EU publishes draft rules on control of subsidies provided by third countries

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The long-awaited draft EU regulation on the control of subsidies granted by third (non-EU) countries was published last week.

If the planned regulation is adopted, the European Commission will soon obtain additional important tools to scrutinize undertakings benefiting from third country subsidies, for instance American or Chinese companies, including supervision of their activity on the EU market, control of their asset acquisition transactions in the EU and assessment of their participation in public procurement tenders in EU member states. The Commission will also gain powers to impose on those undertakings various redress measures and severe financial sanctions. EU companies will in turn obtain an important instrument to defend themselves against competition from undertakings supported by third countries.

As in the case of state aid granted by EU member states, the concept of subsidies granted by third countries will also be defined very broadly, covering virtually all selective benefits, including cash grants, tax breaks, capital contributions or guarantees, for undertakings engaging in activities on the EU market. The Commission will be able to take legal action against such subsidies (following an in-depth investigation) if they have a negative impact on the EU market (outweighing any possible positive effects). The regulation will cover subsidies affecting the trade in goods and provision of services in the EU, and will not exclude any industry or sector.

Control of activities on the EU market

Under the proposed regulation, if it is found that a company has obtained from a third country subsidies detrimental to the EU market, the Commission will be able, for example, to oblige that company to offer or make available its assets on appropriate terms, reduce capacity or market presence, refrain from certain investments, publish R&D results, dispose of certain assets, dissolve a concentration or to repay subsidies with interest. The company itself will also be able to propose to the Commission that the above measures be taken in order to avoid further consequences.

Concentration control

In addition, undertakings receiving subsidies from third countries will be required to notify any intention of a concentration when the acquired undertaking or at least one of the merging undertakings is established in the EU, generating a total turnover in the EU of at least EUR 500 million and at the same time the companies concerned received from third countries in the last three years subsidies with a value exceeding EUR 50 million. Failure to notify (as well as completion of the concentration before the Commission’s decision or against its prohibition) may result in the nullity of the transaction, as well as a financial penalty imposed by the Commission of up to 10% of the total annual turnover. Moreover, the Commission will be able to investigate mergers below the aforementioned threshold on its own initiative and to prohibit them where necessary.

Public procurement control

When bidding for contracts worth an estimated EUR 250 million or more, undertakings will be obliged to notify subsidies received from third countries in the last three years, on pain of being banned from award of the public contract concerned. The notification obligation will also apply to the bidder’s main subcontractors and main suppliers. This information shall be immediately forwarded to the Commission, which will be able to prohibit the award of contract to the undertaking concerned. Moreover, in the event of a breach of the obligation to notify, the Commission will be able, in addition to prohibiting the award of contract, to impose a financial penalty on the undertaking concerned of up to 10% of its total annual turnover. In addition, the Commission will also be able to initiate a procedure for contracts below this threshold.

Other powers of the Commission

Under the proposed regulation, the Commission will also be able to request market participants to provide, on pain of a financial penalty, information requested by the Commission; it can conduct market investigations and on-site inspections (in the EU or in a third country, with the latter’s consent). During the course of the procedure, the Commission will be able to apply interim measures. Beyond the 10-year limitation period, the Commission will not be limited by any time limit to initiate the procedure on the control of activities on the EU market, while in the case of a notified concentration the Commission should complete the procedure within 25 days (or within an additional 90 days if an in-depth investigation is initiated) and in the case of a notified procurement within 60 days (or 200 days if an in-depth investigation is initiated).

The planned regulation will be applied independently of other tools already in place in EU law, such as antitrust law, general rules on merger control or foreign direct investment screening.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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