The EU’s current toolbox does not address risks caused by foreign subsidies:

• Neither EU antitrust nor EU merger control rules specifically take into account whether an undertaking may have benefitted from foreign subsidiaries (even if it could theoretically form part of the analysis) and they do not allow the Commission or member states to intervene solely or even mainly on this basis.

• Financial support granted by non-EU authorities to undertakings in the EU (either directly or through their parent companies outside the EU) is also not covered by EU state aid rules that only apply to subsidies from EU member states.

• Similarly, EU trade defence instruments do not address all foreign subsidies affecting the single market. EU anti-dumping and anti-subsidy rules only apply to the import of goods into the EU and therefore do not cover trade in services, investments or other financial flows in relation to the activities of undertakings in the EU. Nor do trade defence instruments cover goods that are made in the EU but sold at unfair prices because of foreign subsidies granted to the manufacturing plant in the EU. The new FDI Screening Regulation aims at determining the likely impact of foreign direct investments on security or public order, by considering their effects on, for instance, critical infrastructure, critical technologies or critical inputs, but it does not specifically address the potential distortions caused by foreign subsidies across all sectors.

• Finally, the EU’s existing public procurement framework does not specifically address distortions to the EU procurement markets that result from foreign subsidies.

With the proposed new tools, the Commission is now seeking to close this regulatory gap in the EU legal framework.

New EU tools proposed to tackle distortions caused by foreign subsidies

To address potential distortions in the EU single market, the Commission proposes the following three mechanisms (so-called Modules), which could apply alternatively or cumulatively, and additional measures to control foreign subsidies in the context of EU funding.

Module 1: General market instrument to capture foreign subsidies

Module 1 comprises a general (ex-post) control mechanism to review distortions caused by foreign subsidies given to companies active in the EU, irrespective of their place of establishment. The Commission or the competent national authority can initiate the review where it has reason to believe that a foreign subsidy has been granted to a company active in the EU. Foreign subsidies would be considered to fall under Module 1 from the moment the beneficiary has an entitlement to receive the subsidy (payment would only be relevant when determining the appropriate remedy if and when concerns arise).

In a two-step review process, the authorities would then assess the impact of the specific subsidies on the EU internal market. Certain categories of foreign subsidies (e.g., subsidies in the form of export financing; subsidies to ailing undertakings, such as debt forgiveness; government guarantees without limitations on debt/liabilities or duration; tax relief; or subsidies directly facilitating an acquisition) would be considered to most likely cause distortions. Other types of state support would require a more detailed analysis taking into account factors such as the relative size of the subsidy, the situation of the beneficiary, the situation in the market concerned, the market conduct in question, the level of the beneficiary’s activities in the internal market, and whether the beneficiary has privileged access to its domestic market leading to an artificial competitive advantage that could be leveraged in the EU internal market. A relatively low de minimis safe harbour would likely be set for foreign subsidies below a total value of €200,000 (granted over a consecutive period of three years). A blueprint for analysing potential distortions caused by foreign subsidies is likely to be found in the extensive knowledge developed by the Commission in anti-subsidy and anti-dumping investigations.³

If a distortion is established, it would need to be weighed against the possible positive impact that the supported activity or investment might have within the EU or on public policy interests recognised by the EU (the so-called EU interest test), including creating jobs, achieving climate neutrality and protecting the environment, digital transformation, security, public order and safety, and resilience.

If the distortive effects outweighed the positive impact, the competent authority would have the power to impose “redressive measures”. These can range from structural remedies (divestments of assets) and behavioural remedies (reductions of capacity or market presence, prohibitions of investments/acquisitions, third party access obligations, licensing on fair, reasonable and non-discriminatory (FRAND) terms, etc.) to redressive payments to the EU or member states. Any such redressive measures would be combined with reporting and transparency obligations. Alternatively, the competent authority could adopt a commitment decision, whereby commitments offered by the undertaking concerned would be made legally binding. If an undertaking does not comply with the redressive measures imposed or the commitment decision, the authority would have the power to impose fines and periodic penalty payments.

To ensure the new tool is effective, the Commission and competent national authorities would have investigative tools, including mechanisms to gather or request information, the right to impose fines or periodic penalty payments for failure to timely supply the information requested or for supplying incomplete, incorrect or misleading information, and powers to conduct on-site inspections of the EU premises of the alleged beneficiary, as well as in third countries (if the relevant third country agrees).

Module 2: Mandatory notification regime to tackle foreign subsidies facilitating the acquisition of EU targets

Under Module 2 the Commission proposes a mandatory (ex-ante) notification mechanism to review acquisitions of EU companies that have been facilitated by foreign subsidies. The notification regime would go hand in hand with a standstill obligation, so parties would not be allowed to close the acquisition prior to obtaining the green light.

Foreign subsidies may facilitate acquisitions either directly (i.e., where the link to the acquisition can be established) or de facto. While direct facilitation would normally be considered to distort the internal market, a more detailed analysis would be required to determine whether the de facto facilitation could actually or potentially distort the level playing field in the internal market. This concept is (overly) vague and the analysis would depend on a combination of multiple factors, such as the relative size of the subsidy in question, the situation of the beneficiary, the situation in the market(s) concerned, the level of activity in the internal market of the parties concerned, and whether the beneficiary has privileged access to its domestic market leading to an artificial competitive advantage that could be leveraged in the EU internal market.

The notification requirement would not only cover (direct and indirect) acquisitions of control of an undertaking (i.e., the type of acquisitions that are also subject to EU merger control rules), but also non-controlling shareholdings conferring at least a specific percentage of the shares or voting rights, or otherwise ‘material influence’, in an undertaking. The new ex-ante review tool would therefore go beyond the scope of most merger control rules that only catch acquisitions of control (non-controlling minority shareholdings can only trigger reviews in a few jurisdictions, including Austria, Germany and the UK). Such acquisition would also need to be potentially subsidised to trigger a filing obligation, i.e., the buyer would need to have received a financial contribution from a foreign government in the three years prior to the notification or to receive such contribution up until one year following the closing of the acquisition (the latter situation would include cases where there is a political commitment to provide such a financial contribution in the coming months).

To limit the scope of the mandatory regime to potentially problematic cases, acquisitions would only trigger a notification requirement where the size of the EU target and/or the volume of the financial contribution exceed certain thresholds. The Commission is considering establishing thresholds for EU targets on a qualitative basis (with reference to all assets likely to generate a significant turnover in the future and/or the value of the transaction) or on a quantitative, turnover basis (which it proposes to set at €100 million). The volume of the financial contribution could, for instance, be defined by reference to the total amount of financial contributions received by the acquiring undertaking in the three calendar years prior to the notification exceeding a certain amount; or to a given percentage of the acquisition price. These thresholds would still need to be fleshed out in detail and largely depend on the final structure of the new mechanism, including the EU target, the trigger for notification and the supervisory authority entrusted with the implementation of Module 2. Setting the thresholds too low could lead to unnecessary red tape for acquisitions even when the potential risk of distortions is likely to be limited, and impose significant administrative burdens on the Commission and member states.

Similar to Module 1, the effects of the foreign subsidy must be weighed against the overall positive impact that the investment might have within the EU or on public policy interests recognised by the EU (see above). If the Commission finds a distortion, it may adopt a conditional clearance decision based on proposed commitments, or prohibit the proposed transaction.

In addition, and similarly to Module 1, the new tool also provides for a sanction mechanism (fines or periodic payments) for the violation of procedural rules – for instance, if there are indications that the parties’ submissions included misleading or incomplete information, or that binding commitments were not correctly implemented, or where a transaction was not notified, but should have been. A failure to notify could also result in the obligation to unwind the transaction.

Module 3: Adjustments to EU public procurement rules to address distortive foreign subsidies

Under Module 3, the White Paper proposes a new mechanism whereby bidders would have to notify the contracting authority if they (including consortium members, sub-contractors or suppliers) have received financial contributions from non-EU countries within the last three years preceding the procurement process or expect to receive such contributions during the execution of the contract. The contracting authority would then transmit the notification to the competent supervisory authority to assess whether there has been a foreign subsidy and whether it has distorted the public procurement procedure. If the supervisory authority concludes that this is the case, the bidder would be excluded from the procurement procedure and future tenders for a maximum of three years.

Additional protection against foreign subsidies in the context of EU funding

Finally, the White Paper sets out ways to address the issue of foreign subsidies in the case of applications for EU financial support, to ensure all businesses compete for EU funding on an equal footing. Foreign subsidies may, however, distort this process by putting the beneficiaries of such subsidies in a better position to apply. The White Paper proposes options to prevent such unfair advantage. Among others, in case of funding distributed through public tenders or grants, a procedure similar to the one proposed for EU public procurement procedures would apply. Moreover, the White Paper emphasises the importance of ensuring that international financial institutions that implement projects supported by the EU budget, such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), mirror the EU’s approach to foreign subsidies.

Interplay with other EU and international instruments

Despite the regulatory gaps in the existing framework, the proposed new tools on foreign subsidies may partly overlap with existing EU and international legal instruments. It will therefore be important to see how the new tools interplay with the existing EU legal and regulatory framework.

As regards merger control, the new tool (Module 2) will be complementary to EU merger control rules that focus on analysing the significant impediment to effective competition and the structure of the market rather than the existence of effects caused by foreign subsidies. If an acquisition requires notification under Module 2 and the EU Merger Regulation, the notification and any possible assessment will be dealt with in parallel but separately under the respective instruments. The new tools would also complement existing EU antitrust rules (Articles 101 and 102 TFEU) that do address all types of anti-competitive market conduct but not market conduct related to subsidies granted by a non-EU government or a member state.

As regards state aid, the new tools would be separate to EU state aid rules as they would only apply if the financial support is granted by a non-EU country. The proposed adjustments to public procurement rules would introduce the possibility to exclude subsidised bidders from ongoing (and future) public tenders.

The new regime would also be complementary to the FDI Screening Regulation. While the FDI Screening Regulation allows for the assessment of threats to security and public order, the new tools would assess the potential distortions in the internal market more generally. In addition, whereas the FDI Screening Regulation focusses on critical assets, such as critical infrastructure, critical technologies and critical input, the new tools have a wider scope and are not limited to specific sectors or assets. The new tools would be narrower in scope than the FDI Screening Regulation to the extent they only address foreign subsidies that may or may not be linked to an investment, whereas the FDI Screening Regulation targets all types of foreign investments. However, Module 2 (and potentially Module 1) may apply in parallel to the FDI Screening Regulation in situations where the foreign investment constitutes an acquisition that is facilitated by a foreign subsidy and also raises concerns for security or public order.

Finally, the new instruments would supplement existing trade defence instruments that are used by the EU to countervail subsidies and target distortions leading to the dumping of goods imported from third countries, but that cannot at present offset subsidies related to trade in services, or the establishment and operation of companies in the EU that are backed by foreign subsidies.

Concluding remarks and next steps

The new tools would no doubt lead to more red tape in M&A transactions. A large number of M&A deals could potentially be caught by the new regime and be subject to a new and additional mandatory approval regime, on top of merger control and foreign direct investment rules. While the current policy proposal does not yet specify the precise timelines and mechanism for coordination between the Commission and member states, it can be expected that the new process will be time-consuming and expensive. This is particularly the case as, in many instances, it will be complex to assess whether a foreign subsidy facilitates the acquisition of an EU company. There is also a risk that the different regulators responsible for reviewing M&A deals under merger control, FDI rules and the new regime could issue conflicting decisions and require different types of commitments. All of this would have a significant impact on the strategic planning of M&A deals going forward and also make the coordination of the various review and approval processes (even) more challenging.

Proving that a foreign subsidy actually exists would be one of the key challenges for the Commission and the competent national authorities under the new regime. As explained above, the Commission already has a well-established practice in the context of trade defence investigations. If this practice can serve as a guide to how the proposed new instruments will be applied, it is to be expected that foreign subsidies will be assumed to exist, to be large, and to be distortive, unless the investors under investigation can demonstrate otherwise. Furthermore, in practice, financial support measures are often complex in nature and, despite being exposed to investigation tools with sanction mechanisms, companies themselves will often have difficulties in assessing whether they benefitted from foreign subsidies or, at least, in obtaining the relevant information from governments in order to make this self-assessment. This could have major repercussions with regard to legal certainty, in particular for M&A transactions that would also be subject to a tight timetable under the proposed new mandatory notification regime. Equally, this legal uncertainty could negatively impact companies participating in national and EU tenders that could all too easily potentially face exclusion from significant business opportunities.

Overall, there is a risk that the new tools will have a chilling effect on foreign investments into the EU, especially from countries or sectors where state support or involvement is widespread. While the new regime would potentially support EU industries so they can compete on a (more) equal footing with foreign-subsidised companies doing business in the EU, the proposals are likely to raise significant opposition from certain EU member states and industry sectors that are more dependent on foreign investment than others, even more so in the aftermath of the COVID-19 crisis.

Finally, politically, the Commission’s proposals will certainly provoke significant attention among the EU’s major trading partners across the globe. One cannot exclude the possibility that some governments may themselves consider protectionist retaliation measures in response to these new instruments.

Stakeholders now have the opportunity to share their views on the White Paper and take part in a public consultation until 23 September 2020. Based on the comments received, the Commission is aiming at preparing specific legislative proposals in the course of 2021. Such proposals would then need to be adopted by the European Parliament and the member states in the Council.

1. European Commission, ''White Paper on levelling the playing fields as regards foreign subsidies”, COM(2020) 253 final.
2. European Commission Communication, “A New Industrial Strategy for Europe”, COM(2020) 102 final.
3. See, e.g., European Commission Staff Working Document on Significant Distortions in the Economy of the People’s Republic of China, 20 December 2017, SWD(2017) 483 final/2.

Client Alert 2020-395