The EU regulation on the control of foreign subsidies enters into force. The Regulation is intended to provide the EU with a tool to protect the internal market from subsidies provided by third countries. The Regulation gives the European Commission the power to review, on its own initiative, subsidies granted, and creates a new notification obligation in the case of concentrations and participations in public procurement.
Ensuring compliance with the Regulation will impose onerous requirements for monitoring transactions with third countries and undertakings controlled by third countries. Even the undertakings established in the EU will have to start monitoring those transactions.
Regulation EU/2022/2560 on foreign subsidies distorting the internal market (the “Regulation”) enters into force on 12 July 2023. The Regulation aims to bridge the gap between the very strict regime of state aid control within the EU and the weak control of subsidies by third countries (i.e. non-EU countries). This form of aid also affects the level of competition in the common market. Subsidies in international trade are regulated by World Trade Organisation rules, but these controls only apply to trade in goods. The EU has therefore adopted a unilateral instrument allowing it to regulate subsidies that have an impact on its internal market.
It should be noted that the control is not limited to third country undertakings. Even companies established in the EU will have to monitor all their transactions with third countries or with undertakings controlled by third countries. Undertakings will have to monitor not only subsidies and other benefits received from third countries, but also all purchases and sales of goods or services in relation to third countries and/or entities controlled by third countries.
What is a foreign subsidy
A subsidy is a financial contribution provided directly or indirectly (e.g. through a state-controlled company) by a third country, which (while provided only to certain undertakings or industries) confers a benefit on an undertaking operating in the EU internal market. Unlike state aid provided within the EU, foreign subsidies are not prohibited per se, nor is there any obligation to seek authorisation from the European Commission (the “Commission”) before providing them.
Control by the Commission
Although not subject to prior authorisation, subsidies may become subject to ex-post review by the Commission. If the Commission finds that a subsidy distorts the internal market, it may impose redressive measures on the recipient, or accept the recipient’s commitments to remedy the distortion of competition. Redressive measures and commitments may include, inter alia, making certain infrastructure accessible on non-discriminatory terms, reducing capacity, refraining from certain investments, the licensing of assets acquired or developed with the help of subsidies, publication of results of research, divestment of certain assets, or repayment of the subsidy.
The Commission has similar powers in foreign subsidy proceedings as in other competition cases. In particular, it can request information and conduct inspections in the EU. Failure to provide information, obstruction of inspections, and other breaches of cooperation are offences for which the Commission may impose a fine of up to 1% of the turnover of the entire group of undertakings concerned. An important novelty is the Commission’s power conduct inspections in third countries (unless the government of the third country raises objections to the inspection).
In addition to the above, from 12 October 2023, there will be an obligation to notify financial contributions received (a) in cases of concentrations and (b) when participating in public procurement procedures:
Notification of concentrations
For the purposes of the Regulation, concentrations are deemed to include all types of transactions that are generally capable of triggering the obligation to notify the concentration (in particular the merger of previously independent undertakings, acquisition of control, creation of a joint venture, subject to the usual exemptions for financial holding companies, insolvency proceedings, etc.).
The notification obligation arises if at least one of the merging undertakings, or the joint venture being set up, is established in the EU and its aggregate turnover exceeds EUR 500 million and if, at the same time, the undertakings involved in the concentration were granted financial contributions from a third country or an undertaking controlled by it in excess of EUR 50 million in the preceding three years.
In this respect, it is crucial that the notification criterion refers to a financial contribution, not a subsidy. It is therefore irrelevant for the notification obligation whether the financial contribution was granted selectively or whether it conferred an advantage on the undertaking. Pursuant to Article 3(2) of the Regulation, a financial contribution is understood to mean not only capital injections, grants, loan guarantees, fiscal incentives and other customary forms of economic support, but also the provision or purchase of goods or services. Thus, even quite ordinary commercial transactions with third countries or entities controlled by them, even if they take place on market terms, also constitute financial contributions. This way, financial contributions from third countries can also be received by companies established in the EU in the context of a transaction carried out in the EU - for example, the purchase of goods for the needs of a third country’s embassy in the EU will constitute a financial contribution.
The EUR 50 million limit on financial contributions includes financial contributions received by all participants in the concentration. Thus, at the time of the concentration, it will be necessary to verify the volume of relevant transactions of all these entities over the last three years, always for the whole group of undertakings taken together. In hindsight, such a task can be very difficult, so it may be advisable for undertakings to start monitoring their business transactions with third countries and with entities controlled by third countries in great detail now.
If the turnover thresholds and the amount of the financial contribution are exceeded, the transaction must not be pursued until the Commission authorises it on the basis of a notification. Notification under the Regulation is separate from notification, as the case may be, under the Merger Regulation. The fulfilment of the notification criteria is assessed separately and a separate notification form will be submitted. The periods during which the concentration must be suspended will also run separately. As in the case of merger control, the Commission’s procedure has two phases. Once a complete notification has been submitted, the concentration may not be implemented for a period of 25 working days, during which time the Commission will conduct an initial review. During this period, the Commission may initiate an in-depth investigation, which may take up to 90 working days. This period may be extended by a further 15 working days if the parties offer commitments, or by up to 20 working days at the request of the parties. The merger may be implemented if these periods expire without the Commission adopting a decision, or if the Commission clears the concentration, or clears it with commitments. The Commission may also prohibit the transaction.
It is important to correctly qualify and verify that the limit of 50 million euro of financial contributions is not exceeded. An infringement of the obligation to notify such contributions is an offence for which the Commission may impose a fine of up to 10% of the combined turnover of the undertakings concerned. Moreover, such a transaction is considered invalid until cleared by the Commission.
Notification of public procurement procedures
The Regulation is also intended to prevent competition in the internal market from being distorted by unduly advantageous tenders in public procurement procedures where these advantages are based on financial contributions from a third country or undertakings controlled by it. The Commission must be notified if, in a public procurement procedure with an estimated value exceeding EUR 250 million, the tenderer (the whole of its group is to be counted), its main subcontractors and suppliers involved in the same tender in the public procurement procedure received financial contributions exceeding EUR 4 million in the last three years.
Thus, even in the case of tendering procedures, the notification criterion is based on the value of the financial contributions without the contributions actually favouring the participant. Thus, not only aid received but also regular commercial transactions with third countries must be taken into account. In doing so, not only the contributions received by the main contractor, or all members of the consortium, but also by its main subcontractors (those who provide key elements of the implementation of the public contract or whose share of the value of the public contract exceeds 20%) must be verified.
Participants shall not only report the total value of financial contributions received, but shall also provide a list of all financial contributions (i.e. all transactions) with third countries or entities controlled by third countries over the last three years. Participants who have not received contributions exceeding EUR 4 million in the last three years must also submit this list in the form of a declaration.
If the tender of a tenderer that has announced financial contributions exceeding EUR 4 million is evaluated as the most advantageous, the public contract cannot be awarded to that tenderer until the Commission has completed its review of the subsidies. The Commission must carry out a preliminary review of the notified transaction within 20 working days (which may be extended by 10 working days) and, if necessary, initiate an in-depth investigation during this period, which may take up to a maximum of 110 working days (which may be extended by 20 working days). If these periods expire without a decision by the Commission, the contract may be awarded. On the basis of the investigation, the Commission may conclude that the contributions received do not distort the internal market and may authorise the award of the contract, or may accept additional commitments from the participant to remedy the effects on the internal market, or may prohibit the award of the contract to the subsidised participant.
Again, there are severe penalties for breach of the notification obligation. An infringement of the obligation to notify financial contributions received in excess of EUR 4 million is an offence punishable by a fine of up to 10% of the aggregate turnover of the entities concerned.
What does that imply?
In principle, all undertakings, including those operating only within the EU, should start monitoring all their transactions with third countries. It is not only China or Russia, but also the USA, Canada, Brazil, India, or the United Kingdom. The recording of financial contributions related to such transactions will be important both in cases of participation in large tenders and in cases of major concentrations between undertakings. In both cases, only a short time will be available to verify the existence and volume of financial contributions. In such a short time it may not be realistic to verify retrospectively the nature of all transactions over the last three years.
We therefore recommend that undertakings start building up records of transactions with third countries and entities controlled by them on a precautionary basis. Our law firm HAVEL & PARTNERS has been practising competition law and public procurement law (including representation in proceedings before the Commission) for an extensive period of time and we are also developing tools to ensure compliance with the Regulation.
We are ready to help our clients implement a compliance program in respect of the requirements of the Regulation. We will also represent them in proceedings before the Commission to assess whether the subsidies received distort the internal market. In those proceedings, the ability to rebut any concerns the Commission may have about adverse impacts on the internal market with economic arguments will be very important. In this context, we will be able to offer our clients cooperation with our in-house team of competition economists.