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EU Foreign Subsidies Regulation - New rules impacting M&A and public procurement

  • Estonia


    On 30 June 2022 the European Parliament and EU Member States reached agreement on the new Foreign Subsidies Regulation (FSR). The FSR is designed to allow the European Commission (Commission) to review financial contributions by non-EU governments to businesses (Foreign Subsidies) to determine whether they are likely to distort markets within the EU.

    The FSR was published in the EU’s Official Journal on 23 December 2022, and will enter into force on 12 July 2023. The notification requirements for concentrations and public procurement procedures, which are discussed below, will apply from 12 October 2023.
    The FSR establishes three instruments to look into business dealings involving Foreign Subsidies:

    • a mandatory notification tool for concentrations;
    • a mandatory notification tool for EU public procurement proceedings; and
    • a general investigative tool, allowing the Commission to initiate proceedings without prior notification.

    From an M&A perspective, the FSR represents an additional hoop to jump through in addition to existing merger control and foreign direct investment (FDI) regimes. In addition, it will have a significant impact on public procurement and many other market situations.

    As such, it is important that businesses are up to speed and properly prepared for the new regime. This note highlights the key elements of the FSR and potential learnings for businesses in anticipation of its entry into force in 2023, with further briefings to follow focusing on the M&A and procurement notification regimes separately. Our competition/antitrust teams across the EU would be happy to discuss this further.

    What do I need to know about FSR?

    Background – why is the FSR being introduced?

    The catalyst for the FSR is the underlying concern that Foreign Subsidies can provide their recipients with an unfair advantage in acquiring European companies or obtaining public procurement contracts in the EU, to the detriment of fair competition.

    The EU State aid rules regulate subsidies granted by Member States. In contrast, subsidies granted by non-EU governments (i.e. Foreign Subsidies’) go largely unregulated, and may cause distortions in the EU internal market. While merger control regimes can intervene to protect consumers from anti-competitive harm, and FDI regimes can intervene to protect national security, there is a perceived residual gap outside these two areas. The FSR is intended to plug this gap.

    What is a Foreign Subsidy?

    A Foreign Subsidy is where a non-EU state, directly or indirectly, provides a financial contribution that confers a benefit to an undertaking engaged in internal market economic activity. For example, this could take the form of interest-free loans, unlimited guarantees, capital injections, preferential tax treatment, tax credits and grants.

    Overview of the FSR tools

    The FSR will introduce three tools.

    1. The mandatory notification tools

    (A) A mandatory notification system for concentrations

    “Concentrations” must be notified to the Commission where they involve a financial contribution by a non-EU government, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500 million and the transaction involves a foreign “financial contribution” (or multiple contributions) of at least €50 million.

    If these thresholds are met, the parties must submit a notification to the Commission, and may not complete the transaction without prior clearance (i.e. a ‘standstill’ mechanism similar to an EU Merger Regulation filing).

    The initial time period for review is 25 working days, with the possibility for an in-depth investigation of up to 90 working days (plus another 15 working days if commitments are offered).

    (B) A mandatory notification system for public procurement

    FSR also includes a mandatory notification system for bids in public procurements, where there is a financial contribution by a non-EU government, where the estimated contract value is at least €250 million, and where the bid involves a foreign “financial contribution” (or contributions) of at least €4 million.

    As above, the parties must submit a notification to the Commission prior to concluding the public procurement.

    The initial time period for review is 20 working days (extendable by 10 working days), with the possibility for an in-depth investigation of up to 110 working days (which can be extended by a further 20 working days).

    The thresholds are based on receipt of “financial contributions” from third countries (rather than Foreign Subsidies), and financial contribution is defined extremely broadly:

    “the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling; (ii) the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or (iii) the provision of goods or services or the purchase of goods or services”. 

    While the aim may have been to rely on objective criteria (as deciding whether a financial contribution constitutes a Foreign Subsidy involves a legal assessment), the definition is extremely broad and is likely to put a significant burden on businesses. Businesses have to determine whether their dealings have to be considered as a financial contribution, and they have to compile and maintain a list of financial contributions over a three year period.

    For both mandatory notification systems, failure to file can lead to a fine of up to 10% of aggregate turnover in the preceding year for intentionally or negligently failing to file, implementing a concentration without permission, or circumventing (or attempting to circumvent) the notification requirements, and up to 1% aggregate turnover in preceding financial year for intentionally or negligently providing incorrect or misleading information in a notification. Further, for completed mergers or joint ventures that are notifiable, the Commission may also decide that the undertakings must dissolve the concentration.

    2. The general investigative tool for all other market situations

    If the Commission is concerned about alleged distortive Foreign Subsidies, it will also have the power to review market situations of its own initiative (e.g. greenfield investments), and smaller concentrations or public procurement procedures that have not reached the notification threshold.

    After a preliminary review, the Commission may decide to conduct an in-depth investigation. The Commission has significant powers to request information and to conduct inspections.

    Following an in-depth investigation, the Commission may impose fines and periodic penalty payments. The periodic penalty payments shall not exceed 5% of the average daily aggregate turnover of the undertaking or group of undertakings concerned, in the preceding financial year. These can be imposed for each working day of delay before submitting complete information to the Commission or until the undertaking submits to an inspection.

    What is a distortion of competition

    The FSR provides that a distortion of competition will be deemed to exist where the Foreign Subsidy improves the competitive position of a company in the internal market and where this improvement actually or potentially negatively affects EU internal market competition.

    This is to be decided by the Commission on the basis of a non-exhaustive list of factors including:

    • the amount and nature of the subsidy;
    • the market situation of the company involved;
    • the internal market economic activity level and evolution; and
    • the purpose and conditions for the Foreign Subsidy and how it is used within the internal market.

    There will be exemptions from the Regulation, which will apply if a Foreign Subsidy is deemed unlikely to distort the internal market, for example where:

    the total amount of the subsidy does not exceed €4 million over any consecutive period of three financial years; orthe subsidy is aimed at making good the damage caused by natural disasters or exceptional circumstances (e.g. COVID-19).

    Categories identified as most likely to be deemed distortive include the direct financing of acquisitions, and financial contributions to enable a company to submit an unduly advantageous tender in relation to works, supplies or services being procured, amongst others.

    If the Commission identifies that a Foreign Subsidy has distorted the internal market, it will conduct a balancing exercise comparing those negative aspects with the positive effects on the development of the relevant economic activity, as well as broader positive effects. This balancing will be considered as part of the decision as to whether to impose redressive measures or accept commitments, and in determining the nature and level of such measures or commitments.

    Potential redressive measures

    The remedies may include (but are not limited to):

    • the recipient offering access under fair, reasonable and non-discriminatory conditions to an infrastructure acquired or supported by the distortive foreign subsidy;
    • licensing of assets acquired or developed with help of the foreign subsidy, or publication of results of R&D;
    • reducing capacity or market presence (which may include temporary restriction of commercial activity);
    • divestment of assets, or (in the event of a completed acquisition) dissolution of a concentration;
    • repayment of the subsidy; and
    • requiring companies to adapt their governance structure.


    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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