On 14 December 2022, the European Union adopted Regulation 2022/2560 on foreign subsidies distorting the internal market. The Regulation will only apply from 12 July 2023 as Commission implementing regulations must be adopted to regulate the procedures to be followed. These regulations are expected to be adopted in April 2023.
This note examines the key substantive provisions of the Regulation as well as the procedural aspects.
Substantive aspects
Subject Matter and Scope
The Regulation applies to undertakings engaging in economic activity in the internal market which benefit from foreign subsidies likely to distort the internal market. The Regulation targets subsidies from third countries, that provide public funds which are then used to finance economic activities in the internal market. For example, participation in public procurement tenders or acquisitions of undertakings. [1]
In order to fall under the scope of the Proposed Regulation, the foreign subsidy must distort the internal market; be granted to an undertaking; that undertaking must be engaging in an economic activity in the internal market
A three-tiered investigative process
The Regulation provides for three investigative tools to target foreign subsidies:
(1) A notification-based investigative tool for concentrations where the turnover of the EU target exceeds €500 million and the foreign financial contributions exceeds €50 million;
(2) A notification-based investigative tool for bids in public tenders with a contract value above €250 million and the bid involves a foreign financial contribution of at least €4 million per third country; and
(3) An ex officio investigative tool for all other market situations and for concentrations and public procurement procedures below the thresholds for components 1 and 2.
Different rules govern ex officio review of subsidies (Chapter 2), concentrations (Chapter 3) and public procurement procedures (Chapter 4). The duty to notify a notifiable concentration, rests on the undertaking acquiring control.[2] The undertaking submitting a tender or a request to participate in a public procurement procedure must notify or declare all foreign financial contributions received in the previous three years.[3]
The Commission is the competent authority to implement the new rules (DG Competition).
A foreign subsidy
A foreign subsidy exists where a third country provides a financial contribution which confers a benefit to an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries.[4]
It must hereby be understood that:
Foreign subsidies below €5 million over a consecutive period of three fiscal years are considered unlikely to be distortive.
Subsidies most likely to distort the internal market
The Regulation identifies subsidies most likely to distort the internal market i.e., a subsidy granted to an undertaking which will likely go out of business in the short or medium term in the absence of any subsidy, a foreign subsidy in the form of an unlimited guarantee for debts or liabilities of the undertaking, a foreign subsidy directly facilitating a concentration, a foreign subsidy enabling an undertaking to submit an unduly advantageous tender on the basis of which the undertaking would be awarded the public contract.[6]
The negative effects of a foreign subsidy in terms of distortion on the internal market are to be balanced with the positive effects of the subsidy on the development of the relevant economic industry. The Commission shall determine by means of a balancing test whether or not the subsidy is distortive.[7]
Redressive measures and commitments
To remedy the distortion, the Commission may impose redressive measures or the undertaking may offer commitments.[8] The Regulation contains a list of possible commitments. If these commitments fully and effectively remedy the distortion on the internal market, the Commission accept them. The Commission can make these commitments binding on the undertaking.
Procedural aspects
Ex officio review
The Commission may, on its own initiative examine information from any source regarding alleged distortive foreign subsidies. The assessment consists of a preliminary review, concluded within 25 days, possibly followed by an ‘in-depth investigation’ where the preliminary review is conclusive.[9]
An in-depth investigation can lead to three results: a ‘Decision with Redressive Measures’, ‘Decision with Commitments’, or a ‘No Objection Decision’. Decisions adopted following an in-depth investigation must be adopted within 90 working days of the opening of the in-depth investigation.
In practice ex officio reviews are likely to be initiated on the basis of complaints submitted by interested EU parties or by Member States. These complaints are likely to be very similar to complaints to initiate countervailing duty (anti-subsidy) investigations or to request dispute settlement before the World Trade Organisation.
Concentration review
Notification is required for any concentration where (1) the acquired undertaking, or the joint venture, or at least one of the merging undertakings is established in the Union and generates an aggregate turnover in the Union of at least €500 million; and (2) the undertakings concerned received from third countries an aggregate financial contribution in the three calendar years prior to notification of more than €50 million.
Notifiable concentrations shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. A concentration which consists in a merger or in the acquisition of joint control, shall be notified jointly by the parties to the merger or by those acquiring joint control. In all other cases, the notification shall be done by the person or undertaking acquiring control of the whole or parts of one or more undertakings.[10]
The Commission may initiate an in-depth investigation, no later than 25 working days after receipt of the complete notification. Decisions shall be adopted by the Commission within 90 working days of the opening of the in-depth investigation.[11]
The examination of the presence of a distortive foreign subsidy will run in parallel to the examination of the concentration under general EU competition law.
Public Procurement review
A foreign financial contribution in an EU public procurement procedure is notifiable where the estimated value of that public procurement is equal or greater than €250 million. This does not cover contracts under Directive 2009/81/EC (essentially dual use or military tenders). All foreign financial contributions received in the three years preceding notification must be notified when submitting a tender or requesting to participate in a public procurement procedure.[12] If such information is not submitted, undertakings will not be awarded the contract.
Upon notification, the Commission shall carry out a preliminary review no later than 60 days. A decision to close the in-depth investigation shall be adopted no later than 200 days from the point of notification.[13]
Comments
This new instrument has features that are similar to existing EU competition law and to existing EU trade defence law. In practice it is likely that there will be close cooperation between DG Competition and DG Trade in the European Commission in the implementation of the rules. DG Competition will need to draw inspiration from existing EU state aid rules and WTO subsidy rules in understanding issues such as the financial contribution, government revenue foregone, benefit, specificity, a public body and Union interest to impose measures.
The Commission consulted stakeholders on the proposed implementing regulations. Many contributors raised concerns on the burdens on EU companies in collecting and reporting on the range of subsidies that they might receive from central governments and regional authorities.
Identifying and understanding foreign subsidy programmes will require significant research by both the Commission as the competent authority and by entities wishing to complain to the Commission. This is very similar to current anti-subsidy investigations.
WTO anti-subsidy law provides that countervailing duties on goods may only be imposed on the basis of anti-subsidy investigations (Article 32(1) of the WTO subsidies agreement). For this reason, Article 44 of the Regulation states that the EU anti-subsidy Regulation takes precedence over the foreign subsidies Regulation. Thus, the way in which the new foreign subsidies Regulation might or might not apply to goods has yet to be determined.