Beginning July 12, 2023, the European Commission (Commission) may begin “ex officio” investigations of financial contributions that companies receive from non-EU governments. The Commission may request information or conduct inspections within and outside the EU in order to determine if the financial contribution is a foreign subsidy that distorts the EU market. Beginning October 12, 2023, companies anticipating EU M&A or bidding on EU public procurement (government) contracts above a particular amount will be required to notify the Commission of financial contributions received in the prior three years. The potentially broad definition of “financial contribution” may implicate a number of ordinary course transactions, including disclosure of certain tax agreements and incentives. Please see here our global Competition, Trade & Foreign Investment team’s briefing for further background on the FSR.
Background
Entered into force on January 12, 2023, the EU’s Foreign Subsidy Regulation (FSR)1, very generally provides the Commission certain authority to consider the impact of financial contributions by non-EU governments to companies in order to determine if such contributions provide benefits to the recipients that are likely to distort EU markets, and, if so, to initiate corrective measures. In other words, the FSR addresses a concern that businesses receiving Foreign Subsidies will have an unfair competitive advantage in acquiring EU companies or winning EU public contracts because those businesses have additional funds at their disposal.
EU Commission’s Investigative Tools to Identify and Correct Foreign Subsidies
For purposes of the FSR, a foreign subsidy “should be understood as a financial contribution provided directly or indirectly by a third country, which confers a benefit and which is limited to one or more undertakings or industries.” In order to make the determination of whether the financial contribution confers a benefit, the FSR provides the Commission with the following investigative tools:
(1) Beginning July 12, 2023, the Commission may investigate, on its own initiative, a financial contribution by a non-EU government made to a company active in the EU market; and
(2) Beginning October 12, 2023, prior to the consummation of a transaction, the parties must notify the Commission of financial contributions received in the prior three years from non-EU governments, if:
a. With respect to a transaction, one of the merging parties, the acquired company, or the joint venture is established in the EU and generates turnover in the EU of at least €500 million and the parties to the transaction were granted combined aggregate financial contributions of more than €50 million (a notifiable concentration), or
b. With respect to a bid for a contract with an EU government, the estimated contract value is at least €250 million and the contract bidder (including its subsidiaries without commercial autonomy, its holding companies and, where applicable, its main subcontractors and suppliers) was granted aggregate foreign financial contributions of at least €4 million per third country (a notifiable public procurement).
The Commission may take a number of corrective actions upon the finding of a foreign subsidy. However, regardless of such a finding, the Commission may impose monetary penalties of up to 1% of the aggregate turnover in preceding financial year of the companies concerned, where those companies intentionally or negligently, supply incorrect, incomplete or misleading information in an investigation or notification.
What is a Notifiable Financial Contribution?
The concept of financial contribution includes a broad range of support measures, which are not limited to monetary transfers, for instance, granting special or exclusive rights to an undertaking without receiving adequate remuneration in line with normal market conditions. Particularly, the FSR defines financial contribution to include, among other things:
a. The transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling;
b. The foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
c. The provision of goods or services, or the purchase of goods or services (even at arm's length).
The broad reference to “tax exemptions or the granting of special or exclusive rights without adequate remuneration,” introduces uncertainty as to the nature of disclosure required. Read literally this could require disclosure of statutory exemptions from tax in every non-EU jurisdiction where a company operates, even though such exemptions are generally available to all taxpayers operating in such jurisdiction. Advance rulings and advance pricing arrangements raise similar considerations around whether disclosure is required under the FSR rules. There is currently no guidance from the Commission or tax authorities as to what this means in practice.
Identification of potential financial contributions is important, as companies will be obligated to maintain and disclose information about such contributions, including the amount, type and grant date of the financial contribution and the receiving and granting entity, including third country to which attributable. Further, the company must in some circumstances state whether the financial contribution is linked possibly to a concentration or public procurement, elaborate on its main elements or characteristics and provide supporting evidence on list of issues (e.g. categorization of contribution, form of contribution, granting entity, purpose and economic rationale, conditions attached, benefit conferred, benefit limited to certain businesses or industries). Finally, the signatory of the notification must attest that all information provided is true, correct, and complete and acknowledge the penalties that may be imposed for failure to properly report.
In order to ensure the ability to timely comply with the requirements of FSR rules, consideration may be given to developing procedures to track and identify potential financial contributions relating to a company’s tax position.
Further guidance is expected, although a timeline has not been indicated. The hope is that the guidance will clarify the scope of what is a notifiable financial contribution, including whether the concept is aligned with EU State Aid rules and/or the WTO rules under the Agreement on Subsidies and Countervailing Measures. Very generally, the EU State Aid rules consider whether the potential unlawful state aid is “selective”, meaning that it derogates from the norm and differentiates between companies in comparable situations; whereas, the WTO rules consider whether the potential subsidy is “specific”, meaning it is only given to one company or to a special group of companies. If adopted in future FSR guidance, the well-established law in this area would help mitigate any required reporting with respect to tax matters.
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1 On June 30, 2022, the European Parliament and EU Member States reached agreement on Regulation (EU) 2022/2560, on foreign subsidies distorting the internal market.
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