The EU Foreign Subsidies Regulation is here: What’s it all about?

Today, the EU Foreign Subsidies Regulation (“FSR”) was published in the Official Journal of the EU. This means the FSR will come into force on 12 January 2023 (20 days after publication) as Regulation (EU) 2022/2560. The provisions of the FSR will apply from 12 July 2023, six months after its entry into force. The notification requirements for concentrations and public procurement procedures will apply from 12 October 2023, cf. Article 54(4) FSR.

The FSR is the EU’s response to subsidies granted by non-EU countries to companies that could distort the EU’s internal market (“Foreign Subsidies”). Companies supported by non-EU countries may be able to benefit from advantages that EU Member States cannot give to “their” companies because of stricter requirements under EU State aid law. At the same time, the European Commission (“Commission”) came to the conclusion that Foreign Subsidies cannot be adequately regulated by the existing tools of EU State aid, merger control, public procurement, and foreign trade law. Indeed, in the Commission’s view, there has been no comparable, effective regulation of Foreign Subsidies so far.

The EU is now closing this regulatory gap with the FSR. The aim is to create a level playing field for all companies operating in the EU’s internal market.

The legislative initiative goes back to the Commission’s White Paper on levelling the playing field as regards foreign subsidies, published back in June 2020 (see our alert here). In May 2021, after a public consultation process based on the White Paper, the Commission presented its proposal for the FSR (see our alert here). The legislative process was eventually concluded on 28 November 2022 with the adoption of the FSR by the Council of the European Union.

What preparations do companies have to undertake now?

From 12 July 2023 onwards, all companies doing business in the EU will have to consider the issue of Foreign Subsidies, especially when planning M&A activities and participating in public tenders which trigger the relevant thresholds. This may lead to a further notification obligation to the Commission, including a standstill obligation. This in turn will affect deal timelines, and the coordination of regulatory approvals will become even more complex. In more detail:

First, companies will have to clarify internally whether they have received a financial contribution from non-EU countries. , In this context, the FSR defines the concept of “financial contribution” very broadly. A rough reference point for the existence of a foreign subsidy is expected to be the “advantage” conferred within the meaning of EU State aid law, which is not the necessarily equivalent to the economic benefit enjoyed by aid recipients. Companies that determine that they have received a financial contribution from a non-EU country are obliged (if the thresholds are exceeded) to notify transactions (“M&A instrument” – cf. Article 21 FSR) and participations in procurement procedures (“Procurement instrument” – cf. Article 29 FSR) to the Commission.

In addition, there is a general instrument for market investigation – the Commission can act ex officio even if there is no obligation to notify and can thus examine information from any source regarding alleged distortive financial contributions (cf. Article 9 FSR).

The Commission will in these cases evaluate whether the identified financial contributions constitute a foreign subsidy and have any distorting effect on competition. Finally, the Commission may evaluate whether any positive effects may outweigh the negative effects (“balancing test” – cf. Article 6 FSR).

The Commission is currently working on an implementing regulation that will contain procedural specifications. It will include notification forms and clarifications on the procedures relevant for notification and access to file. Highly relevant in this regard is the notification form which will identify the level of detail and information that companies need to submit both for concentrations and public procurement notifications. In the coming weeks, the Commission will launch a public consultation; the adoption of the implementing regulation is expected for the second quarter (at the latest third quarter) of 2023.

Therefore, it can be expected that further clarifications also on the responsible Directorate General within the Commission will be provided. So far, only assumptions have been made regarding three possible scenarios:

• the Directorate-General for Competition (DG Comp), given its experience in State aid and merger control, as unique enforcer;
  
  
• two Directorates-General in charge of the new rules, more precisely DG Comp (for the scrutiny of concentrations) and the Directorate-General for Internal Market, DG Grow (for public procurement procedures);
  
  
• the creation of a specific joint task force with officials coming from different Directorates-General.
  
  

More on the FSR

This News Alert is the first in a series of articles on the FSR. We will discuss the FSR in more detail along with its implications for merger control, public procurement, foreign trade law and more. Sign up here to receive all our News Alerts on the FSR.