On 10 July 2023, the European Commission (the “Commission”) adopted the Implementing Regulation (“IR”) for the European Union (“EU”) Foreign Subsidies Regulation (“FSR”). The FSR, which starts to apply today, 12 July 2023, creates a new instrument designed to prevent foreign subsidies from distorting the EU internal market (see our blog). The objective is to level the playing field within EU markets between companies subject to scrutiny under the EU State aid rules and companies receiving subsidies from non-EU Member States.
To attain this objective, the FSR empowers the Commission to assess foreign subsidies either on its own motion or after the notification of concentrations or public procurement tenders in the EU where certain thresholds are exceeded. Foreign subsidies are financial contributions (i.e. any value transfer) granted by non-EU countries, or entities whose action can be attributed to a non-EU country (i.e. foreign financial contributions or “FFC”) that confer a benefit that is not available on the market, specifically to one or to several companies or industries. Where foreign subsidies are problematic, this assessment may lead to remedies and even to the prohibition of the concentration or of the award of a public contract. Although the FSR starts to apply on 12 July 2023, allowing the Commission to investigate foreign subsidies on its own motion, the notification obligations only kick in on 12 October 2023. That means that notification may be requested for transactions signed after 12 July but not closed by 12 October and for public procurement procedures initiated after 12 July.
The purpose of the IR is to set out the rules applicable to proceedings conducted by the Commission under the FSR, including the submission of notifications.
Key things you need to know about the IR and the notification obligations:
- The IR enacts the forms that notifying parties will have to complete and submit to the Commission in the context of concentrations and public procurement tenders.
- The Commission must review foreign subsidies within statutory time limits that start to run as soon as the notification is complete and that may be suspended to obtain further information.
- Detailed information must be submitted for FFCs that are considered to fall into the most distortive categories of foreign subsidies, whereas aggregate information must be provided for most other FFCs.
- Information must be provided for FFCs provided to all group entities of the party or parties involved.
- Companies that are likely to be involved in large concentrations or public procurements would be well advised to prepare sufficiently well in advance to avoid delays in their clearance timeline.
What is the form, content and procedural detail of notifications?
As of 12 October 2023, companies will have to notify FFCs that 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 FFCs of at least €50 million 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 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 for the lot(s) to which the tenderer intends to participate); and (ii) the tenderer was granted aggregate FFCs of at least €4 million per third country in the three years prior to notification. If the tenderer has received fewer FFCs, it would nevertheless have to declare the FFCs received, to allow the Commission to verify the position.
Notifying parties will have to complete a “Form FS-CO” for concentrations to be submitted to the DG COMP (the Commission DG in charge of competition) and a “Form FS-PP” for public procurement procedures to be submitted to the contracting authority which will then forward the notification to DG GROW (the Commission DG in charge of the internal market).
The notifying parties in concentrations are in the case of a merger all merging parties or, in case of an acquisition of control, all parties acquiring control. The parties include not only the legal entities directly involved in a transaction but all group entities (including parents, subsidiaries and companies directly or indirectly controlled by the parent companies) of the companies concerned, except for investment funds, which benefit from a specific limitation under certain conditions. The notifying parties in public procurement tenders are the economic operators (including subsidiary companies without commercial autonomy and all holding companies), their consortia, as well as the main subcontractors and main suppliers that are expected to contribute to the performance of the resulting contract for more than 20% of the contract value.
The notifying parties must provide general information regarding the notified transaction and public procurement tender and turnover data. They also need to provide information on FFCs. The level of detail to be provided depends on the nature of the FFCs:
Most distortive categories of FFCs
Certain types of FFCs are considered to be the most distortive: a subsidy to an ailing company, unlimited guarantees, an export financing measure not aligned with the OECD Arrangement, a subsidy directly facilitating a concentration and a subsidy enabling the tenderer to submit an unduly advantageous bid.
Where their amount is equal to or exceeds €1 million, those potentially distortive FFCs are required to be notified in detail, including information on their form (e.g. loan, tax, capital injection); the granting entity (e.g. public authority or public company); the amount; the reason for which they were granted; the conditions attached; their main characteristics (e.g. interest rates, duration of loan); whether they confer a benefit and are specific or of general application; and, in public procurement procedures, whether the FFCs are granted only to cover operating costs exclusively linked with the public procurement tender under consideration.
On other FFCs
On other FFCs, the IR requires notifying parties to provide an overview grouped by non-EU country and by type (e.g. direct grant, loan, tax advantage), with a short description of each type and the granting entities, and a specification of their aggregate amount in defined ranges (€45-100 million, €100-500 million, etc.).
Importantly, the IR excludes from the reporting obligation the following FFCs:
- supply/purchase contracts (except financial services, such as loans by public banks) if they are at market terms in the ordinary course of business (e.g. after a competitive, transparent and non-discriminatory tender);
- deferrals of payment of taxes or social security contributions, tax amnesties/holidays, depreciations and loss-carry forward rules as well as tax reliefs for avoidance of double taxation if they are of general application (i.e. applicable to any company irrespective of the sector or location);
- the other FFCs if their aggregate amount – including of FFCs that may fall in one of the most distortive categories of foreign subsidies – per third country is less than €45 million for concentrations, or less than €4 million for public procurement procedures;
- the FFCs below the individual amount of €1 million.
Possibility to obtain waivers to submit information
Where information is not reasonably available or is not necessary for the Commission’s investigation, the notifying parties may request in pre-notification discussions that the Commission dispense with the obligation to provide the information in the particular case. It is expected that the Commission will be cautious in granting such waivers in the early stages of applying the FSR, as it will want to test the application of the FSR and avoid creating too restrictive precedents regarding information requirements. This may evolve with time, as the Commission will gain experience in applying the FSR.
How will the Commission conduct its investigations?
The IR imposes statutory time-limits on the Commission for examining foreign subsidies in the context of notifications, with a view to aligning these as much as possible with potential merger review and public procedure timelines. Those time-limits only start to run when the notification is complete. Incorrect, incomplete or misleading information may delay the start of the Commission’s assessment. In public procurement, incomplete information or late submissions may even lead to the tenders being rejected. In the context of concentrations, the Commission can also “stop the clock” until the notifying parties submit to an inspection or provide the additional information requested by the Commission, or “relevant information”, such as changes in the facts prevailing at the time of the notification.
How does the IR affect companies?
The FSR has potentially far-reaching consequences for companies that receive financial benefits from foreign public entities. It adds a further unique set of regulatory considerations to be included in companies’ strategies for investing in the EU. The IR casts a wide net for the notification obligations. Although FFCs to be reported are more limited than in the initial draft of the IR, they need to be reported for any group entity even if they have no link with the concentration or the procurement. The regulatory burden on notifying parties is still significant. Lack of (sufficient) information in the notification process may have an impact on the Commission’s statutory time-limits to review the notifications and hence on the transaction and procurement timelines.
Companies would be well advised to start preparing sufficiently in advance of a planned transaction or public procurement process of a certain size. Preparation requires the collection of information on FFCs across all group entities and a robust analysis of FFCs for the Commission assessment.