European Union Foreign Subsidies Regulation
Introduction
The European Union continues to be an important investment center for foreign investors. According to data from the European Commission's "Second Annual Report on the monitoring of foreign direct investment in the European Union", the European Union received €117 billion worth of foreign direct investment in 2021. Compared to 2020, the number of acquisitions in the European Union increased by 32% and the number of greenfield investments by 12%. In 2021, 32.3% of acquisitions were from the United States and 25.6% from the United Kingdom, while 39.4% of greenfield investments were from the United States and 20.9% from the United Kingdom.[1]
The European Union imposes strict rules on financial aids from member states to undertakings. Member states have to notify the European Commission about the state aid they receive, and the European Commission has the power to prohibit such state aid. However, these rules on state aid from member states do not apply to financial aids from third countries. Whereas, just like financial aids from member states, financial aids from third countries also carry the risk of distorting competition in the internal market of the European Union. Moreover, while undertakings receiving financial assistance from Member States of the European Union are subject to strict scrutiny, undertakings receiving financial assistance from outside the European Union are not subject to similar scrutiny, which creates inequality among these undertakings. The Foreign Subsidies Regulation, which was prepared by the European Commission in order to ensure a favorable competitive environment in the internal market of the European Union and to eliminate the legislative gap on foreign subsidies, was published in the Official Journal of the European Union on December 22, 2022 and entered into force on January 12, 2023. The Foreign Subsidies Regulation will be implemented as of July 2023. On the other hand, the draft regulation on the implementation of the Foreign Subsidies Regulation was opened for consultation on February 6, 2023, but has not yet entered into force.[2]
The Foreign Subsidies Regulation aims to identify and remedy potential distortions in the internal market of the European Union caused by financial aids provided by foreign countries to undertakings operating in the European Union.
Foreign Subsidies
For the purposes of the Foreign Subsidies Regulation, foreign subsidy means any financial contribution that (i) is provided directly or indirectly by a third country that is not a Member State of the European Union, (ii) provides benefits and (iii) is limited to one or more undertakings or industries.
Financial Contribution
Pursuant to Article 3 of the Foreign Subsidies Regulation Financial contribution involves;
- “capital injections, grants, loans, loan guarantees, financial incentives, the setting off of operating losses, compensation of financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling,
- the foregoing of revenues that would otherwise be due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
- the provision of goods or services or purchase of goods or services.”[3]
Those Who Contribute Financial Contribution
Financial contributions from third countries and their public authorities at all levels are covered by the Foreign Subsidies Regulation, as well as financial contributions from foreign public and private entities whose activities are attributable to third countries.
Financial Contribution Providing Benefits
Under the Foreign Subsidies Regulation, only financial contributions that provide a benefit that cannot be obtained under normal market conditions are taken into account. The existence of the benefit is determined in the light of comparative criteria, such as the investment practices, market-available financing rates, comparable tax treatment or the reasonable price to be paid for a particular good or service.
In addition, the preamble to the Foreign Subsidies Regulation states that foreign support should be considered granted from the moment of entitlement to receive foreign subsidy and that actual payment is not a necessary condition.
Distortion in the Internal Market
The assessment of whether foreign subsidies distort competition in the internal market of the European Union is based on the amount and nature of the foreign subsidy, its size in absolute terms or in comparison with the size of the market or the value of the investment; the characteristics of the relevant market and sector, such as the size of the undertaking and barriers to entry; the level and development of the economic activity of the undertaking in the internal market; the purpose of the foreign subsidy and its use in the internal market. For example, foreign subsidies that cover a significant portion of the price of the target company in an acquisition transaction or a significant portion of the contract price in a public tender may be considered to distort competition in the internal market. According to another example from the Foreign Subsidies Regulation, foreign subsidies provided for operating costs rather than investment costs may be more likely to distort competition.
The Foreign Subsidies Regulation provides that guarantees with no limits in terms of quantity or duration, unfair advantageous tenders, export financing are largely deemed to be anti-competitive and that the European Commission does not need to carry out a detailed examination of these issues.
If the European Commission considers that the foreign subsidy distorts competition in the internal market, it will compare the negative effects of the foreign subsidy on competition with the positive effects of the subsidy on the development of the economic activity in the internal market. Accordingly, if the European Commission finds that the negative effects outweigh the positive effects, it may impose certain measures.
Powers of the European Commission under the Foreign Subsidies Regulation
In order to monitor the effects of foreign subsidies on the internal market, the Foreign Subsidies Regulation gives the European Commission three important powers: acceptance of notifications for concentrations and for public procurements, ex officio investigations.
Notifications for Concentrations and for Public Procurements
Turnover and financial contribution thresholds are envisaged for notifications made in respect of concentrations. In a merger and acquisition transaction, notification shall be made if (i) one of the merging parties or the target company or joint venture is established in the European Union and its annual turnover within the European Union is higher than EUR 500 million, (ii) the total financial contribution received in the three years preceding the notification is higher than EUR 50 million. However, the European Commission may decide that notification is also required for concentrations that do not meet these thresholds.
Similarly, contract value and financial contribution thresholds are set for notifications for public procurement. For public procurement taking place within the European Union, a notification to the European Commission is required if (i) the estimated value of the public procurement or framework contract is EUR 250 million or more, (ii) the financial contributions provided to the economic entity (including its subsidiaries, group companies, key subcontractors and suppliers involved in the public procurement) in the last three years are EUR 4 million or more per third country.
The provisions of the Foreign Subsidies Regulation imposing notification obligations for concentrations and public procurement apply from October 12, 2023.
Ex Officio Investigation
The European Commission may request notification of certain concentrations and public procurements for which foreign contribution is provided, even if they fall below the notification thresholds.
Review Procedures and Possible Decisions by the European Commission
The review by the European Commission consists of two stages. The procedure for foreign subsidy notifications is similar to the procedure for merger notifications. In the case of concentrations, a preliminary review of twenty-five working days is followed by an investigation of ninety working days; in the case of public procurement, a preliminary review of twenty working days is followed by an investigation of one hundred and ten working days.
At the end of its investigation, the European Commission may prohibit the award of the concentration or public contract and may decide to impose measures or commitments.
Conclusion
The Foreign Subsidies Regulation introduces important notification obligations for companies engaging in mergers and acquisitions in the European Union or participating in public procurement within the European Union. Given that the European Commission's review will also take past foreign subsidies into account, companies should review foreign subsidies received in the past before commencing a notifiable transaction.
- “Second Annual Report on the screening of foreign direct Investments into the Union” (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52022DC0433, Access Date: 25.02.2023.)
- Draft Implementing Regulation (https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13602-Distortive-foreign-subsidies-procedural-rules-for-assessing-them_en, Access Date: 25.02.2023.)
- “Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market” (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022R2560&qid=1673254237527, Access Date: 25.02.2023.)
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