Blog: The European Commission is taking aim at distortive foreign subsidies – Lexology

Overview

On 5 May 2021, the European Commission (Commission) proposed a Regulation (Regulation) which, if adopted, would address potentially distortive effects of foreign subsidies in the EU.

This represents a material addition to the Commission’s competition enforcement measures.

The Regulation follows the June 2020 White Paper on foreign subsidies and a public consultation process.

The Commission is looking to close a regulatory gap whereby non-EU government subsidies which potentially distort competition go largely unregulated in the EU (while Member State subsidies are closely scrutinised under the EU State aid rules).

It is also helps deliver on the updated EU Industrial Strategy which was also adopted on 5 May 2021 and which is designed to promote a fairer and more competitive Single Market.

The main objectives of the Regulation are to:

  1. tackle distortive subsidies granted by non-EU countries
  2. ensure a level playing field in the EU
  3. deal with unfair advantages in the EU caused by such subsidies
  4. close a gap in the EU’s rule book to make sure that all companies compete on an equal footing in the EU.

EU rules on competition, public procurement and trade defence are designed to ensure fair conditions for companies operating in the Single Market – however none of these measures really tackles foreign subsidies which can provide recipients with an unfair advantage when:

  1. acquiring EU companies
  2. participating in public procurement processes in the EU or
  3. engaging in other commercial activities in the EU

In summary, the Regulation:

  1. introduces a merger review system to analyse acquisitions involving foreign subsidies
  2. allows the Commission to investigate and impose remedies regarding foreign subsidies that distort competition in the EU
  3. allows the Commission to prohibit acquisitions and public procurement awards in the EU

What types of foreign subsidy are caught by the Regulation?

The types of foreign subsidy caught by the Regulation include zero-interest loans, below-cost financing, unlimited State guarantees, zero-tax agreements or direct financial grants – these are similar to the type of State aid measures granted by Member States that can be scrutinised under the EU State aid rules.

What are the main measures under the Regulation?

Under the Regulation, the Commission will have the power to investigate financial contributions granted by public authorities of a non-EU country to companies engaging in an economic activity in the EU and can address any distortive effects.

The Regulation proposes to introduce three tools for the Commission (two based on notifications to the Commission and one based on general market investigations). These tools are:

  • A notification tool to investigate acquisitions involving a financial contribution by a non-EU government where the EU-wide turnover of the company to be acquired (or of at least one of the merging parties) is at least €500m and the foreign financial contribution is at least €50m
  • A notification-based tool to investigate bids in public procurement processes involving a financial contribution by a non-EU government, where the estimated value of the procurement is at least €250m
  • A tool to investigate other market situations, smaller acquisitions and public procurement procedures in relation to which the Commission can start its own initiative and may request ad-hoc notifications.

What are some key features of the notification tools under the Regulation?

In relation to the notification tools, the recipient must notify to the Commission any financial contribution received from a non-EU government in relation to an acquisition or public procurement process meeting the relevant thresholds (see above).

Pending the Commission’s review, the acquisition in question cannot be completed and the investigated bidder cannot be awarded the contract.

Failure by a company to comply with the obligation to notify a subsidised acquisition or a financial contribution in a public procurement process meeting the thresholds (see above) can result in the Commission imposing fines and reviewing the transaction as if it had been notified to the Commission.

What are some key features of the general market investigation tool under the Regulation?

The general market investigation tool enables the Commission to investigate other types of market situations (e.g. greenfield investments or acquisitions and procurements below the compulsory notification thresholds (see above)) if the Commission believes that a foreign subsidy may be involved.

The Commission can start investigations on its own initiative and can request ad-hoc notifications by the parties involved.

How will the Regulation be enforced?

The enforcement of the Regulation will lie with the Commission to ensure its uniform application across the EU.

Therefore the Competition and Consumer Protection Commission (which enforces Irish competition law (and Irish merger control) under the Competition Act 2002 (as amended)) will not be involved.

What will be of interest is to see how the application of the Regulation might interact with merger control in Ireland (and in other Member States as there may be parallel notification processes).

If the Commission establishes that a foreign subsidy exists and that it is distortive, it will consider the possible positive effects of the foreign subsidy and balance such effects with the negative effects brought about by the distortion.

When the negative effects outweigh the positive effects, the Commission will have the power to impose “redressive” measures or accept commitments from the companies concerned that remedy the distortion.

What are the redressive measures and commitments under the Regulation?

The Regulation includes a range of possible structural or behavioural remedies (e.g. the divestment of certain assets or the prohibition of certain market behaviours).

In the case of notified transactions, the Commission can prohibit the subsidised acquisition or the award of the public procurement contract to the subsidised bidder.

What are the next steps regarding the Regulation?

The European Parliament and the Member States will discuss the Regulation in the context of the EU’s legislative procedure with a view to adopting a final text of the Regulation.

The proposal is open for feedback until 22 July 2021.

  • adopted, the Regulation will be directly applicable across the EU.

Quite apart from the practical application of the Regulation (e.g. in the context of a concentration with an EU dimension notified to the Commission under the EU Merger Regulation or acquisitions notified to Member State merger control authorities), the interaction of the Regulation with

  1. the EU State aid measures,
  2. the subsides provisions under the Trade and Cooperation Agreement with the UK (as a result of Brexit)
  3. the subsidies provisions under the World Trade Organisation (i.e. WTO) rules

will be of particular interest.

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