EU Regulation proposed to tackle distortive third country subsidies

On 5 May 2021, the European Commission (the "Commission") published its proposal for a new Regulation to address potential distortive effects of foreign subsidies in the internal market. With its proposal, the Commission aims to tackle the legislative gap between the available WTO-tools and the existing EU State aid rules. The proposal comes in response to a perceived lack of a level playing field within the EU caused by the presence in the EU of undertakings financially backed by non-EU countries.

The proposal concerns subsidies by third (non-EU) countries, including by public or private entities whose actions can be attributed to a third country.  Subsidies are defined as financial contributions in any form that confer a benefit to an undertaking engaging in an economic activity and which are limited to an individual undertaking or industry or to several undertakings or industries. While the definition is worded somewhat differently than the definition of State aid (or the definition of subsidies in the EU-UK Trade and Cooperation Agreement), it essentially covers the same concept.

If adopted, the proposed Regulation will allow the Commission to investigate such subsidies in very specific situations.  If foreign subsidies are found to cause market distortions within the EU, the Commission will be entitled to impose remedies on the beneficiaries. The Commission proposes in this respect a number of categories and indicators. Unlimited guarantees, subsidies to an ailing company without a restructuring plan, subsidies directly facilitating an acquisition or subsidies facilitating the submission of an unduly advantageous tender, are considered to be particularly likely to have a distortive effect. However, any type of subsidy may be considered distortive on the basis of a case-by-case analysis. Moreover, in its decisions, the Commission will always have to balance the distortion with the possible positive effects of the subsidy.

Under the proposed Regulation, the Commission would have exclusive jurisdiction to review foreign subsidies within the EU (at the exclusion of national authorities).  When adopted, the Commission will have far-reaching powers to curtail subsidies granted by any non-EU country that have market distortive effects within the EU. In two areas new notification obligations will be introduced, ie acquisitions of EU businesses by beneficiaries of foreign subsidies and the participation of the latter in public procurement procedures within the EU. 

1. Review of concentrations

Certain concentrations will be subject to the Commission's review - in addition to the Commission's existing powers under the EU Merger Regulation. The current proposal sets the thresholds for mandatory notification as follows:

1. the EEA-wide turnover of the target undertaking or, in case of a full-function joint venture, of at least one of the parents, is at least €500m; and

2. the acquiring undertaking or, in case of a full-function join venture, another parent, has received over the last three calendar years at least €50m foreign financial contributions (note that the threshold refers to 'financial contributions', which is broader than the concept of 'subsidies').

Worth noting is that the Commission may also request the prior notification of any concentration that does not meet the thresholds if it suspects that the acquiring companies may have benefitted from foreign subsidies in the three prior calendar years.

Similar to the existing EU merger control rules, a suspension obligation applies and parties will be prohibited from implementing the concentration until the adoption of a final Commission decision. As under the EU Merger Regulation, the Commission will have the right to approve, with or without conditions, or prohibit concentrations.  The review procedure is subject to the same time-limits as those that apply within the context of the EU Merger Regulation.

2. Review of public bids

The proposal further imposes a notification requirement in the context of public procurement procedures within the EU.  Again, the aim is to avoid that beneficiaries of foreign subsidies distort the process.  Notifications will be made to the contracting authority/entity which will then transfer the matter to the Commission.

Such notification will be mandatory for all public procurement procedures involving public procurement valued at least at €250m.  All participants in the tender will need to declare all foreign 'financial contributions' - not: foreign 'subsidies' - received in the last three years or will need to declare that no such foreign financial contributions were received.

After notification, the Commission will have 60 calendar days to carry out a preliminary review (phase I) at the end of which it may decide to initiate an in-depth investigation. In case of an in-depth review (phase II), the Commission will have an additional 200 calendar days (which may in exceptional cases be extended after consultation with the concerned contracting authority/entity).  The Commission can decide not to object, it can subject its decision to structural and/or behavioural remedies, or prohibit the award of the contract to the undertaking concerned.

The evaluation of tenders in a public procurement procedure by the contracting authority/entity may continue during that time as long as the contract is not awarded to the undertaking concerned. This suspension of award does not apply in case the notification concerns a mere declaration of non-receipt of foreign financial contributions.

3. Investigations on the Commission's own initiative

In addition to the two tools discussed above, the Commission will also be able to conduct investigations on its own initiative (eg based on public reporting, an informal complaint, etc.) by means of the far-reaching investigation powers it has in the context of competition law enforcement (requests for information and dawn raids).  If the Commission concludes that there are sufficient indications that an undertaking has been granted a foreign subsidy that distorts the internal market, it will initiate an in-depth investigation which may ultimately result in the imposition of redressive measures or the acceptance of offered commitments.

The Commission will also be able to conduct a market investigation in case of a reasonable suspicion that foreign subsidies in a particular sector, for a particular type of economic activity or based on a particular subsidy instrument may distort the internal market. Such market investigation may equally involve requests for information and dawn raids.

4. Sanctions

In addition to the measures outlined above, the proposed Regulation also gives the Commission the power to impose significant fines.  These fines will be subject to the usual caps that apply within the context of the Commission's competition enforcement powers, ie fines of up to 10% of consolidated worldwide turnover in case of substantive infringements and fines of up to 1% of consolidated worldwide turnover in case of procedural infringements.

The European Parliament and the Council will now discuss the proposed Regulation with a view to adopting a final text. Note that the current proposal will also be open for public consultation for 8 weeks.

Should you need assistance, have any further questions regarding this client alert or competition law generally, please do not hesitate to contact any of the individuals listed or your usual contact at Simmons & Simmons.