Blog: Foreign Subsidies Regulation Enters Into Force On 12 January 2023 … – Mondaq

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Foreign Subsidies Regulation Enters Into Force On 12 January 2023 – Notification Requirements Apply From October 2023

17 January 2023

Arendt & Medernach

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The EU Regulation on foreign subsidies
distorting the internal market

(“FSR“) enters into
force on 12 January 2023.1 It marks an important
legislative evolution for companies from third countries engaged in
an economic activity within the EU and aims to ensure a level
playing field in the EU internal market.

Broad scope of application

The FSR targets any undertaking engaged in an economic
activity in the internal market that has received a foreign subsidy
distorting the internal market.

A foreign subsidy is any financial contribution
provided by a third country (non-EU Member State) which confers a
benefit on an undertaking engaging in an economic activity in the
internal market and which is limited to one or more undertakings or
industries.2

A distortion in the internal market is deemed
to exist when a foreign subsidy is liable to improve
the competitive position of an undertaking in the internal market
and where, in doing so, it actually or potentially negatively
affects competition in the internal
market“.3

The FSR indicates that a distortion is considered
unlikely if the total amount of the
subsidy is below EUR 4 million over any consecutive period of three
fiscal years. However, distortion is deemed most
likely in situations involving an ailing undertaking
or when the foreign subsidy (i) takes the form of an unlimited
guarantee for debts or liabilities, (ii) directly facilitates a
concentration or (iii) enables the submission of an unduly
advantageous tender. The Commission’s assessment will balance
the negative effects against the positive effects on the
development of the relevant economic activity.

The EU Commission’s powers

The Commission has exclusive competence to enforce the
FSR and has been entrusted with far-reaching powers
to do
so. These include conducting market investigations, adopting
interim measures, imposing fines and binding commitments,
prohibiting concentrations and the award of a public procurement
contract.

The Commission is equipped with three intervention
tools: t
wo notification-based tools
(notification of concentrations and notification of foreign
financial contributions in the context of public procurement
procedures (“PPP“)), and an
ex officio review tool.

Notifiable M&A

Concentrations – i.e. transactions resulting in a change of
control on a lasting basis – that involve an acquirer or a target
that has received foreign financial contributions must be notified
to the Commission prior to their implementation (“stand-still
obligation”) where:

  • At least one party to the concentration is established in the
    EU and has generated an EU-wide aggregate turnover of at
    least EUR 500 million
    ; and
  • The undertakings concerned received a combined foreign
    subsidy in excess of EUR 50 million in the three years

    prior to the conclusion of the agreement, the announcement of the
    public bid, or the acquisition of a controlling
    interest.4

To calculate the aggregate turnover and the combined foreign
subsidy, the Commission will not only look at the amounts
generated/received by the notifying parties but those
generated/received by the entire corporate group to which the
parties belong to.

In addition, for transactions falling below the thresholds, the
Commission can request the notification of any concentration on its
own initiative if it suspects that the undertakings concerned may
have benefited from foreign subsidies in the three years prior to
the concentration.

The Commission will assess whether the foreign financial
contributions received by a party to a concentration constitute
foreign subsidies and whether they distort the EU internal market.
This assessment is limited to the concentration concerned.

Notifications in the context of public procurement
procedures

Undertakings participating in a PPP must notify the contracting
authority or entity (which must transfer such notification to the
Commission) of foreign financial contributions they have received
if:

  • The estimated value of the procurement at issue is at
    least EUR 250 million
    ; and
  • The aggregate contributions granted to the bidder in
    the three years prior to notification amount to at least EUR 4
    million per third country
    .5

Where the procurement is divided into lots, foreign financial
contributions must be notified if the thresholds above are reached
and if the value of the lot or the aggregate value of all the lots
to which the tenderer applies is of at least EUR 125 million.

Where these thresholds are not reached:

  • The undertakings must list in a declaration (to be passed to
    the Commission by the contracting authority or entity) all foreign
    financial contributions they have received and confirm that those
    contributions are not notifiable under the FSR;
  • Before the award of the contract, the Commission may request
    notification of foreign financial contributions if it suspects that
    the bidder may have benefitted from foreign subsidies in the three
    years prior to the bid submission or request to participate in the
    PPP.

The Commission will assess whether foreign subsidies cause or
risk causing a distortion in a PPP, i.e. whether the foreign
subsidies enable the bidder to submit an unduly advantageous bid.
Similarly to M&A transactions, this review is limited to the
PPP in question. During the Commission’s review, all procedural
steps can continue, except for the award of the contract.

Ex officio investigations

The Commission may examine information from any source regarding
alleged foreign subsidies distorting the internal market, even
after the closing of M&A transactions. 6 Such
investigations are not limited to foreign financial contributions
in a concentration or those in the context of PPP.

However, with regards to PPP, the ex officio review is
limited to awarded contracts. Therefore, the only provisions of the
FSR applicable to as yet unawarded public procurement contracts are
those related to the ex ante notification of certain
foreign financial contributions, as mentioned above.

Next steps – How to prepare

The FSR will apply from 12 July 2023 and the
notification obligations will apply from 12 October
2023
.

The FSR will not apply to:

  • Concentrations for which the agreement was concluded, the
    public bid announced, or a controlling interest acquired before 12
    July 2023; or
  • Public procurement contracts awarded or initiated before 12
    July 2023.

In principle, in all other situations, the FSR applies to
foreign subsidies granted in the five years prior
to
12 July 2023 or, by way of derogation
for undertakings notifying a concentration or foreign financial
contributions in the context of a PPP, three years prior to
12 July 2023
.

Given the FSR’s broad scope, it is
strongly recommended that companies from third countries with a
business in the EU start preparing now for the application of the
FSR.
This is especially important for companies planning
to participate in M&A transactions and PPPs as the timelines
for receiving the Commission’s decision may be affected if
notification is required.

Companies are advised to (i) identify and review financial
contributions from third countries since at least July 2023 and
possibly July 2018, and (ii) ensure internal monitoring of foreign
financial contributions granted.

Footnotes

1 Regulation (EU) 2022/2560 of 14 December 2022 on
foreign subsidies distorting the internal market

2 Article 3 FSR

3 Article 4 FSR

4 Article 20(3) FSR

5 Article 28(1) FSR

6 Article 9 FSR

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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