Notifications under the foreign subsidies regulation are now mandatory

The obligation for companies to notify the European Commission of subsidies from third countries in connection with mergers or public procurement comes into force on 12 October 2023.

I. The purpose of the foreign subsidies Regulation is to combat distortions of competition within the European Union resulting from subsidies granted by third countries.

Since January 2023, the Commission has had a new tool at its disposal to fight against distortions of competition caused by foreign subsidies: Regulation (EU) 2022/2560 of 14 December 2022, of the European Parliament and of the Council on foreign subsidies distorting the internal market (the “FSR”). The FSR applies to all economic activities and is binding on both private and public sector companies.

Applicable since 12 July 2023, the FSR was supplemented on 10 July 2023 by an Implementing Regulation, the purpose of which is to detail the procedural aspects of its implementation, and in particular the forms to be used by the companies concerned to notify their foreign subsidies in the context of mergers (mergers, acquisitions or creation of joint ventures) and public procurements. The Implementing Regulation also specifies the applicable procedure, the Commission's investigation process, the procedural rights of notifying parties, and the deadlines for this new control. In particular, from 12 October 2023, companies that have benefited from foreign subsidies falling in the FSR’s scope of application, will be obligated to notify it.

For the purposes of the FSR, a “foreign subsidy” is the financial contribution provided by a third country (outside the EU), directly or indirectly, conferring a benefit limited to one or more undertakings or industries operating in the internal market. The subsidy may come either from a government of a third country or from any other public or private entity whose actions can be attributed to a third country.

Only foreign subsidies likely to distort competition will be subject to the Commission’s control. Under Article 4 of the FSR, a distortion of competition is deemed to exist when (i) the foreign subsidy is such as to strengthen the competitive position of a company in the internal market and (ii) such subsidy actually or potentially affects competition in the internal market. This concept can therefore be broadly understood.

II. The control procedures introduced by the FSR

The FSR introduces three control tools for which the Commission has exclusive competence, in order to apprehend the largest foreign financial contributions, and therefore those most likely to be a source of distortion of competition within the internal market. 

1) Merger control [2]

Companies are required to notify the Commission of mergers involving a financial contribution from public authorities in a non-EU country, where (i) the acquired company, one of the merging parties, or the joint venture generates European Union sales of at least €500 million, and (ii) the foreign subsidy involved is more than €50 million.

This FSR therefore brings an additional constraint to merger operations. Parties must now and prior to any merger, verify the existence of any subsidies from third countries from which they may have benefited, and whether they have crossed the thresholds provided for in the FSR, in addition to and independently of the thresholds provided in Regulation 139/2004 on merger control.

In the event of failure to comply with the notification obligation, or in case of a merger taking place prior to the Commission’s authorisation, the latter may impose a fine of up to 10% of total sales of the concerned companies. The Commission can also prohibit a merger involving a subsidised company.

2) Control of public procurement procedures [3]

Companies are required to notify the Commission of any participation in public procurement procedures where (i) the estimated value of the contract is at least €250 million and (ii) the foreign financial contribution involved is at least €4 million per non-EU Member State.

The Commission may prohibit such a procedure for companies receiving foreign subsidies which it considers to be a source of distortion of competition.

In the event of failure to comply with the obligation to notify, or completion of a public procurement prior to the Commission’s approval, the Commission may impose on the company involved a fine of up to 10% of its total sales.

3) Ex-officio control [4]

In addition to the control exercised in the context of mergers or public procurements, the Commission may, if it considers it necessary, examine any other situation on its own initiative. This may be the case when it suspects that a foreign subsidy has distortion of competition effects in the internal market. This power of control is subject to a ten-year time limit, starting from the day a foreign subsidy is granted to a company.

III. Investigating powers and procedures

The Commission has several means at its disposal to carry out investigations. It can send requests for information to companies, carry out surveys both inside and outside the European Union, and/or launch market surveys focusing on specific sectors or types of subsidies. The Commission may also base its analysis on information supplied by companies, Member States, or any other natural or legal person.

Where the Commission finds that a foreign subsidy distorts competition in the European Union market, it carries out an analysis of the effects of the subsidy, balancing its effects on the distortion of competition against any positive effects on the development of the subsidised economic activity. If the Commission considers that the negative effects outweigh the positive ones, it may then impose on the companies concerned (or accept as a commitment on their part) remedial measures of a structural or non-structural nature, such as the divestment of certain assets or the prohibition of certain market behaviors.

In this respect, it should be noted that the Commission has indicated that, as a general rule, subsidies of less than €4 million over three years are considered "unlikely" to cause distortions.

 

 

[1] Commission Implementing Regulation (EU) 2023/1441 of 10 July 2023, on the detailed rules for the procedures to be implemented by the Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market.
[2] Chapter 3 of FSR
[3] Chapter 4 of FSR
[4] Chapter 2 of FSR