The EU’s Foreign Subsidies Regulation (FSR) has entered into force today addressing distortions caused by foreign subsidies across all economic activities including concentrations (mergers and acquisitions) and public procurement procedures.

Under the new Regulation, the EU Commission has been empowered to investigate financial contributions granted by non-EU countries to companies engaging in an economic activity in the EU and redress, if needed, their distortive effects.

As a general rule, the FSR deems subsidies below €4m over a 3-year period to be ‘unlikely' to be distortive while subsidies below the EU State aid ‘de minimis' thresholds are considered to be non-distortive. 

Obligations under the FSR

Companies are now obliged to notify the Commission of concentrations which involve a financial contribution by a non-EU government where: (a) the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least €500m; and (b) the foreign financial contribution involved is at least €50m.

On the other hand, where companies are participating in public procurement procedures, they are now required to notify the Commission where the estimated contract value is at least €250m, and the foreign financial contribution involved is at least €4m per non-EU country. Under the FSR, the Commission also reserves the right to prohibit the award of contracts to companies benefiting from distortive subsidies.

In all other market situations, the Commission has the right to investigate ex officio if it suspects any distortive foreign subsidies. This right includes the possibility to request ad-hoc notifications for public procurement procedures and smaller concentrations. The FSR grants the Commission wide-ranging investigative powers to gather information, including the ability to send information requests to companies, to conduct fact-finding missions both in and outside the EU, and to launch market investigations into specific sectors or types of subsidiaries.

A notified concentration cannot be completed and an investigated bidder cannot be awarded a public procurement contract while under investigation. Breach of this requirement may lead to fines of up to 10% of the company's annual aggregated turnover. The Commission is also empowered to prohibit the completion of a subsidised concentration or the award of a public procurement contract to a subsidised bidder.

If the Commission finds that a foreign subsidy exists and is distorting the Single Market, it may balance the distortion’s negative effects with the positive effects of the subsidy on the development of the subsidised economic activity. However, if the negative effects outweigh the positive, the Commission may impose structural or non-structural redressive measures on companies, or accept them as commitments, to remedy the distortion.

When investigating notifiable concentrations and public procurement procedures, the Commission can look at foreign subsidies granted up to 3 years before the transaction in question. However, this only applies to concentrations concluded and public procurements initiated after 12 July 2023.

In all other situations, the Commission can look at subsidies granted in the previous 10 years. However, the Regulation only applies to subsidies granted in the 5 years prior to 12 July 2023 where such subsidies distort the Single Market after the start of application.

The Way Forward

These new rules will thus allow the EU to remain open to trade and investment, while ensuring a level playing field for all companies operating in the Single Market.

The Commission will be able to launch ex officio investigations as from 12th July 2023 while the notification obligation for companies will be effective as of 12th October 2023. A draft Implementing Regulation is expected in the coming weeks which will provide clarity on the applicable rules and procedures, including the notification forms for concentrations and public procurement procedures, the calculation of time limits, access to file procedures and confidentiality of information.

For further information and assistance kindly contact Dr Ian Gauci and Dr Cherise Abela Grech.

Disclaimer This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.
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