EU Foreign Subsidies Regulation: State of Play

The process for introducing new EU rules on companies that receive foreign subsidies has really sped up. EU lawmakers are now in so-called “trilogue” discussions meant to finalise the “Foreign Subsidies Regulation” still this year. The regulation will affect companies in M&A transactions and in public procurement bids, and will basically introduce yet another review regime to go through (in parallel to, for example, merger control and foreign investment control). Time to look at the state of play and at what is next.

The European Commission published its draft of the “Foreign Subsidies Regulation” about a year ago, and celebrating the draft’s anniversary last week, the European Parliament and the Council of the EU (representing the national governments) set out their respective negotiating positions. The three EU bodies then kicked off the “trilogue” right away, in which they will work towards a common position and a finalized text of the regulation. The Commission’s Executive Vice-President (and Competition Commissioner) Vestager even skipped her planned personal attendance at the International Cartel Network Conference when “kicking off the legislative process here in Strasbourg on an important new regulation concerning foreign subsidies”.

What is the foreign subsidies regulation?

The foreign subsidies regulation is meant to tackle the (perceived) issue of non-EU companies receiving state subsidies and thereby gaining a competitive advantage over EU companies. The EU itself has a state aid regime that regulates subsidies, but this regime only applies to EU Member States. So, subsidies to foreign companies are not caught.

There have been calls in a number of industries (including, e.g., railway and aviation) that foreign and sometimes state-owned companies have an unfair advantage because they are heavily subsidised, e.g., because those companies are able to pay higher prices when acquiring EU companies or are able to offer lower prices to their customers, thereby driving competition out of the market (sounds familiar? Take a look again at the Aeonmed/Heyer-prohibition).

To address this issue, the foreign subsidies regulation will basically introduce three tools:

• M&A: Transactions of a certain size will have to be notified and reviewed by the Commission if a “financial contribution” by a non-EU government above a certain threshold is involved.
• Public procurement: Bids in public procurements of a certain size will have to be notified and reviewed by the Commission if a ”financial contribution” by a non-EU government is involved.
• Power to investigate: The Commission will also have the power to investigate all other market situations when it suspects that a foreign subsidy may be involved. The regulator will have the power to impose redressive measures and demand commitments from companies.

The regulation is not just forward-looking: It is meant to apply to foreign subsidies granted ten years before the regulation enters into force.

What is a foreign subsidy?

Well, that is the key question – and a difficult one to answer. The draft regulation defines a foreign subsidy as a “financial contribution” by a third country conferring a benefit to a company and being limited to: that company, a group of companies or an industry.

So far, so good. Where things become blurry is the definition of “financial contribution”, which is to include, inter alia, the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees and fiscal incentives; or the provision of goods or services or the purchase of goods and services.

In particular for larger companies and conglomerates, it will likely be a challenge to track and centrally document such financial contributions (even more so when having to look back at the last ten years). That might not be an excuse in the eyes of the Commission, though: Reportedly, the regulator’s position might be that the proposal of the foreign subsidies regulation has been around long enough for companies to prepare and create an internal system to ensure compliance with the new rules.

What do the review process and test look like?

In its review, the European Commission would first assess whether a financial contribution indeed is to be qualified as a foreign subsidy and would then determine whether it distorts the EU’s internal market. To assess a potential distortion, the Commission would need to balance positive effects of a subsidy with negative effects of the distortion.

For M&A transactions, the review process is tailored after the EU’s merger control system: At least based on the Commission’s draft, the regulator would have 25 working days for a preliminary review and another 90 working days for an in-depth review. The review timelines for public procurement are longer with 60 and 200 (interestingly not: working) days.

What is the European Parliament’s position?

The European Parliament seems to back the Commission’s proposal as such. The changes to the draft suggested by the European Parliament appear to be relatively small: They concern items such as lowering the threshold for when M&A transactions (EU target turnover of EUR 400 million instead of EUR 500 million) and public procurement bids (size of the procurement of EUR 200 million instead of EUR 250 million) would be notifiable, reducing the review period for public procurement bids and requesting the Commission to issue guidelines on the regulation within 24 months after it enters into force.

What is the Council of the EU’s position?

Similar to the European Parliament, the Council also seems to back the Commission’s proposal. The suggested changes to the draft regulation do not hint to major obstacles to finalising the text: The Council would like to, inter alia, clarify the criteria for the balancing test, ensure that the EU’s Member States are kept informed and involved, and – diverging from the Parliament – increase the notification thresholds for M&A transactions (EU target turnover of EUR 600 million) and public procurement (size of the procurement of EUR 300 million).

What is next?

Overall, the foreign subsidies regulation seems to be in line with general political landscape and the global trend towards more protectionism. With the Parliament and the Council being broadly on board, chances are that EU legislators might indeed be able to agree on a text for the foreign subsides regulation still this year. The regulation could then potentially even enter into force next year. With that timeline in mind, companies might already want to start preparing for what is to come, at least in terms of considering how to gather the right information on the foreign subsidies they might have received.

But that does not just affect foreign companies: As the draft regulation stands, the formation of joint ventures outside of the EU can trigger notification obligations when a foreign JV partner has received subsidies – including when the joint venture is not meant to be active in the EU. Thus, also EU companies may find themselves involved in notifications.

Generally, stakeholders should not be mistaken: While the concerns around a “level playing field” and distortive subsidies are often spun towards Chinese companies, the regulation is agnostic to where a company is based. Given the effort countries across the globe these days put into, e.g., supporting digital, semiconductor, biotech and other technology companies, a range of industries and “unlikely players” will be affected by the regulation (even though, interestingly, by relying solely on the target turnover as a trigger for a review process in M&A transactions, the intention of the regulation does not seem to be to capture “killer acquisitions”, which are otherwise a topic much talked about by regulators).

[Photo by Neil Thomas on Unsplash]