Reed Smith In-depth

On 5 May 2021, the European Commission (the Commission) published its proposal for a far-reaching regulation (the Regulation) to tackle foreign subsidies that distort the level playing field in the EU Single Market. This legislative proposal builds on the Commission’s White Paper of 17 June 2020 (see also our prior alert) and the related public consultation, and forms an integral part of the Commission’s updated EU Industrial Strategy, which was also adopted the same day.

The new regime targets foreign-subsidised M&A transactions, but also any kind of foreign-subsidised activity affecting EU markets, including the bidding for public contracts in the EU, and seeks to close an enforcement gap under existing EU law rules. To this extent it will complement existing EU law rules in force, in particular those on antitrust (merger control) and trade.

If adopted, the proposed Regulation will have far-reaching implications for companies operating or investing in the EU with support from foreign states across all economic sectors. The new rules would grant the Commission the power to investigate foreign subsidies granted in the 10 years prior to the entering into force of the new rules. Businesses benefitting from foreign subsidies are advised to follow these developments and to closely monitor the receipt of foreign subsidies in order to anticipate and limit potential future risk exposure.

The European Parliament and the Council will now discuss the proposal in the context of the ordinary legislative procedure. The final text of the new Regulation is not expected to be concluded before the end of 2022. The Commission also opened a public consultation on the proposals, and stakeholders are invited to provide feedback until 13 July 2021.

Scope of the Regulation

The proposed Regulation targets subsidies granted by non-EU government resources (foreign subsidies) that cause distortions and harm the level playing field in the Single Market.

Foreign subsidies addressed by the proposed Regulation

The definition of ‘foreign subsidy’ is similar to that of State aid under EU State aid rules. It comprises any financial contribution originating directly or indirectly from a non-EU state that benefits a company engaging in an economic activity in the EU, and which is limited to individual companies or industries. It is irrelevant whether the beneficiary is established in the EU.

Financial contributions include a wide range of economic benefits, such as:

  • grants, capital injections, loans, guarantees, below-cost financing, fiscal incentives, compensation and certain forms of export financing;
  • foregoing of revenue that is otherwise due; and/or
  • provision or purchase of goods or services.

The Commission’s new investigation toolbox to address distortions

The proposed Regulation introduces three investigative tools for the Commission to address distortions caused by foreign subsidies in the EU, namely two (mandatory) notification-based tools and a general market investigation tool.