On June 30, 2022, the European Parliament (EP) and the Council of the EU (Council) reached a political agreement on the final text of the Foreign Subsidies Regulation (FSR). The final text reflects amendments advanced by both the EP and the Council to the initial proposal tabled by the European Commission (Commission) in May 2021 (see Sidley Update of May 2021). FSR aims to address alleged distortions caused by subsidies granted by non-EU countries (foreign subsidies). Bringing in subsidy concepts from World Trade Organization (WTO) law, FSR builds on but differs in scope from EU antisubsidy rules, which govern the impact of foreign subsidies in the EU but are limited to imports, and EU state aid rules, which govern subsidies granted by EU Member States. FSR hence marks a paradigm shift in EU foreign subsidies control, giving the Commission extensive powers to investigate and redress foreign subsidies’ distortive effects.
What to expect: a few practical considerations
As described in our Sidley Update of May 2021 and further detailed below, FSR is expected to have a broad scope and far-reaching implications for operators active on the EU market. With FSR expected to start applying from mid-2023, there are a few items operators should bear in mind and start applying.
1. FSR’s scope of application is broad: FSR applies equally to operators established in and outside of the EU insofar as they receive financial contributions from non-EU countries and carry on economic activities or investments in the EU. Although state-owned entities and sovereign wealth funds will likely be more exposed, FSR will apply to purely private entities too. Notably, for FSR to be triggered, it will suffice that an operator receives a financial contribution from a non-EU country. The assessment of whether a financial contribution grants an unfair advantage and hence amounts to a distortive foreign subsidy is part of the assessments conducted by the Commission under FSR.
2. Start mapping financial contributions received from non-EU countries. FSR imposes certain notification and other obligations on operators that receive financial contributions from non-EU countries. The concept of “financial contributions” under FSR is very broad and borrows heavily from EU and WTO rules on protection against subsidized imports. Financial contributions encompass, among others, transfer of funds or liabilities (e.g., capital injections, grants, loans, loan guarantees, fiscal incentives or preferential tax treatment, compensation for financial burdens, debt forgiveness, debt to equity swaps); foregoing of revenue otherwise due (e.g. tax exemptions, granting of special rights without adequate compensation); and provision or purchase of goods or services. Financial contributions may be granted directly or indirectly by governments, state-owned entities, and even private entities provided that the contributions are attributable to a non-EU country. The Commission may investigate the effects of financial contributions granted up to five years before the FSR’s entry into force. Given the breadth of the foregoing rules, operators should start identifying and mapping current and past financial contributions to be able to effectively comply with applicable requirements.
3. Assess whether the financial contributions could be seen as distortive foreign subsidies and prepare mitigating arguments. The Commission will have powers to impose remedial measures and also prohibit transactions and other economic activities deemed affected by financial contributions that amount to distortive foreign subsidies. For a financial contribution to amount to a distortive foreign subsidy, it must improve the competitive position of the receiving operator and, as a result, actually or potentially negatively affect competition in the EU. This assessment should follow a case-by-case analysis of all circumstances at stake to balance the positive and negative effects stemming from the foreign subsidies. When mapping the received financial contributions, operators should assess their impact on investments and economic activities in the EU and preempt any finding of distortion. Although the alleged absence of distortive effects will not forego the notification obligations under FSR, operators should start assessing risks and mitigating factors to be prepared for potential future reviews and investigations.
4. Adopt internal procedures to take account of FSR rules especially in mergers and acquisitions (M&A) and public tender processes. The FSR will impose, among others, certain notification obligations on operators that receive financial contributions from non-EU countries and engage in certain M&A activities and public tenders. Operators should prepare for these requirements when negotiating an M&A deal or preparing a public tender bid — among others, by conducting relevant diligence to assess applicability of FSR notification requirements; including relevant provisions in the contractual arrangements (e.g., cooperation among parties, conditions to closing); and taking account of the timing implications on closing of the notifications and reviews under FSR.
What has changed since the Commission’s initial proposal
The Commission first tabled the FSR proposal in May 2021. The overall framework of FSR remains the same — providing notification obligations in connection with M&A deals and public tenders exceeding certain thresholds and granting the Commission broad investigative powers to assess other market situations, including M&A deals and public tenders below the prescribed notification thresholds.
Nonetheless, a few notable changes have been introduced following the interinstitutional dialog involving the EP and Council. In particular, the thresholds triggering notification obligations in respect of certain M&A deals and public tenders have been increased to limit the (still broad) scope of FSR. For instance, in the case of public tenders, a notification obligation will be triggered in respect of public tenders with a contract value of at least €250 million (as initially envisaged) and if the relevant operators have received financial contributions by non-EU countries above certain thresholds (additional threshold). In addition, the Commission may investigate foreign subsidies granted up to five years before the entry into force of FSR and not 10 years as initially envisaged.
Let’s recall certain key aspects of the Foreign Subsidies Regulation
While the current text of FSR remains substantially in line with the initial proposal (see Sidley Update of May 2021), it is worth recalling some of the key aspects that will shape the FSR regime:
1. A composite toolbox. FSR envisages three tools for controlling the effects of foreign subsidies on the EU market:
- Notifications of M&A deals: Operators will have to seek preclosing approval from the Commission for acquisitions of control, mergers, or the creation of joint ventures, where (i) the target, one merging undertaking, or the joint venture is established in the EU and generates turnover in the EU of at least €500 million, and (ii) the undertakings concerned received financial contributions from non-EU countries for more than €50 million in the aggregate in the three calendar years prior to the notification. The notification triggers a suspensory review during which the parties are prohibited from completing the transaction. Following the review, the Commission may approve or prohibit the transaction, impose remedial measures, or accept commitments offered by the parties.
- Notifications in public tenders: Operators that participate in public tenders in the EU will have to report the financial contributions received to the contracting authority, which will pass on the information to the Commission for review, where (i) the total value of the public tender is equal to or above €250 million, and (ii) the operator received financial contributions of at least €4 million per non-EU country in the three preceding calendar years. The Commission will then assess the potential distortive effects of these financial contributions and verify whether they enable a bidder to submit an offer that is unduly advantageous. If distortion is found, the Commission may prohibit the award of the tender to the operator concerned, impose remedial measures, or accept commitments offered by the operator.
- Ex officio investigative tool: The Commission will be able, at its own initiative, to investigate all other market situations (including M&A deals and public tenders below the aforementioned thresholds) regarding alleged distortive foreign subsidies and impose redressive measures where necessary. The Commission will be able to act based on information received from Member States, market operators, and other interested parties. Operators subject to investigation will need to reply to information requests and submit to inspections by the Commission. Operators that do not cooperate risk that the Commission decides on the basis of facts available, which more likely involves adverse inferences (already the case in EU antisubsidy investigations).
2. The focus is on remedying the effects of “distortive” foreign subsidies. The Commission will have powers to impose remedial measures and also prohibit transactions and other economic activities considered unduly affected by distortive foreign subsidies. The assessment of whether foreign subsidies are distortive follows a case-by-case balancing exercise of the subsidies’ positive and negative effects. FSR provides some guidance on the subsidies that are less or more likely to be considered distortive:
- Subsidies that should never be considered distortive: These are subsidies below €200,000 over a period of three consecutive financial years per non-EU country or subsidies aimed at repairing the damage caused by natural disasters or exceptional situations.
- Subsidies that are unlikely to be distortive: These are subsidies lower than €4 million over a period of three consecutive financial years.
- Subsidies that are likely to be distortive: These including subsidies (i) granted to ailing companies, (ii) in the form of unlimited guarantees for debts or liabilities, (iii) directly facilitating an M&A deal, (iv) enabling an operator to submit an unduly advantageous tender for a public contract, or (v) in the form of export subsidies that are not in line with the Organization for Economic Cooperation and Development arrangement on officially supported export credits.
3. The Commission will have broad powers. The Commission will be tasked with implementing and enforcing FSR. It will enjoy broad investigative powers to request and audit information from operators, conducting fact-finding inspections, and launching market investigations. The Commission’s decision-making powers will be significant, as it will have the power to approve or prohibit transactions and economic activities affected by distortive foreign subsidies, impose remedial measures, or accept commitments offered by the parties. Remedial measures are potentially very broad and may consist of, among others, reducing capacity or market presence; refraining from certain investments; divesting assets; licensing certain assets on fair, reasonable, and nondiscriminatory terms; and repaying the foreign subsidies.
4. Operators that breach FSR will face severe penalties. Operators will face monetary fines of up to 10% of their global turnover and periodic penalty payments up to 5% of their daily turnover in case of breaches of FSR — for example, if they fail to notify an M&A deal or public tender, provide incorrect information, implement a transaction before approval, or breach commitments.
The current text of FSR needs to be formally adopted by the EP and Council. This will likely occur later in 2022. Once adopted, FSR will enter into force 20 days after its publication in the Official Journal of the EU and start applying apply six months after the entry into force. The notification obligations will start applying nine months after its entry into force, likely by mid-2023. Operators active in the EU should take preemptive steps to assess, mitigate, and manage the regulatory risks stemming from FSR.
Sidley’s market-recognized leading experience in EU antisubsidy investigations, EU state aid investigations, and WTO antisubsidy law, combined with our specific expertise in investment screening and competition/antitrust filings in the context of M&A deals and in government procurement, makes us highly qualified to assist operators as they prepare for the FSR and successfully streamline regulatory burdens.
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