Reining In Foreign Subsidies Distorting the EU Market: The European Commission Takes One Step Closer

Jones Day

In Short

The Situation: The European Commission ("Commission") has faced significant pressure from stakeholders to quickly address growing concerns over the distortive effects of foreign subsidies and to ensure a level playing field in the EU.

The Result: As anticipated in our recent Alert, on 5 May 2021, the Commission adopted a proposal for a Regulation of the European Parliament and the Council on foreign subsidies distorting the internal market ("Proposed Regulation"). This comes one year after the Commission's White Paper on foreign subsidies, which unveiled a series of proposals to address distortions arising from foreign subsidies.

Looking Ahead: The Proposed Regulation is expected to be adopted in 2022, although its final form remains subject to legislative process by the European Parliament and the Council.

A. Background

As anticipated in our Alert, the Commission has adopted the Proposed Regulation to tackle EU marketplace distortions arising from foreign subsidies. The Proposed Regulation closely follows the Commission’s White Paper on foreign subsidies of June 2020 on tackling distortions arising from foreign subsidies (see Jones Day Commentary The EU "Club" Gets More Exclusive: Closing The Doors On Foreign Subsidies? (July 2020) for a detailed analysis of the White Paper).

The distortive effects of foreign subsidies revealed an important vacuum in EU law, i.e., significant restrictions on state subsidies under the EU State aid regime apply only to EU Member States, allowing non-EU countries to escape. The Proposed Regulation aims at filling this vacuum. The consistency between World Trade Organization rules and the envisaged foreign subsidy tools is questioned by some stakeholders. The Commission has attempted to address some of these concerns and specified that no action taken under the Proposed Regulation would amount to a specific action against a state subsidy under the WTO Agreement on Subsidies and Countervailing Measures (Article 32.1). How broadly the Commission would interpret such exclusion, however, is unknown.

The following examines the Proposed Regulation, and in particular, its general rules (Section B), the ex officio review covering all foreign subsidies distorting the EU internal market (Section C), and specific procedures addressing distortive foreign subsidies in the context of concentrations (i.e., mergers and acquisitions), as well as public procurement (Section D).

B. General Rules

The Proposed Regulation provides for a set of general provisions applicable to all tools contained in the proposal.

Scope: The Proposed Regulation concerns foreign subsidies granted to an undertaking engaged in an economic activity in the internal market and distorting the internal market. It presents tools aimed at tackling all such distortions, particularly focusing on concentrations and public procurement.

Competence: The Commission has exclusive competence in applying the Proposed Regulation. While the earlier White Paper had envisaged a role for Member States, this approach was not followed in the Proposed Regulation, due to concerns over the potentially inconsistent application of the tools.

Definition of foreign subsidy: A foreign subsidy is defined as:

  • A financial contribution, 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, foregoing of revenue that is otherwise due, provision of goods or services and purchase of goods or services;
  • Granted by a third country, which includes the foreign central government, foreign government authorities at all other levels, foreign public entities whose actions can be attributed to the third country, as well as any private entity whose actions can be attributed to the third country;
  • Conferring a benefit;
  • To an undertaking engaging in an economic activity in the internal market; and
  • Specifically limited to, in law or in fact, an undertaking, the industry or several undertakings and industries.

This very wide definition of foreign subsidies thus captures any kind of contribution provided by public or private entities, if such actions "can be attributed to the third country."

Distorting the internal market: Internal market distortions are deemed to exist where:

  • A foreign subsidy is "liable to improve the competitive position of the undertaking concerned" in the internal market; and
  • The foreign subsidy "actually or potentially negatively affects competition" on the internal market.

The assessment of distortions (whether actual or merely potential) must be carried out on the basis of "indicators," which may include the amount and the nature of the subsidy, the situation of the undertaking and the markets concerned, the relevance of the undertaking in the internal market, and the purpose, conditions and use of the subsidy.

Importantly, the threshold below which a foreign subsidy is deemed "unlikely to distort the internal market" is now significantly increased. While the White Paper proposed a threshold of EUR 200,000, the Proposed Regulation sets the total amount at "EUR 5 million over any consecutive period of three fiscal years." The Proposed Regulation, however, does not entirely exclude subsidies below EUR 5 million. For subsidies below this threshold, the Commission must provide more stringent evidence of a distortion. As a result, operators face uncertainty even when they receive a limited amount of subsidies.

Black-listed subsidies: The Commission identified the following set of subsidies as "most likely to distort the internal market":

  • Subsidies granted to failing undertakings;
  • Unlimited guarantee for debts or liabilities;
  • Subsidies directly facilitating a concentration; and
  • Subsidies enabling an unduly advantageous tender.

Balancing assessment: As anticipated in the White Paper, the Proposed Regulation sets forth a balancing provision in assessing subsidies: the Commission must balance the negative effects in terms of distortions with positive effects on the development of the relevant economic activity. Such balance must be taken into account when deciding on whether to pursue redressive (i.e., corrective) measures and commitments, as well as determining the nature and level of such eventual measures or commitments. This rule would afford the Commission with broad discretion and thereby once again clouds legal certainty.

Commitments and redressive measures: Under the Proposed Regulation, the Commission may impose redressive measures to remedy an actual or potential distortion. The undertaking may also offer commitments. The Proposed Regulation lists possible commitments or redressive measures, such as access to infrastructure, refraining from investments, providing licenses, publication of results of R&D, divestments, etc. Notably, the list includes "reducing capacity and market presence," which implies that the Commission could even impose the reduced presence in (or even exclusion from) the EU market of the concerned undertaking.

The list of measures also includes repayment of the foreign subsidy to the third country. It does not include the White Paper’s contemplated redressive payments to the EU or to Member States. Under the current proposal, repayment to the third country must be transparent and take into account the risk of circumvention.

The Proposed Regulation also provides that the Commission can impose general reporting and transparency requirements in relation to commitments and redressive measures. For non-compliance with a decision with commitments issued by the Commission, an undertaking can be subject to fines of up to 10% of the aggregate turnover and periodic penalties up to 5% of the average daily aggregate turnover.

C. Ex Officio Review of Foreign Subsidies

The Proposed Regulation empowers the Commission to investigate any distortive subsidy, with a limitation period of ten years starting on the day of granting the foreign subsidy. Importantly, the ex officio review can also be initiated against subsidies already notified and reviewed under the Proposed Regulation’s specific procedures for concentrations and public tenders (detailed in section D) and could be used to address situations falling outside of the thresholds of those specific tools.

Preliminary review and in-depth investigation: The ex officio review procedure is a two-step system consisting of (i) a preliminary review to assess whether a financial contribution provided to an undertaking active in the EU constitutes a subsidy and distorts (actually or potentially) the EU internal market, possibly followed by (ii) an in-depth investigation, if a foreign subsidy is suspected of such internal market distortion. There is no notification obligation.

Interim measures: The Commission may adopt interim measures where there is prima facie evidence of the existence of the distortive subsidy and a serious risk of substantial and irreparable damage to competition on the internal market.

Information requests: The Commission may request information from the undertaking concerned, other undertakings, association of undertakings, Member States, as well as a third country concerned. The Commission could impose fines (up to 1% of aggregated turnover) or periodic penalties (up to 5% of the average daily aggregated turnover) for failure by an undertaking concerned or an association of undertakings to provide the requested information.

Inspections: The Commission may inspect the premises of undertakings in the EU. It may, for instance, enter any premises and land of the undertaking concerned; examine books and other business records and taking/requesting copies; ask any representative of the undertaking to explain facts or documents relevant to the inspection and to record the answers; and seal any business premises and books or records for the period and to the extent necessary for the inspection). The Commission may impose the same fines mentioned above for refusal to submit to inspections in the EU or for breaking sealed business premises, books or records in the context of an inspection.

The Commission may also conduct such above-described inspections outside the EU, but with the consent of the undertaking concerned and of the third country. However, in case of refusal to provide such consent, the Commission may come to a decision on the basis of facts available.

Non-cooperation: If the undertakings concerned or the association of undertakings do not provide the requested information, provide incomplete, incorrect or misleading information, fails to respond timely to such an information request, or refuses to accept inspections inside or outside the EU or otherwise impedes the investigation, the Commission may decide on the basis of facts available whether a foreign subsidy exists that distorts the internal market and eventually proceed to an in-depth investigation. When the assessment is limited to the facts available, its outcome may be less favorable to the undertaking concerned than if it had cooperated.

Such non-cooperation is also subject to the same above-mentioned fines.

D. Mandatory Notification of Concentrations and Public Procurements

As concerns concentrations and public procurements, foreign subsidies granted three calendar years prior to the relevant operation would be subject to a review triggered by a notification system.

Thresholds: The Proposed Regulation sets out thresholds for triggering the notification systems.

For concentrations:

  • One of the relevant undertaking (acquired or merging; the established joint venture or its parent undertakings) must be established in the EU and generates an aggregate turnover of in the EU of EUR 500 million; and
  • The undertakings concerned must have received from third countries an aggregated financial contribution of more than EUR 50 million.

For public procurement:

  • The threshold for the public procurement procedure is an estimated value of EUR 250 million;
  • No threshold applies for the foreign subsidy, as all foreign subsidies must be notified. Failure to do so will lead to the exclusion from the tender. This obligation extends to subcontractors whose contribution exceeds 30% of the value of the contract.

Fines and periodic penalties: In addition to the earlier-mentioned fines and periodic penalties, the Commission could impose fines up to 1% of the aggregated turnover for failure to provide correct information in the notifications for both concentrations and public procurements. Moreover, the Commission would have the power to impose fines of up to 10% of the aggregate turnover if the undertakings fail to notify a notifiable concentration, implement a concentration in violation of a suspension or implement a prohibited concentration, or fail to notify a subsidy in a public procurement procedure.

Three Key Takeaways:

  1. The new foreign subsidies review system, if adopted, would constitute a small revolution in the EU regulatory legal system. The funding of undertakings who intend to actively participate in the EU internal market would be subject to intense scrutiny, particularly in the context of concentrations and public procurement. Importantly, foreign subsidies would not be prohibited per se, but subsidies found to be distortive might limit economic activity in the EU internal market.
  2. To anticipate such potential risks of disruptions to economic activities planned in the EU internal market, businesses will need a clear understanding of financial contributions that could constitute targeted foreign subsidies. This is particularly relevant for undertakings intending to engage in M&A activity and/or public procurement, which will face significant legal uncertainty on how the Commission will conduct its assessments of foreign subsidies.
  3. It remains to be seen how the ongoing legislative review may modify the Commission's proposal. What appears likely is that the European Parliament and the Council will proceed rather swiftly towards reaching a final regulation within one year.

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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