The Regulation of the European Parliament and the of the Council of 14 December 2022 on foreign subsidies distorting the internal market (Regulation 2022/2560, Off.J. 23 December 2022, 330/1) (hereinafter: “Foreign Subsidies Regulation” or “FSR”) entered into force on 12 January 2023 and will be fully operational as of 12 October 2023.

It introduces a new set of rules aiming to ensure a level playing field for all companies active in the European Union. The FSR constitutes a new investigatory review tool for the European Commission and is focusing on economic behavior on the internal market by companies who received foreign subsidies from non-EU States. These foreign subsidies have so far been escaping the Commissions control. Therefore, the FSR will complete the established competition, merger control, State Aid, Foreign Direct Investments and trade rules of the EU, closing the existing regulatory gap (Hornkohl, 2023, p. 3).

The FSR has an impact on companies that engage in M&A transactions and public tenders in the EU, and which have received financial contributions from non-EU countries.

Scope of the FSR

The FSR applies to subsidies granted by third States (non-EU states) to undertakings engaging in an economic activity in the internal market.

The purpose of the FSR is to scrutinize financial contributions from non-EU countries and to address distortions caused by foreign subsidies on the internal market.

Foreign subsidy

A foreign subsidy shall be deemed to exist if the following (cumulative) criteria are met:

• The recipient obtains directly or indirectly a financial contribution;
• The financial contribution is provided by a third country (i.e. a non-EU state);
• The recipient engages in an economic activity in the internal market; and
• The financial contribution is limited to one or more undertakings or industries.

The concept of financial contribution is broad. The FSR provides a, non-exhaustive, list of potential forms of financial contributions such as grants, loans, fiscal incentives, debt forgiveness, the provision of goods or services or the purchase of goods or services, etc.

Distortion of the internal market

A foreign subsidy is considered distortive to the internal market if it could improve the recipient’s competitive position and potentially adversely affect competition in the internal market.

The FSR provides examples of certain types of foreign subsidies that are considered most likely to distort the internal market, such as:

• foreign subsidies granted to an ailing undertaking;
• a foreign subsidy in the form of an unlimited guarantee for debts or liabilities of the undertaking;
• an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
• a foreign subsidy directly facilitating a concentration;
• a foreign subsidy enabling an undertaking to submit an unduly advantageous tender on the basis of which the undertaking could be awarded the relevant contract.

In these cases, a distortion is presumed. Affected companies may however provide relevant information as to whether a foreign subsidy listed as ‘likely to distort the internal market’ in the specific circumstances does not distort the internal market.

Pursuant to the FSR the following foreign subsidies are considered unlikely to distort the internal market:

• A foreign subsidy that does not exceed 4 million EUR over any consecutive period of three years;
• Foreign subsidies that are aimed at making good the damage caused by natural disasters or exceptional occurrences.

Where the total amount of the foreign subsidy to a single undertaking does not exceed 200.000 EUR over any consecutive period of three years shall not be considered to distort the internal market.

The FSR provides a ‘balancing test’ for the European Commission. This means that the European Commission will also consider whether the negative effects of the foreign subsidy on the internal market are outweighed by its positive effects on the development of the relevant subsidized economic activity on the internal market or other positive effects such as the broader positive effects in relation to the relevant policy objectives.

Investigative tools

The FSR provides three new tools which shall enable the European Commission to conduct investigations. There are two specific tools for concentrations and public procurement which are notification-based, the other one is a general ex officio tool for investigating all other market situations.

Concentration tool

Notification obligation

If one of the parties to an M&A transaction receives foreign financial contributions, such transaction must be notified to the European Commission if the following (cumulative) criteria are met:

• At least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate EU turnover of at least 500 million EUR; and
• The following parties involved in the transaction have received a total of more than 50 million EUR in financial contributions from third countries in the three years prior to the notification:

–  In the case of an acquisition, the acquirer or acquirers and the acquired undertaking;

–   In the case of a merger, the merging undertakings;

–   In the case of a joint venture, the undertakings creating a joint venture and the joint venture.

Notifiable concentrations must be notified to the Commission jointly by the parties to the merger or by those acquiring joint control as the case may be. In all other cases, the notification shall be made by the person or undertaking acquiring control of the whole or parts of one or more undertakings.

Impact on the transaction process

Subject to certain exceptions and derogations, the general principle is that a notifiable concentration cannot be implemented before it is notified.

When the Commission receives a complete notification, a concentration shall not be implemented for a period of 25 working days after that receipt.

When the Commission initiates an in-depth investigation, the concentration shall not be implemented for a period of 90 working days after the opening of the in-depth investigation. This period can be extended by 15 working days if commitments are offered.

Sanctions

Compliance with the notification requirements is mandatory.

The Commission may impose fines up to 10% of a company’s aggregate turnover in the preceding year in case that a company fails to notify foreign financial contributions, or when it implements a concentration before it has been notified, or when it implements a notified concentration prohibited by the Commission, or when it circumvents (or attempts to circumvent) the notification requirements.

The Commission may impose fines of up to 1% of the company’s aggregate turnover in the preceding year in case a company, intentionally or negligently, supplies incorrect or misleading information in a notification.

The Commission can also impose periodic penalties of up to 5% of the average daily aggregate turnover for each working day of delay, until the complete and correct information, as required by the Commission, is submitted.

Public procurement tool

Notification and information obligations

Notification for public procurement procedures is required when the following conditions are met:

• the estimated contract value is at least 250 million EUR; and
• the bid involves a foreign financial contribution of at least 4 million EUR per third country.

Moreover, in all other cases economic operators shall list in a declaration all foreign financial contributions received and confirm that the foreign financial contributions received are not notifiable. This means that compliance with the FSR is not only an issue for high value public tenders, but is in fact a relevant topic in connection with any public procurement process.

This broadness in scope is further stressed as it also applies  to main subcontractors and main suppliers known at the time of submission of the complete notification or declaration, or complete updated notification or declaration. This means that companies participating in tenders shall have an interest in imposing adequate information duties on their relevant subcontractors and suppliers, in order to enable them to comply with FSR requirements.

Impact on the procurement process

The economic operator(s) is (are) participating in a public procurement procedure are responsible for submitting the notification or declaration to the contracting authority, which will then transfer the notification or the declaration to the European Commission.

In open procedures, the notification or declaration shall be submitted only once, together with the tender. In a multi-stage procedure, the notification or declaration shall be submitted twice, first with the request to participate and then as an updated notification or updated declaration with the submitted tender or final tender.

The contracting authority is obliged to state in the contract notice or, in case of a procedure without publication, in the tender documents, that the economic operators are under the notification obligation.

During the preliminary review and the in-depth investigation by the Commission, all procedural steps in the public procurement procedure may continue, except for the award of the contract. If the Commission decides to open an in-depth investigation, the contract shall not be awarded until the Commission has reached a decision or the applicable time limits have expired.

Sanctions

Where a notification or declaration is missing, the contracting authority may request the economic operators concerned to submit the relevant document within 10 working days. If an economic operator still fails to comply, its tender shall be declared irregular and rejected by the contracting authority who shall inform the Commission of that rejection.

The Commission may impose fines up to 10% of the economic operator’s aggregate turnover in the preceding year in case that the economic operator fails to notify foreign financial contributions or circumvents (or attempt to circumvent) the notification requirements.

Fines of up to 1% of the economic operator’s aggregate turnover in the preceding year can be imposed in case he, intentionally or negligently, supplies incorrect or misleading information in a notification or declaration.

The Commission can also impose periodic penalties of up to 5% of the average daily aggregate turnover for each working day of delay, until the complete and correct information, as required by the Commission, is submitted.

General ex officio tool

For all other market situations (including concentrations and public procurement procedures that do not meet the notification thresholds) the European Commission will have the power to investigate, on its own initiative, any market situation where it suspects the existence of a distortive foreign subsidy.

Timeline

Even though the FSR became effective on 12 January 2023, the European Commission’s ex officio investigative powers started to apply on July 12 2023. The two notifications-based tools for concentrations and public tenders will start to apply on 12 October 2023.

For deals signed on or after 12 July 2023 that will close before 12 October 2023, the notification obligation does not apply.