Foreign Subsidies

Author Definition

Definition

On 5 May 2021, the European Commission (the “Commission”) published a proposal for a Regulation on foreign subsidies distorting the internal market (the “Proposed Regulation”). On 30 June 2022, the Commission and the European Parliament reached a political agreement on the Proposed Regulation. The final Regulation will enter into force once it has been formally adopted by the Council and the European Parliament. This definition is current as of 22 July 2022 and will be updated in the online version of the dictionary once a final version of the Regulation has been adopted.

The Proposed Regulation establishes a legal framework to regulate the granting of foreign subsidies by non-EU countries to companies carrying out an economic activity within the EU’s single market, regardless of nationality. The Proposed Regulation aims to remedy the distortions created by subsidies granted by non-EU countries and to ensure equal competition in the EU. While the proposed scheme concerns all economic activities, the Proposed Regulation pays particular attention to the impact of such subsidies in the context of mergers or public procurement procedures.

Commentary

The Proposed Regulation aims to remedy the distortions created by subsidies granted by non-EU countries and to ensure equal competition in the EU.

This legal framework is intended to fill a long-standing legal gap, which has been discussed for a long time and that could not be addressed by existing European regulations, namely (i) state aid control, (ii) merger control, (iii) public procurement or (iv) foreign investment contrat at EU country level.

Until this Proposed Regulation, only Member States had to comply with State aid rules, as opposed to non-Member States. The assessment of the qualification of foreign subsidies granted by non-Member States borrows its structure to State aid control. The procedural aspects of the regulation are, for their part, inspired by merger control (filing required if certain thresholds are exceeded – in terms of turnover or value, behavioural and structural remedies).

While the Proposed Regulation applies to all economic activities, its content pays particular attention to the impact of such subsidies in the context of mergers or public procurement procedures.

More broadly, this Proposed Regulation introduces several control tools entrusted to the exclusive competence of the Commission. These tools are intended to provide broad oversight of foreign subsidies while allowing the Commission to identify the most critical foreign financial contributions:

  • mandatory ex ante notification of the most significant foreign subsidies in the context of mergers and large-scale public procurement;
  • ex officio investigations by the Commission for all other market situations, including smaller mergers and public procurement procedures.

The Proposed Regulation confers broad powers of investigation and sanction to the Commission, which may:

  • adopt provisional measures;
  • carry out requests for information or investigations within the European Union or in a non-EU country;
  • take sanctioning measures in cases of non-cooperation, including fines and penalty payments;

The 4-step analytical approach of anti-competitive foreign subsidies is largely inspired by the State aid control regulation.

1. Characterization of a foreign subsidy conferring a selective benefit to the recipient

A foreign subsidy is deemed to exist where three cumulative criteria are met:

• a public financial contribution: the financial contribution must be granted, directly or indirectly, by the public authorities of a non-EU country, whether through public or private entities

  • The forms that these foreign subsidies can take are, by analogy, those retained for State aid analysis.
  • In the same way as what prevails in terms of State aid, the financial contributions granted by the non-EU country include both financial contributions granted by (i) the government central and governmental authorities, (ii) foreign public entities, or (iii) any private entity whose acts can be attributed to the relevant non-EU country.

• an economic activity: the financial contribution must grant an advantage to an undertaking carrying out an economic activity within the EU market. Within the meaning of the Proposed Regulation, an undertaking which merges with an undertaking established in the EU, or which acquires control, or an undertaking that participates in a public procurement procedure, is considered to be carrying out an economic activity within the EU market;

• a selective advantage: the advantage granted to the beneficiary by the public authorities of a non-EU country may be conferred on a particular firm or industry or several firms or industries.

2. Characterization of a distortion of competition

Foreign subsidies are not prohibited per se.

The Proposed Regulation provides that a distortion of the EU market is deemed to exist where (i) the subsidy is such as to strengthen the competitive position of the undertaking concerned and (ii) the subsidy has or is likely to have an adverse effect on competition within the EU market.

The effect of the subsidy is assessed based on indicators provided for in the Proposed Regulation (amount, nature, market situation, level of the beneficiary’s economic activity within the internal market, etc.) and in particular the objectives pursued by the subsidy and the conditions under which it was granted. This last criteria differs from the traditional analysis of State aid since the TFEU does not distinguish between the causes or objectives of the interventions in question but defines them in terms of their effects.

The Proposed Regulation focuses, through the ex-ante notification mechanism, on mergers and the most critical public procurement:

• in the context of a merger: any public contribution from a non-EU country, where the turnover generated within the EU market by the target company or at least one of the parties to the merger is equal to or greater than EUR 500 million and the foreign financial contribution is at least EUR 50 million. In contrast to the prevailing merger control thresholds, the Proposed Regulation does not provide for a worldwide turnover threshold.

• in the context of public procurement: any bid submitted involving a public financial contribution from a non-EU country, where the estimated value of the public procurement is equal to or greater than €250 million. In contrast to the notification mechanism provided for mergers, in the case of a public procurement contract, notification is required where the estimated value of the contract is equal to or greater than €50 million.

The Proposed Regulation also introduces a general de minimis threshold, set at EUR 5,000,000 (total amount over three consecutive financial years.).

3. Balancing the negative and positive effects of the subsidy

Where the Commission characterizes a distortion of competition generated by a foreign subsidy, it balances the negative effects of the subsidy within the EU market with its positive effects on the development of the relevant economic activity.

Some uncertainties will need to be clarified in practice and, possibly by future case law, it will be necessary to better determine how the Commission will balance the distortive effect of the subsidy measure and its positive effects on the economic activity. In particular, it remains to be seen whether these justifications will be assessed using a framework similar to State aid control or whether another test will apply. The Commission has indeed adopted a number of texts specifying the conditions under which categories of State aid may be found compatible under Article 107(3) TFEU. Although these texts do not apply to foreign subsidies, the Commission may be able to replicate them in relation to foreign subsidies.

4. Commitment and remedial measures

If the Commission considers that the foreign subsidy creates an actual or potential distortion in the EU market, it may impose remedies to address the situation. The undertaking concerned may also submit commitments (behavioral or structural) to the Commission to counterbalance the competitive distortion.

Bibliography

Council press release of 30 June, 2022.

Council negotiation mandate of 4 May, 2022.

Position of the European Parliament on the proposal for a regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market of 4 May 2022.

Proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market, published by the Commission on 5 May 2021.

Alain Alexis, Foreign subsidy controls: the new European Commission proposal, Concurrences N° 4-2021, Art. N° 102820, pp. 210-218

Andris Rimsa, François-Charles Laprévote, Giuliana D’Andrea, Mario Siragusa, Alessandro Comino, The EU Commission proposes a far-reaching regulation to tackle foreign subsidies, 5 May 2021, e-Competitions May 2021, Art. N° 101054

Catherine Gordley, The EU Commission unveils its proposed regulation on foreign subsidies, 5 May 2021, e-Competitions May 2021, Art. N° 101255

Françoise Labrousse, Bernard Amory, Renato Antonini, Charles de Navacelle, Kaarli Harry Eichhorn, Eva Monard, The EU Commission adopts a proposal for a regulation on foreign subsidies that might be distorting the internal market, 5 May 2021, e-Competitions May 2021, Art. N° 100983

Case Comments

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