On 12 January 2023, Regulation (EU) 2022/2560 on foreign
subsidies in the European Union (EU) that
distort the internal market came into force. In the meantime, the
buzzword-like abbreviation for the Foreign Subsidies
Regulation, FSR, has become
generally accepted. The FSR contains regulations for mergers and
procurement procedures within the EU and is directly applicable
alongside the respective merger control regimes and the regulations
concerning foreign direct investment (FDI).
Although the FSR has already been applicable since 12 July 2023,
a notification obligation of mergers and procurement
procedures, if the FSR is applicable, only exists as of today, 12
October 2023. It should be noted that mergers, where the
signing took place on/after 12 July 2023, but closing will take
place only after the 12 October 2023, are also subject to a
notification obligation as of today. In parallel to the FSR, the
European Commission (Commission) has
adopted the Implementing Regulation (EU) 2023/1441
(Implementing Regulation), which has been
in force since 12 July 2023. Below, we provide an overview of the
essential elements of the FSR as well as an outlook for the
practice:
I. Three new review mechanisms for the Commission
The FSR contains three new review mechanisms for the Commission
to review subsidies that potentially distort competition in the
internal market:
1. Merger control 2.0
Pursuant to Art. 21 (1) FSR, concentrations (merger, acquisition of
sole/ joint control and creation of a full-function joint venture)
– in accordance with Art. 3 FSR – must be notified to the
Commission if they exceed the thresholds of Art. 20 (3) FSR:
- The target (acquisition of control), joint venture (creation)
or one of the parties (merger) is established in the EU and has an
EU-wide turnover of at least EUR 500 million in
the last financial year; and - The companies involved in the merger have received
financial contributions of at least EUR 50 million from third
countries in the last three years prior to the closing of
the transaction.
The calculation of turnover should not be problematic, as this
follows the generally known rules from merger control. This is
likely to be different in the case of the identification of
financial contributions from third countries (see III.
below).
2. Public procurement procedures
When reviewing public procurement procedures, there is a
notification obligation to the Commission under Art. 29 (1) FSR if
the thresholds of Art. 28 (1) FSR are exceeded:
- The contract value of the public procurement
procedure is at least EUR 250 million;
and - The respective tenderer (including subsidiaries and holding
companies as well as the main subcontractor(s) and supplier(s)) has
received financial contributions of at least EUR 4 million
per third country in the last three years prior to the
notification.
In contrast to the notification of mergers, if the thresholds
are not met in public procurement procedures, the tenderer must
submit a declaration listing all financial contributions received
from third countries and additionally confirming that the threshold
of EUR 4 million has not been exceeded.
3. Ex-officio procedure by the Commission
Finally, the Commission has the power to investigate all
market situations, i.e. in particular mergers and public
procurement procedures, even if they are below the
thresholds, if the Commission suspects distortive
third-country subsidies (cf. Art. 9 FSR). In this case, the
Commission can initiate an ex-officio investigation and
request comprehensive information (e.g. from the
companies involved, but also from Member States or other market
participants) or investigate itself by way of
searches (cf. Art. 14 FSR). If the Commission concludes
through the ex-officio investigation that third-country subsidies
distort the internal market, it can either take interim measures or
order remedial measures or declare commitments by the companies
involved to be binding.
II. General duration of proceedings and implementing
regulation
The review procedures for mergers and public procurement
procedures are structured in two stages each:
- Thus, for mergers (cf. Art. 25 FSR), a period
of 25 working days applies for the preliminary
review (Phase I) from receipt of the notification.
If the Commission initiates an in-depth investigation, the deadline
is 90 working days (Phase II).
Analogous to merger control, extensions of the deadline are
possible upon request or on the basis of commitments by the
parties. At the same time, the Commission can also suspend the
deadline if, for example, information is not provided in full
“stop-the-clock”. - In the context of public procurement
procedures (cf. Art. 30 FSR), a period of 20
working days from receipt of the notification applies
(Phase I), which may be extended by the Commission
by a maximum of 10 additional working days. If the Commission
initiates an in-depth examination, the deadline is 110
working days (Phase II), which may be
extended once by 20 working days.
To facilitate the respective notifications in practice, the
Implementing Regulation contains detailed provisions on the
procedures as well as the relevant deadlines for individual stages
of the procedure, rules on the confidentiality of information
provided, third-party access to files and the Commission’s
powers of investigation. In particular, the forms
“FS-CO” (mergers) and “FS-PP” (public
procurement procedures) contained in the annexes to the
Implementing Regulation provide helpful guidance as to which
information must be provided to the Commission in the context of
the notification.
III. Financial contributions vs. subsidies
In Art. 3 (2) FSR, the FSR essentially defines
a third-country subsidy as a direct or indirect financial
contribution which confers a benefit on
an undertaking engaging in an economic activity in the internal
market and which is limited in law or in fact to one or a
number of undertakings or industries. Such contribution
must be granted either by the central government, authorities of a
third country or by public bodies respectively private entities
whose actions are attributable to the third country. For the
purposes of the FSR, the notion of financial contributions
includes, but is not limited to
- the transfer of funds or liabilities, such as capital
injections, grants, loans, loan guarantees, fiscal incentives, the
setting off of operating losses, compensation for financial burdens
imposed by public authorities, debt forgiveness, debt to equity
swaps or rescheduling, or - the foregoing of revenue that is otherwise due, such as tax
exemptions or the granting of special or exclusive rights without
adequate remuneration, or - the provision of goods or services or the purchase of goods or
services.
The concept of financial contribution is modelled on the
concept of aid under Art. 107 TFEU. Consequently, it is (i) very
broad and (ii) requires a comprehensive assessment of commercial
transactions undertaken with public authorities. Subsidies
should be relatively easy for a company to identify, as they are
direct benefits. In the case of financial benefits, i.e.
indirect benefits, this is likely to be much more
difficult. In principle, this includes all measures that
provide a company with an advantage that could not have been
obtained in this form under normal market conditions. In
this respect, the Commission makes it clear in its FAQs on the FSR
that in the first step, all financial contributions granted
by a third country must be included without exception when
assessing the threshold values. However, whether these
constitute an actual benefit must
be assessed by the Commission in a second
step.
Based on the very broad understanding, indirect benefits granted by
the state and not identified per se as a financial contribution by
their nature should therefore already fall under Art. 3 (2) FSR. An
example of this would be the establishment of business premises, in
the context of which the company establishing the business premises
has received e.g. tax relief, energy respectively infrastructure
cost subsidies or loans or other financial securities. Also
included would be advantages granted by public companies such as
energy suppliers or airports, if these are attributable to the
state. Thinking further, ultimately any conscious or unconscious
state economic support is to be taken into consideration for the
concept of financial support when examining any notification
obligations on the basis of the FSR.
In this context, the question whether the compensation in return
for the sale of goods and/or services that are sold at
arm’s length is also relevant for the
assessment of a financial contribution is likely to be of
particular importance for the practice. In this regard, the FAQs
clarify that all compensation in return for the sale of goods to a
third country (e.g. sale of medical devices to a state hospital)
must be included without exception when assessing the thresholds.
However, provided that this is done at arm’s length, any such
contributions (most likely) do not constitute an advantage for the
recipient within the meaning of the FSR.
In summary, the following rule applies: All direct or
indirect financial contributions by a third country must be
included in the assessment of the thresholds. Whether these
constitute a benefit and thus a subsidy, is up to the
Commission’s assessment. The identification of
financial contributions is likely to be the greatest challenge for
companies under the new FSR (see VI. below).
IV. Substantive assessment
Irrespective of the actual investigation procedure, the
Commission examines whether foreign subsidies lead to a distortion
on the internal market. Art. 4 FSR sets out the standard of
review. According to this, a distortion exists if
a foreign subsidy is liable to improve the competitive position of
an undertaking on the internal market and the foreign subsidy
thereby actually or potentially negatively affects
competition in the internal market.
In order to determine such a distortion, the Commission uses
various indicators in its assessment, including the amount, nature
and purpose of the subsidy, the situation and size of the company
and the extent of the company’s activity in the domestic
market. In addition, the Commission specifies in Art. 5 FSR which
categories of subsidies it considers most likely to cause
distortion:
- a foreign subsidy granted to an ailing undertaking, namely an
undertaking which will likely go out of business in the short or
medium term in the absence of any subsidy, unless there is a
restructuring plan that is capable of leading to the long-term
viability of that undertaking and that plan includes a significant
own contribution by the undertaking; - a foreign subsidy in the form of an unlimited guarantee for the
debts or liabilities of the undertaking, namely without any
limitation as to the amount or the duration of such guarantee; - export financing measures that is not in line with the OECD
Arrangement on officially supported export credits; - a foreign subsidy directly facilitating a concentration
- a foreign subsidy enabling an undertaking to submit an unduly
advantageous tender on the basis of which the undertaking could be
awarded the relevant contract.
If the Commission finds negative effects of a foreign subsidy
according to these standards, the Commission may balance any
effects with possible positive effects on the development of the
subsidised economic activity concerned in the internal market and,
in doing so, also examine other positive effects of the foreign
subsidy, such as the wider positive effects in relation to the
relevant policy objectives, in particular those of the EU
(balancing test, cf. Art. 6 FSR). In doing so, it will be up to the
companies to demonstrate positive effects, as the Commission can by
its very nature only base its assessment on the information
provided by the companies involved in the notification.
If the Commission finds during its investigation that there is a
distortion of the internal market on the basis of the foreign
subsidy, it can order remedial measures or declare
commitments binding in order to eliminate the distortion
on the internal market (cf. Art. 7 (1) and (2) FSR). As already
known from merger control, remedies or commitments can include both
structural and behavioural obligations. Conceivable, for example,
would be the granting of licences or access to a certain
infrastructure or also the repayment of corresponding subsidies or
the sale of assets (cf. Art. 7 (4) FSR).
V. Sanctions / Prohibition of enforcement
In case of non-compliance with the FSR, the Commission may
impose both fines and penalties. Incorrect or misleading
information on financial contributions can be penalised
with up to 1% of the total turnover achieved in
the previous year (both in the case of mergers and public
procurement procedures (cf. Art. 17 (2), Art. 26 (2), Art. 33 (2)
FSR)). If a mandatory notification is not
made, the Commission may impose fines of
up to 10% of the total turnover (also in the case
of both mergers and public procurement procedures (cf. Art. 26 (3),
33 (3) FSR)). Since notifiable mergers are also subject to the
enforcement prohibition (gun-jumping) known from
merger control, any infringement in view of an too early
consummation can also be punished with a fine of up to 10% of the
total turnover.
VI. Outlook for practice
Due to the FSR, M&A transactions or public procurement
procedures are becoming increasingly complex:
- M&A advice: Already now, in the context of
M&A transactions, it must be examined at an early stage whether
the respective transaction falls under the merger control regimes
of the Member States or the Commission. Furthermore, it often
requires a parallel examination whether national investment control
regimes are relevant. In addition, it is now also necessary
to examine whether a notification under the FSR is
relevant. As a result, transaction advice, which is often
already complex, faces further challenges, as notification
procedures under the FSR must also be considered
in the contractual arrangements between
the parties, the transaction duration of parallel and
independent review procedures is becoming increasingly
difficult to forecast and, with increasing
review procedures, the transaction security will
ultimately also be more difficult to assess. - Internal company data collection on financial
contributions: In order to be able to guarantee legally
compliant advice on the basis of the FSR, companies must now
systematically identify, record and collate the receipt of
financial contributions – which they receive worldwide.
Since the collection and evaluation of any data is likely to
involve a great deal of effort and the use of considerable time and
human resources, there is a risk that transactions will be
significantly delayed if the relevant data is not yet available.
Consequently, a system must be established within the
company that guarantees the permanent and complete recording of
financial contributions.
It remains to be seen how the FSR and the reporting procedures
will develop in practice and whether the Commission will be able to
ensure that the reporting procedures are carried out swiftly and
transparently, especially in unproblematic cases. With a view to
questions that remain open at present, such as the substantive
assessment and the possible limitation of disclosing financial
contributions, guidelines would be desirable for the purpose of
clarification. However, publication is probably only to be expected
in a few years’ time. Art. 46 (1) FSR provides for the issuance
of guidelines by 12 January 2026 at the latest.
Link:
The relevant texts can be found under the following links: FSR, Implementing Regulation and
FAQ.
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.
