New EU FSR - major impact on companies doing business in the EU

• Scope: The FSR aims to curb subsidies from non-EU countries that may distort competition in the EU. To achieve this, the EC will intervene ex ante in M&A operations and public procurement procedures involving companies financed by non-EU countries. In addition to a possible EC intervention in these two areas, the FSR also empowers the EC to launch ex post investigations where it has indications of distortive foreign subsidies.

• Concept of “subsidies”: The concept of subsidies is equivalent to that of EU State aid. It covers therefore a wide range of measures such as direct grants, selective tax exemptions or payments for goods or services that are not market conform. Distortions are assessed on a case-by-case basis – taking also into account positive effects and/or broader policy objectives such as climate change or digitalisation. The FSR lists several categories of foreign subsidies that are most likely to be distortive, such as bail-outs, unlimited guarantees or subsidies directly facilitating a concentration.

• Concept of foreign “financial contributions”: This is a key concept in the FSR, especially in the context of the mandatory notification thresholds discussed below. The notion of financial contributions is much broader than the concept of a subsidy and basically covers the transfer of funds or liabilities, the foregoing of revenue otherwise due and income from the supply of goods or services (including when on market terms). Valuing these revenues may turn out to be a complex exercise.

• New filing obligations: The FSR creates two new ex ante notification obligations discussed in more detail below. The first relates to M&A operations (concentrations). The second mandatory notification will apply in the context of public procurement procedures. These two new mandatory notification obligations will only apply as from 12 October 2023. However, it should be noted that M&A operations signed after 12 July 2023 but not yet implemented on 12 October 2023 will be required to be notified as well. The EC issued two notification forms for respectively concentrations and public procurement cases. The EC strongly encourages to initiate pre-notification contacts in all instances where a notification is or maybe required.

• Wide catchment area but focused substantive review: One of the mandatory notification thresholds refers to foreign “financial contributions” received by the companies concerned. These revenues have to be calculated on an aggregated basis and for all non-EU countries that made these contributions. This financial contributions thresholds make the FSR’s catchment area very wide. However, the EC’s substantive review will focus only on the possible distortive effect of the narrower category of foreign subsidies.

• Impacted companies: The FSR applies to any company doing business in the EU, irrespective of the sector and country of origin, and regardless of whether or not it has establishments in the EU. It is expected to apply more typically to companies or funds owned by non-EU countries (e.g. sovereign wealth funds) and companies operating in State-run economies. However, it will equally apply to companies and funds operating in market economies and to EU businesses that have received financial contributions from non-EU countries, e.g. in case of substantial operations outside the EU.

• Enforcement: The EC has exclusive jurisdiction to enforce the FSR. It has far-reaching investigation and enforcement powers, comparable to the powers it has as a competition law enforcer. When distortive foreign subsidies are identified, the EC can prohibit certain M&A transactions or public procurement awards, as well as it has the option to impose redressive measures or accept commitments to remedy the distortion. These measures include divestments, dissolution of concentrations, repayment of a foreign subsidy, the adoption of an adequate governance structure or an obligation to inform the EC of all future concentrations and/or public procurement participations.

• Other regulatory regimes: The FSR comes on top of the existing EU merger control rules and more generally EU competition law, foreign direct investment (FDI) regimes, trade defence instruments, etc.

• International law: The FSR confirms that WTO and international agreements providing for subsidy control take precedence. This could turn out to be an important exception. However, there is no carve-out for equivalent State aid/subsidy control regimes in third countries that may be based on bilateral trade agreements, such as the EU-UK Trade and Cooperation Agreement. We expect that, the closer the third country’s subsidy control regime is to the EU State aid rules, the less likely that the substantive review of foreign subsidies will turn out to be problematic.

• Timeline: The FSR will apply as from 12 July 2023, with the mandatory notification obligations applying as from 12 October 2023. Implementing rules still need to be adopted and the EC is about to launch a consultation process on draft rules. This will be a critical piece of legislation that is expected to inform companies on the notification processes, the foreign financial contributions to be reported, other data to be notified to the EC (and their level of detail), etc. The EC is also expected to issue further guidance on how it intends to assess foreign subsidies before the FSR takes effect. Not all guidance will, however, be issued in advance of the FSR’s taking effect.

Notification thresholds

1. at least one of the merging companies (in case of a merger), the target business (in case of an acquisition) or the joint venture (creation of a JV) generates an aggregate turnover in the EU of at least €500 million; and

2. all undertakings involved in the concentration received over the last three years combined aggregate foreign financial contributions of more than €50 million.

The EC expects approximately 30-40 notifications per year under this obligation.

Important things to note:

• the FSR notification requirement comes on top of the existing EU or national merger control and FDI regimes; this may add complexity and delay the process;
• the threshold in terms of financial contributions is low, especially in light of the broad scope of this concept;
• there is some retroactive effect in terms of the data to be reported: the notifications to be filed will need to contain data on the amount of financial contributions received in the three preceding years (i.e. as from 2020 for notifications filed as from 12 October 2023);
• the EC 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 preceding years.

Main features of the review procedure

• Suspension: similar to the existing EU merger control rules, a suspension obligation applies until the adoption of a final EC decision
• Outcome: as under EU merger control law, the EC can approve, with or without conditions, or prohibit notified M&A transactions
• Time-limits: the review procedure is subject to the same time-limits as those that apply in the context of the EU Merger Regulation; this points to a consolidation of the two vetting procedures (likely to be clarified in the implementing regulation).

The FSR Implementing Regulation requires notifying parties to:

• quantify for each non-EEA country the received financial contributions in aggregate;
• if the aggregate financial contributions received in the last three years for one country exceeds 45 million EUR:
  • list for that country all financial contributions received in the last three years that exceed 1 million;
  • group these per country and per type (direct grant, loan, tax advantage, equity intervention, etc.); and
  • provide per type a brief description of the purpose and the identity of the granting entity

Certain types of financial contributions (such as financial contributions directly facilitating a concentration, export financing, etc.) will require more information.

Helpfully, following the Implementing Regulation, for the above-mentioned quantification and listing, the following categories of foreign financial contributions should not be taken into consideration (but, for the avoidance of doubt, these remain relevant to determine whether the notification threshold is exceeded or not):

• (a) Deferrals of payment of taxes or of social security contributions, tax amnesties and tax holidays as well as normal depreciation and loss-carry forward rules that are of general application. If these measures are limited, for example, to certain sectors, regions or (types of) undertakings, they have to be included.
• (b) Application of tax reliefs for avoidance of double taxation in line with the provisions of bilateral or multilateral agreements for avoidance of double taxation, as well as unilateral tax reliefs for avoidance of double taxation applied under national tax legislation to the extent they follow the same logic and conditions as the provisions of bilateral or multilateral agreements.
• (c) Provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business, for example the provision/purchase of goods or services carried out following a competitive, transparent and non-discriminatory tender procedure.
• (d) Foreign financial contributions below the individual amount of 1 million EUR.

Private equity funds can further limit certain information requirements to the fund in question (whereas typically in merger control, information needs to be provided in relation to all funds managed by the private equity manager).

Notification thresholds

1. the value of the public procurement or framework agreement is 250 million EUR or more; in case of division into lots, the value of the lot or the aggregate value of all the lots to which the tenderer applies is 125 million EUR or more; and

2. the received financial contributions in the last three years amount in aggregate to 4 million EUR or more per third country

The EC expects approximately 20-30 notifications per year on this basis.

Important things to note:

• notifications have to be made to the authority of the EU Member State running the tender, which will inform the EC without delay;
• the EC can also impose a notification below these thresholds -- the EC is expected to provide guidelines on the criteria it will use in this respect;
• even below the abovementioned thresholds, participants to a public procurement process will be required to declare to the contracting authority all foreign financial contributions received and confirm that these are below the thresholds;
• as for the M&A transactions, the financial contributions to be taken into account may go back to 2020.

Main features of the review procedure

• Suspension: pending the EC’s review, the contracting authority/entity cannot award the contract to the notifying company; it can, however, assess the various tender submissions (the award suspension does not apply in case of mere declarations)
• Outcome: at the end of the in-depth investigation, the EC can decide not to object, it can accept offered commitments or prohibit the award of the contract to the undertaking concerned
• Time-limits: the review procedure is subject to the similar time-limits as under the EU Merger Regulation (20 working days for a preliminary phase I review and an additional 110 working days for the in-depth investigation phase (phase II); these time-limits may in exceptional cases be extended with 20 working days).

Apart from reviews and investigations following notifications relating to M&A and public procurement projects, the EC may also start ex officio investigations if it suspects that a distortive foreign subsidy may affect the activities of companies active in the EU. Such investigations are not limited to M&A or tender situations where the thresholds mentioned above are not met. Thus, by way of example, these investigations could include situations where greenfield investments are made or minority interests are taken in companies. Although the FSR does not contain provisions concerning complaints, it is expected that EU industries or industrial organisations will often be the source of an ex officio investigation.

Note that in case of an ex officio investigation, the EC may require data on foreign financial contributions received in the previous five years (thus potentially going back to 2018).

The EC expects to start some 40-50 ex officio investigations per year.

The FSR is live and will soon mean additional reporting obligations for companies that have received subsidies outside of the EU.

It will also be interesting to see how the EC intends to determine the existence of a distortion resulting from foreign subsidies in the EU or how it will apply the balancing test when reviewing the impact of foreign subsidies in the EU. This will be addressed in guidelines to be issued by the EC, which are expected to evolve in line with the practice that will be developed.

Businesses are advised to get prepared and ready for the application of the FSR. At this stage, we see the following priority areas where internal reporting systems will need to be set up:

• Make an inventory of and monitor foreign financial contributions (at least the obvious ones such as government payments/procurements, subsidies, grants, etc.): the mandatory filings require a reporting of foreign financial contributions in the three preceding years, possibly going back to 2020. In case of an ex post investigation, the EC may require data on foreign financial contributions received in the previous five years (thus potentially going back to 2018)

• Determine which of these financial contributions may be considered to be subsidies having an impact on competition within the EU – an important parameter being whether or not the contribution is in line with market conditions and selective

• Keep an inventory of foreign subsidies received as from 2020, to the extent they may have an impact on operations within the EU

• Monitor new foreign subsidies received and assess their potential impact on EU operations.