On 12 January 2023, the EU Regulation on foreign subsidies distorting the internal market (Regulation (EU) 2022/2560, ‘Foreign Subsidies Regulation’, ‘FSR’) entered into force. The aim of this regulation is to close existing loopholes in EU rules on competition, trade and public procurement with regard to foreign subsidies that could distort the European single market and thus create a level playing field.
The regulation will have a significant impact on investments and economic activities in the EU. Among other things, it introduces additional reporting obligations for mergers and public tenders if companies have received a certain amount of financial support from non-EU countries.
Subsidies from non-EU countries must be scrutinised under the FSR
These regulations are also relevant for European companies if they have received financial support from non-EU countries. Enforcement and surcharge bans apply, and non-compliance can result in high fines of up to 10% of the group's global annual turnover. In addition, the European Commission has the option of subsequently unbundling completed mergers, even if they have not exceeded the notification thresholds.
Definition of ‘third country subsidy’
A ‘third country subsidy’ within the meaning of the Regulation must fulfil four criteria. It must:
- be a financial contribution,
- be granted directly or indirectly by a third country,
- confer a benefit on a company operating in the internal market and
- be limited to a single company, a specific economic sector or several companies or economic sectors.
What can the Commission do under the EU foreign subsidies regulation?
The Regulation introduces three new instruments for the European Commission:
1. an additional merger control regime that provides for a notification obligation for mergers where the turnover in the EU of one of the undertakings concerned, the target undertaking or the joint venture is at least €500 million and the sum of financial contributions from third countries for all undertakings concerned exceeds €50 million in the three calendar years preceding the notification. The Commission may prohibit a merger if a third-country subsidy distorts the internal market.
2. tenders in public procurement procedures must be notified if the estimated contract value is at least 250 million euros and the bidder has received total financial contributions of at least 4 million euros per third country in the last three calendar years. The award may be refused if third country subsidies distort or threaten to distort the award procedure.
3. Irrespective of thresholds and notification obligations, the Commission can initiate ex officio investigations and take remedial action against third-country subsidies that distort the internal market. This includes, among other things, the subsequent unbundling of a merger that has already been implemented, even if there was no obligation to notify. The Commission can also require ad hoc notifications of mergers and participations in public procurement procedures that do not reach the thresholds.
The Commission examines whether a foreign subsidy distorts the internal market. This is the case if the subsidy is likely to strengthen the competitive position of a company in the internal market and thereby actually or potentially affect competition.
The regulation contains a non-exhaustive list of criteria for this assessment, such as the amount, type and purpose of the subsidy. It also defines categories of third-country subsidies that are particularly likely to distort the internal market, such as subsidies for ailing companies or those that directly facilitate a merger.
If the Commission comes to the conclusion that there is a distortion, it carries out a balancing exercise. In doing so, the negative effects are weighed against the positive effects of the subsidy on the development of the subsidised economic activity or other relevant objectives, in particular of the EU.
Lawyer European law
Dr Simon Harald Baier LL.M. advises on questions of international trade law and European law.
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