On May 5, 2021, the European Commission took a crucial step toward regulation of the potential distortive effects of foreign subsidies on undertakings in the Single Market. Following up on last year’s White Paper on the same subject, the authority published a proposal for a new regulation and opened an eight-week public consultation.
The proposal defines “foreign subsidies” as “support measures provided by non-EU governments to undertakings active in the EU” in all possible forms, such as “capital injections, grants, loans, guarantees and foregone public revenue in the form of preferential tax treatments.”
In recent years, the regulatory gap on this issue, especially in comparison to the highly developed system of “State aid” rules (which only apply to subsidies granted by Member States of the EU), has become a key concern for the Commission because this “difference in treatment can distort competition in the EU’s internal market.”[1] Indeed, the risk is that inefficient operators will gain strong positions in the Single Market by means of contributions from foreign (non-EU) governments, taking advantage of that gap. In order to tackle the issue, the proposal adds three new measures to the Commission’s toolbox, all designed to foster a level-playing field and prevent distortion of competition in the Single Market generated by public subsidies.
The first such tool is conceived to ensure general and lasting scrutiny of any potential distortive effect deriving from foreign subsidies that may not be caught by existing competition and internal market rules in the Treaty for the Functioning of the European Union (namely, State aid rules). In accordance with the public consultation results, which highlighted the need for uniform application of the rules, the Commission would be the sole authority with jurisdiction, thus excluding the jurisdiction of national competition authorities on the matter. According to the proposal, the Commission would be entitled to carry out preliminary investigations in any market on its own initiative (ex officio). If deemed necessary, at the outcome of a preliminary investigation, the Commission may decide to start an in-depth investigation, availing itself of the power to request information and conduct dawn raids. If after comparing the negative and positive effects of the subsidy on the internal market the Commission concludes that the contribution determines a distortion of the normal functioning of competition, it may then provide redressive measures or accept commitments offered by the undertakings concerned to remove the anticompetitive effects.
The second and third tools apply only to “concentrations” and contractual offerings in the field of public procurement, where, pursuant to section 4 of the proposal, foreign subsidies above certain thresholds are deemed likely (or even presumed) to distort the internal market.
With respect to concentrations, as defined under the EU Merger Regulation, the proposal requires the parties to provide prior notification of a transaction to the Commission if:
- the EU-wide turnover of the target company (or of at least one of the merging parties) is at least €500 and the foreign subsidy is equivalent to at least €50 million;
- in the case of joint ventures, the joint venture itself (or at least one of its parent undertakings) is established in the EU and generates aggregate turnover of at least €500 million, and the aggregate financial contribution from foreign countries in the three calendar years prior to notification is equivalent to at least €50 million.
A similar notification-based procedure is also used to investigate bids in public tenders with estimated value equal to or greater than €250 million. Undertakings intending to participate in these tenders shall report all foreign contributions received in the prior three years to the contracting authority. The contracting authority shall then transmit the notification to the Commission. After carrying out a preliminary review and, if needed, the subsequent in-depth investigation, the Authority can determine whether the foreign subsidies could have net negative effects on the normal functioning of competition in the context of the specific public tender procedure. If so, the Commission can prevent a public contract from being awarded to the investigated undertakings or accept the undertakings’ commitments to remove the distortive impact of the subsidy.
It is worth noting that both the notification procedures introduce an additional and significant administrative burden and a source of regulatory obstacles for firms doing business in the EU. Indeed, such systems could lead to intensified legal uncertainty or cause serious slowdowns (if not outright impediments) to the completion of M&A transactions, joint ventures, and, above all, public contracts. The Commission’s strategy of adapting well-known tools to fill the gap on foreign subsidies seems ambitious, and it will surely be interesting to assess the impact it will have on foreign investment trends across Europe.
[1] European Court of Auditors. The EU’s response to China’s state-driven investment strategy, Review 03, 2020: https://www.eca.europa.eu/Lists/ECADocuments/RW20_03/RW_EU_response_to_China_EN.pdf
