EU Commission Proposed Regulation to Address Distortions Caused by Foreign Subsidies in the Single Market



Yongqing Bao & Simon Hirsbrunner | Steptoe

On 5 May 2021, the European Commission proposed a Regulation which lays down rules and procedures for investigating foreign subsidies that distort the EU internal market, and with a view to creating a level playing field as between EU and non-EU market actors in the Single Market (the Proposal). Following its White Paper on foreign subsidies in the Single Market published on 17 June 2020, the European Commission proposed this new instrument with the intention of filling a regulatory gap in the existing EU toolbox.  The latter already includes State aid disciplines, merger control and antitrust, public procurement and trade defense instruments.  However, none of these EU tools aim at dealing with foreign (non-EU) government subsidies provided to  foreign service providers who are active in the EU market, or with such subsidies otherwise facilitating acquisitions of EU companies or assets, or aimed at securing a competitive advantage in public contract tender procedures.

The Proposal, which lies at the intersection of competition and trade law, seeks to help implement  the updated EU Industrial Strategy.  The Industrial Strategy has as its objective  promoting a fair and competitive Single Market by ensuring the development of appropriate  conditions for European industry to thrive.

Scope of application

According to the Proposal, the Commission will have the power to investigate foreign subsidies granted to an undertaking engaging in any “economic activity” in the EU Single Market, including, in particular, activities relating to the acquisition of control or a merger with an EU undertaking or participation in a public procurement procedure.

A “foreign subsidy” is defined under the Proposal as a financial contribution which confers a benefit.  A foreign subsidy must be limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries that carry out economic activities on the EU internal market. Several types of subsidy will thus fall within the definition, which is very similar to “countervailable subsidy” under the  EU anti-subsidy regulation as well as  to “selective” State aid within the meaning of the State aid prohibition found  in Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU). A “foreign subsidy” may not only include a transfer of funds or liabilities, but also a measure whereby the State foregoes revenue that is otherwise due (for example, through tax waivers or reductions), or any measures by which the State grants a benefit through the provision of goods or services or purchases goods or  services, including the transfer or lease of property for free or below market value. The financial contribution may be provided by either the foreign country government at all levels or by foreign public entities or indeed by any private entity whose actions can be attributed to a third country government, including by State-owned enterprises.

The existence of a “foreign subsidy” is not problematic per se under the new instrument, unless it is liable to create a distortion on the EU Single Market.  In other words, the foreign subsidy must improve the competitive position of the undertaking concerned in the EU Single Market and in doing so, actually or potentially negatively affect internal Single Market competition. Determining whether such a distortive effect  exists will depend on a case-by-case analysis, by taking into consideration different indicators including, among others, the amount of the subsidy, its nature, the situation of the undertaking and the markets concerned. Whereas some categories of foreign subsidies are considered hardcore distortive according to Article 4 of the Proposal – such as unlimited guarantee, subsidies directly facilitating a concentration/merger, or subsidies enabling an undertaking to submit an unduly advantageous tender – those below a certain financial threshold (EUR 5 million over a period of three consecutive years) are deemed not to be distortive, similar to de minimis State aid  under existing EU State aid rules.

A three-fold review toolbox

The Proposal posits the introduction of three tools to address  distortions in the EU internal market caused by foreign subsidies: a general market investigation tool and two notification-based tools.

In general, undertakings participating in a concentration or a bidder in a public procurement procedure would have to notify ex ante any financial contributions received from a non-EU government meeting specific thresholds. A concentration will be deemed notifiable when the company to be acquired or the joint venture to be created (or at least one of the parties to the concentration established in the EU) has a consolidated EU turnover of EUR 500 million or more, and the aggregate foreign financial contribution in the three calendar years prior to notification is at least EUR 50 million. For bids in public procurement procedures, an obligation to notify will apply where the estimated value of the public procurement in question amounts to EUR 250 million or more. Bidders will be required to report to the contracting authority or to the contracting entity all foreign financial contributions received in the three years preceding that notification, or confirm in a declaration that they did not receive any foreign financial contributions. Where the threshold of EUR 250 million is met, the contracting authority or the contracting entity will subsequently transfer the notification to the Commission without delay. Pending the Commission’s review, the concentration in question cannot be completed or the contract in question cannot be awarded to the bidder under investigation.

Additionally, the Commission may, on its own initiative, examine information from any source regarding alleged distortive foreign subsidies. The scope of such ex officio investigations is very broad and enables the Commission to investigate all market situations, including any types of business operation or greenfield investments suspected of having benefitted from foreign subsidies, or concentrations and procurements below the above-cited thresholds.

The Regulation foresees a two-stage investigation process, which is broadly similar to what is foreseen in the Procedural Regulation for the review of state aid and the Merger Control Regulation. A preliminary review will be initiated by the Commission to assess the existence of a suspected foreign subsidy distorting the internal market. If the preliminary investigation reveals “sufficient indications that an undertaking has been granted a foreign subsidy that distorts the internal market”, an in-depth second-phase investigation is then initiated by means of a Commission decision. This in-depth investigation may be concluded with or without remedies, depending on whether the preliminary assessment is confirmed or not, or if positive effects of the foreign subsidy outweigh its negative effects (a so-called “balancing test”).

If the fallback ex officio review mechanism might be charged with arbitrariness, the practical difficulty in carrying it into effect should be considered as a mitigating factor. In any event,  proposed notification requirements may impose significant compliance efforts on companies, which may in turn potentially hamper foreign investment  into the EU economy.

Redressive measures

Regardless of the proposed tool employed, in case of a finding of the existence of a distortive foreign subsidy, and after running a balancing test, the Commission will be entitled to impose redressive measures or to accept commitments from the undertakings concerned that remove the distortion. The redressive measures and commitments may be behavioral, such as offering access to an infrastructure under fair and non-discriminatory conditions; licensing of assets acquired or developed with the help of foreign subsidies on fair, reasonable and non-discriminatory terms; or publication of R&D results. They could also be structural, including reducing capacity or market presence; divestment of assets; or dissolution of a concentration. Repayment of subsidy is an acceptable commitment, provided that it is transparent, effective and does not give rise to circumvention concerns. The Commission may also adopt interim measures where there are indications of the existence of a distortive foreign subsidy and of a serious risk of substantial and irreparable damage to competition in the Single Market.

The rules on the control of concentrations under the Proposal bear many similarities with the EU Merger Control Regulation. Thus, where the Commission finds that a concentration is affected by distortive foreign subsidies, it may either prohibit the concentration or grant a clearance conditional on  compliance with commitments. by the undertakings concerned. Where a concentration has already been completed but found to distort the internal market or has been completed in breach of previous commitments, the Commission may order the dissolution of the merger or the disposal of all the shares or assets acquired or it may order any other actions to restore the situation prevailing prior to completion of the merger.

Similar to the situation under the EU Merger Regulation, an undertaking that either fails to notify a notifiable concentration, completes the concentration before the expiry of the waiting period, closes that concentration despite a prohibition by the Commission, or breaches  the redressive measures or commitments, will be exposed to fines of up to 10% of its aggregate turnover in the preceding business year. Further, where an undertaking, either intentionally or negligently, provides incorrect or misleading information in a merger notification, it runs the risk of fines of up to 1% of the same turnover amount.

Likewise, in public procurement procedures, the Commission would be able to block the award of the public procurement contract to the undertaking concerned, or render commitments legally binding. Identical financial penalties to those outlined above are envisaged in case where an undertaking participating in a public tender fails to notify a subsidy, or does not comply with redressive measures or commitments, or supplies incorrect or misleading information.

EU one-stop shop

The enforcement of the Regulation is to lie exclusively with the Commission, as the legislative proposal presently stands, in order to ensure its uniform application across all EU Member States. This is an important change in comparison with the White Paper, which was still based on the idea that jurisdiction should be split between the Commission and the national authorities as far as the general investigation tool and scrutiny in public procurement procedures are concerned.

It remains to be seen whether EU Members State governments will support the one-stop shop proposal and how it might work in practice.  The Proposal explains that exclusive enforcement by the Commission would require the creation of a separate task force comprising around 145 full-time equivalent investigators and staff and an estimated cost of approximately EUR 80.5 million.

The proposed Regulation would also confer extensive decisional powers on the Commission. While the distortive effects of every subsidy should in principle be assessed on the merits of each individual case, by means of the “balancing test” that is envisaged in the Regulation, the application of the Regulation will nevertheless be unpredictable to companies and will be unlikely to be subject to full judicial review. This could give rise to concerns that the Regulation could pave the way for an overly interventionist control of foreign subsidies by the European Commission, which may stifle foreign investment in the EU and ultimately undermine the new legal instrument’s objective of promoting growth, investment and trade.

The way forward

The Proposal now goes to the European Parliament for review and to EU Member States in accordance with ordinary EU legislative procedure, with a view to balancing the different interests and refining  existing provisions. It is expected that the proposed new tools might become effective within the next year.

Regardless of when the new Regulation finally enters into force, it will add another layer to the regulatory complexity already facing  non-EU companies wishing to carry out transactions and investments in the EU, and also their business partners in the EU. This will be particularly noticeable in the area of mergers, where the proposed Regulation will introduce yet another regulatory framework, in addition to the existing merger control mechanisms at EU and national level, the national screening mechanisms for transactions in strategic industries and the capital market regulation.

Moreover, the proposed Regulation, as currently drafted, will apply retroactively to foreign subsidies granted in the ten years prior to the date of its application where such foreign subsidies continue to  have distortive effects on the Single Market after the application of the Regulation. Foreign subsidies granted in the three years prior to the date of application of the proposed Regulation to an undertaking concerned by notifiable concentrations or public procurement procedure also will be included for the purpose of such notifications pursuant to the Proposal. Consequently, companies are advised to start monitoring closely any foreign subsidies they have received or anticipate that they may receive in order to prepare for exposure to future investigations by the Commission : once the Proposal is adopted, the Commission will have the power to apply the new rules retroactively by at least three years.

 is a qualified lawyer in both Switzerland and Germany and a leading legal directory, The Legal 500, recognizes Simon for financial services, along with trade, anti-dumping, and WTO. 

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