Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (FSR) entered into force on 12 January 2023 and will start to apply as of 12 July 2023.

The FSR creates a brand new instrument to fill a regulatory gap, by preventing foreign subsidies from distorting the European Union (EU) internal market. Whereas companies receiving public support in the EU are subject to strict State aid rules, companies obtaining public support outside the EU are generally not. This was perceived as putting companies in the EU at a disadvantage compared to companies that obtained subsidies outside the EU, but that also engaged in economic activity in the Union.

The FSR’s scope extends far beyond the obvious State support, to cover common types of benefits that are granted all over the world, including in countries driven by a market economy. Its obligations will inevitably place an additional administrative burden on companies engaging in an economic activity in the EU. Acceptance of a foreign subsidy distorting the EU internal market may have far-reaching consequences for the company. The FSR places additional compliance obligations on companies, and for many will entail a thorough assessment to identify and justify foreign subsidies received. For companies considering transactions in the EU, the FSR effectively creates a third layer of deal conditionality, besides merger control and Foreign Direct Investment laws. This is adding a further unique set of thresholds, timings and factual considerations, to be included in companies’ strategies to invest in the EU. This will require expertise in EU antitrust and State aid law, and a good understanding of the details of the FSR.

Key things you need to know:

• As under EU State aid law, a foreign subsidy includes any form of public support granted by a third country, e.g., direct grants, capital injections, interest-free or low-interest loans, etc., but also support such as tax exemptions or reductions, and exclusive rights without proper remuneration.
• From 12 October 2023, when acquiring control of a company in the EU or participating in a public tender in the EU, companies will have to notify the European Commission (Commission) of foreign subsidies received, if the relevant thresholds are met, or if the Commission so requests. Notifications have suspensive effect. Failure to notify may lead to severe sanctions.
• The Commission may launch ex officio investigations into other market situations that are not already caught by other legislation.
• If the Commission deems that a foreign subsidy distorts the internal market, the beneficiary may need to apply remedies, such as reducing its market presence. If these remedies are not effective, the Commission may prohibit a concentration or the award of a public procurement contract that is not yet closed.

What is a foreign subsidy?

A foreign subsidy is:

1. a financial contribution, e.g., direct grants, interest-free or low-interest loans, loan guarantees, capital injections, compensation of operating losses, debt rescheduling, fiscal incentives, and also preferential tax treatment, granting of special or exclusive rights without adequate remuneration, etc.;
2. that is granted directly or indirectly by a non-EU country (including public and private entities whose actions are attributable to that country);
3. that confers a benefit that is not normally available on the market to a company engaged in an economic activity in the EU; and
4. that is “selective”, i.e., limited to one or more companies or industries (as opposed to a measure available to any company).

When must foreign subsidies be notified for prior review?

As of 12 October 2023, companies will have to notify foreign subsidies they have received when they intend to participate in:

• a concentration, if: (i) at least one of the merging companies, the target, or the joint venture, generates a turnover of at least €500 million in the EU and is established in the EU; and (ii) the companies involved in the concentration received combined aggregate financial contributions of at least €50 million from third countries in the three years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest; or
• a public procurement procedure in the EU (including for concessions), if: (i) the estimated contract value amounts to at least €250 million (with an additional threshold where the procurement is divided into lots of at least €125 million per lot); and (ii) the tenderer (including its subsidiaries without commercial autonomy, its holding companies, and, possibly, main subcontractors and suppliers) was granted aggregate financial contributions of at least €4 million per third country in the three years prior to notification. Below these thresholds, tenderers must nevertheless declare all foreign financial contributions received.

The Commission may also request the notification of concentrations or public procurements where these thresholds are not met.

Notification has suspensive effect. This means that the notified concentration may not be implemented, or the notified public procurement may not be awarded to the beneficiary of the foreign subsidy, until the time limits for the Commission to review the foreign subsidy have elapsed.

Failure to comply with these obligations may lead the Commission to impose fines of up to 10% of the aggregate turnover, or to request the dissolution of a concentration.

An implementing regulation, to be adopted by 12 July 2023, will set out the procedural details underpinning the submission of notifications to the Commission.

When will a foreign subsidy be reviewed by the Commission in the absence of a notification?

The Commission has the ability to start ex officio investigations into foreign subsidies allegedly distorting the internal market granted in the preceding 10 years (but not longer than five years prior to the application of the FSR). It will examine information from any source, including Member States, natural or legal persons, or associations. Although there is no formal procedure for complaints in the FSR, this tool will allow competitors to denounce potential foreign subsidies affecting the internal market.

The ex officio investigations can be conducted in market situations other than the ones targeted by the notification obligations.

When would foreign subsidies be subject to remedies?

During its investigation, the Commission will determine if the qualification of a foreign subsidy is correct and if so, if it has a distortive effect on the EU internal market. To do so, it will consider, amongst other factors, the amount and nature of the subsidy, the situation of the company (size, markets, sectors, etc.), the level and evolution of the company’s economic activity in the EU, and the purpose and conditions of the foreign subsidy. The foreign subsidy will be deemed to distort the internal market where it improves the competitive position of the company in the internal market and it actually or potentially affects competition in the internal market. There are some presumptions of distortion (e.g., subsidies to ailing companies, in the form of unlimited guarantees or subsidies directly granted to facilitate a concentration), and also presumptions of no distortion (e.g., subsidies of less than €4 million over three years, or those granted to make good the damage caused by natural disaster or exceptional occurrences). If a distortion is found, the Commission may conduct a balancing test, weighing the positive effects of the subsidy against the negative ones to determine the need for — or level of — a remedy.

If the negative effects outweigh the positive ones, the company may propose commitments to remedy the distortion on the internal market. This might include offering to reduce its capacity or market presence, divest assets, repay the foreign subsidy to the foreign country, refrain from certain investments in the EU, or to provide a license on FRAND terms for those assets developed with foreign subsidies. If these remedies are ineffective, the Commission may prohibit the concentration or the award of the public contract to the beneficiary of the foreign subsidy. When acting ex officio, the Commission may also impose redressive measures to remedy the distortion.