Clarifications on Foreign Subsidies

The EU’s Foreign Subsidies Regulation will start to apply in about two weeks. While some things are still in limbo, the European Commission has published a Q&A to clarify certain topics. The Q&A admittedly went online earlier this month, but I could not find a good summary so far – so I thought the one below might be helpful, alongside an overview of where things currently stand.

We blogged about the Foreign Subsidies Regulation (FSR) previously, when final negotiations started last year (here) and in the form of a “nightmare story”. To summarise in two sentences: The FSR is meant to tackle the (perceived) issue of companies receiving non-EU state subsidies and thereby gaining an unfair competitive advantage over other companies in the EU’s internal market. The FSR has three main pillars – a new review regime for M&A deals, a review regime for public bids of a certain size, and the power for the European Commission to launch (ex officio) market investigations and impose measures on companies.

To many, the most important piece is the review regime for M&A deals. In addition to merger control and foreign investment control, deals meeting certain turnover and subsidies thresholds will also have to be notified to and cleared by the Commission under the FSR before those deals can close.

The current status – Implementing Regulation pending

The FSR itself will be accompanied by a so-called Implementing Regulation that will provide additional details on the filing documents, the process and – maybe most importantly – what kind of information will have to be included in filings.

The Commission published a draft of the Implementing Regulation for consultation and public comments earlier this year. Same as the FSR itself, it was rather controversial. While the regulation is meant to target foreign subsidies, many EU-based companies that are active globally will be caught by it, as well. Under the FSR, whether or not a transaction is notifiable inter alia depends on the amount of foreign “financial contributions” received by the relevant parties. Because that term is defined very broadly, companies preparing for compliance with the FSR and for FSR filings will have to gather information on all sorts of support they might have received abroad (think: a municipality building a road to a new factory; tax grants; sales to government bodies), information which is typically not stored centrally.

There is hope that the Implementing Regulation might ease that burden by setting the thresholds for which information is to be provided with a filing at a high level or by showing some flexibility on what is to be considered as a financial contribution. But, EU Member States are still negotiating the final version of the Implementing Regulation. That version is only expected next week, so shortly before the FSR will actually start to apply.

Meanwhile, the Commission’s Executive Vice President Vestager is (still) saying that the regulator will need more staff to be able to actually deal with the FSR workload.

The Q&A – clarification incoming

While those affected by the FSR are eagerly awaiting the final text of the Implementing Regulation, the Commission has tried to bring some additional clarity by publishing a Q&A. It does not cover what a filing should look like, but clarifies or confirms other points. Here is a selection of the most important ones with regard to M&A deals:

• Application: The mandatory filing obligation under the FSR will apply to deals that have been signed on or after 12 July 2023 and have not been closed by 12 October 2023.
• Joint Ventures: The formation of pure greenfield joint ventures will not be notifiable. That is different where a new joint venture is formed and existing businesses are contributed to that joint venture. In those cases, the turnover of the joint venture is also calculated differently than in EU merger control.
  
• Relevant date for financial contributions: The FSR takes foreign financial contributions into account which were granted in the three years prior to signing a transaction agreement. Financial contributions are relevant from the moment in time they have been granted, i.e., as of when the beneficiary is legally entitled to them. The date of the payment is generally not relevant.
  
• Sales of goods/services at market conditions: Sales of goods/services to foreign public bodies at normal market prices can count as “financial contributions” and are therefore relevant to determine whether a notification is necessary. This one can have quite an impact: Companies would have to basically keep record of all direct or indirect sales to public bodies. On the upside, such sales will generally not be relevant for the substantive assessment of a transaction. The final Implementing Regulation might also allow companies to not provide details on such sales in a notification.
  
• Tax exemptions: Tax exemptions in non-EU countries qualify as relevant foreign financial contributions.
  
• Pre-notification: Similar to EU merger control, notifying parties will have to go through a pre-notification procedure before starting the official review process (and starting the review deadline for the Commission). The process appears similar to merger control, with a case team allocation request being the first step. While pre-notification discussions will generally only be possible once the final Implementing Regulation has been adopted, the Commission is already open to discuss cases where necessary.

Uncertainty left – next steps

The Q&A is a step in the right direction and overall the Commission seems eager to lighten the burden of FSR notifications or to at least reassure companies that the process will not be too painful and that the Commission will be pragmatic. There is a certain tension between the main political goal of the FSR (tackling foreign subsidies from certain countries to foreign companies affecting the EU) and its practical implications (EU companies investing time and effort to prepare for the FSR). How that will play out and how pragmatic case teams will really be remains to be seen.

Photo by Ksenia Chernaya