11. July 2023 – need2know
At the end of 2022, EU Regulation 2560/2022 on foreign subsidies distorting the internal market (“Foreign Subsidies Regulation“; “FSR“) was announced. It applies from 12 July 2023 and aims to protect the internal market from distorting foreign subsidies. The FSR thus supplements the established system of EU state aid control of Member State subsidies with a (limited) control of foreign (third-country) subsidies. The EU Commission enforces the FSR.
The objectives of the FSR shall be achieved through the following three control mechanisms:
- Control of foreign subsidies in the context of M&A transactions (obligation to notify to the EU Commission)
- Control of foreign subsidies in the context of public procurement procedures (obligation to notify within the procurement procedure)
- General control of foreign subsidies (ex officio review)
In the M&A context, the FSR adds to the existing regulatory control mechanisms of (national or EU) merger control and FDI control. Accordingly, mergers may be subject to a parallel review under the following three review standards: (i) merger control, (ii) FDI control and (iii) control under the FSR.
The notification obligations under the FSR (for mergers and in the context of public procurement procedures) do not apply from 12 July 2023 but from 12 October 2023 (Art 54 (4) FSR).
What is a distorting foreign subsidy?
A foreign subsidy within the meaning of the FSR exists (similar to the concept of state aid under Art 107 (1) TFEU) in case of a beneficial financial contribution by a third country to one or more undertakings or industries engaging in an economic activity in the EU-internal market (Art 3 (1) FSR).
The term “financial contribution” is of special importance for the assessment of a (notification) obligation under the FSR (in the M&A context as well as in procurement procedures). The notification obligation is not linked to the existence of a foreign subsidy, but to the (wider) concept of a financial contribution. To assess a possible notification obligation it must be determined whether the undertakings concerned have received financial contributions from a third state within the last three years before the potential notification.
The term “financial contribution” is very broad and includes, inter alia, grants, loans or debt forgiveness, but also, e.g., tax exemptions or the provision and purchase of goods/services (Art 3 (2) FSR). It covers contributions from the central government, other authorities at all levels but also foreign public entities or private entities (provided that their actions are attributable to the third country).
A foreign subsidy distorts the internal market if it is liable to improve the competitive position of an undertaking in the internal market and thereby actually or potentially negatively affects competition. This shall be determined on the basis of different indicators (e.g. the amount of the subsidy or the nature of subsidy). If the total amount of a foreign subsidy for an undertaking does not exceed EUR 4 million over any consecutive period of three years, a distortion of competition shall be considered unlikely (Art 4(2) FSR). In general, the EU Commission may balance the negative effects of the subsidy against the possible positive effects of the subsidy in its assessment.
The FSR in the M&A practice
The FSR is of special importance for M&A practice. In particular, under the conditions described below, mergers are subject to a notification obligation under the FSR.
The definition of a concentration in Art 20 FSR follows the definition under merger control law in Art 3 EUMR. According to the basic rule, it covers both the merger of previously independent undertakings and the acquisition of direct or indirect control over another (or parts of another) undertaking. A notification obligation under the FSR exists if the following notification thresholds are reached:
- At least one of the undertakings concerned is established in the Union and generates an aggregate turnover in the Union of at least EUR 500 million; and
- The undertakings concerned were granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.
Concentrations meeting these criteria (“notifiable concentrations”) shall be notified to the Commission and may not be implemented before its notification. A merger is cleared for closing either
- after the expiry of a period of 25 working days after receipt of the notification if the Commission does not initiate an in-depth investigation within this period (phase I review),
- after the expiry of a period of (in principle) 90 working days in the case of the initiation of an in-depth review within the time limit of Phase I (phase II review) or
- in the case of an approval decision by the Commission.
In the event of a breach of the notification obligation or the enforcement prohibition, the companies involved may be imposed to fines of up to 10% of their aggregate turnover in the preceding financial year.
FSR and public procurement procedures
The control of foreign subsidies that enable an economic operator to submit a tender aims to protect against distortions of competition caused by unduly advantageous bids. Only foreign subsidies granted during the three years prior to the potential notification shall be taken into account. The notification must be made by the tenderer to the contracting authority, which shall transfer it to the Commission. A notifiable foreign financial contribution in a public procurement procedure exists if
- the estimated value of the agreement is at least EUR 250 million and
- the participant (including subsidiaries, main subcontractors and main suppliers in involved in the same tender) was granted aggregate financial contributions in the three years prior to notification of at least EUR 4 million per third country
In the case of a subdivision of the contract into lots, there shall be a notification obligation if
- the estimated value of the procurement exceeds EUR 250 million, and
- the value of the lot or the total value of all lots for which the tenderer applies is at least EUR 125 million and the foreign financial contribution is at least EUR 4 million.
If the aforementioned requirements for notification are not met, the participant must confirm in a declaration that the foreign financial contributions received are not notifiable under the FSR.
The review by the Commission exists of (i) a preliminary review in principle no longer than 20 working days (phase I examination) and, if an in-depth investigation is initiated within the Phase I period, (ii) an in-depth investigation in principle no longer than 110 working days (Phase II examination) after receipt of the complete notification.
During the preliminary review and the in-depth investigation, all procedural steps in the public procurement procedure may continue, except for the award of the contract. Inter alia, a violation of the notification obligation may be punished by a fine of up to 10% of their aggregate turnover in the preceding financial year.
Ex officio review of foreign subsidies
In addition to the (notification) obligations described above, the FSR also provides for the possibility of an ex officio review of foreign subsidies by the Commission. The review also covers subsidies granted within the last five years before 12 July 2023. Here, too, the Commission’s review has in principle two stages: a preliminary review (Phase I) and a possible in-depth investigation (Phase II). The Commission may initiate an ex officio review if it has reason to believe – e.g., based on the submission of information by natural or legal person – that a foreign subsidy distorting the internal market exists.
This ex officio review of foreign subsidies by the Commission differs substantially from EU state aid control. State aid control generally provides for a general obligation to notify state aid to the Commission (with an implementation prohibition until approval by the Commission). The FSR, on the other hand, does not provide for a general obligation to notify (except of the described M&A and public procurement areas), but only for a right of ex officio review by the Commission.
If the Commission finds that there is no foreign subsidy distorting the internal market, the procedure ends by mere notification (phase I) or by decision (phase II). If, on the other hand, the Commission finds that there is a subsidy distorting the internal market, it can impose redressive measures or make (possible) commitments offered by the undertaking binding. Interim measures are also possible.
Assessment and outlook
With the FSR, the EU pursues the approach of also examining foreign subsidies with potential distorting character in the internal market. However, this review is not designed as a general examination of foreign subsidies (as it is the case in EU state aid control), but rather a focused review in the area of M&A transactions and public procurement procedures as well as a supplementary possibility of an ex officio review.
In particular for larger M&A transactions, the FSR – beyond the provisions on merger control and FDI – adds as a third standard of review that must be taken into account. In the future, an additional “control loop” of foreign subsidies must also be included in larger public procurement procedures. Due to the considerable threat of fines of up to 10% of the aggregate turnover in the preceding financial year, a checking for a (possible) notification obligation is highly recommended.
If you have any questions, please contact:
Astrid Ablasser-Neuhuber, Gerhard Fussenegger, Sebastian Reiter or your bpv Hügel contact.
Competition and antitrust
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Note: This article is intended as general information and provides a brief overview of a complex topic. For this reason, this article is not exhaustive and is no replacement for individual legal advice. If you have any questions, do not hesitate to contact us. We look forward helping you.