implementing acts and guidelines may be slightly different from existing State aid guidance and (ii) if, in the context of the application of EU State aid rules, external lawyers usually represent beneficiaries which are legally considered only as interested third parties which will not be the case under the Regulation.
The Hogan Lovells team in Brussels and across other regions can provide tailored “one-stop-shop” advice on the Regulation as well as on merger control, FDI, TDI and public procurement rules applicable to undertakings which may be affected by the Regulation.
Authored by Michel Struys, Marc Schweda, Lourdes Catrain, Francesco Pili, Raphael Fleischer, Stephanie Seeuws, Philipp Heuser and Hélène de Cazotte.
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.