General (ex-officio) market investigation of any other subsidised activity

The EC also has the power to investigate, on its own initiative, all other market situations and to request ad hoc notification of smaller concentrations and public procurement procedures that do not meet the thresholds for mandatory filings (see above) if it suspects that a distortive foreign subsidy may be involved.

The limitation period is 10 years, starting on the day on which a foreign subsidy is granted (with the possibility of interruptions), and foreign subsidies granted up to five years before the entering into force of the FSR can be investigated by the EC. Different to the mandatory review regime outlined above, the EC’s (ad hoc) market investigation is not subject to any formal timeline.

If the EC suspects that foreign subsidies in a given sector distort the internal market, it also has the power to launch a market investigation into an entire sector and to use information obtained to initiate an investigation against individual companies.

Wide scope of financial contribution

Mandatory filing requirements for M&A transactions and public bids depend, amongst other things, on whether the financial contributions granted by third countries to the companies involved exceed certain thresholds, and they can therefore arise irrespective of whether the contributions were granted at arms’ length or their potential effects on the internal market.

What constitutes a financial contribution is broadly defined and it covers any transfer of funds or liabilities (e.g., grants, capital injections, loans, loan guarantees, below-cost financing, fiscal incentives, debt forgiveness, setting off of operating losses, compensation for financial burdens imposed by public authorities and debt to equity swaps), forgoing of revenues that are otherwise due (e.g., tax exemptions and the granting of special or exclusive rights without adequate remuneration) or the provision or purchase of goods or services. Importantly, financial contributions provided by a non-EU country include not only contributions provided by the country’s central government and government authorities at all other levels but also all foreign public or private entities whose actions can be attributed to the third country.

Distortive effect on the internal market?

Foreign subsidies only raise concerns if they have a distortive effect in the EU (i.e., they improve the competitive position of the undertaking concerned and thereby actually or potentially negatively affect competition in the internal market).

General assessment criteria: The EC will examine whether a foreign subsidy has distortive effects in the EU market based on several indicators, such as the amount, nature and purpose of the subsidy; the market situation; the purpose; and conditions attached to the foreign subsidy.

Types of foreign subsidies that are ‘most likely’ distortive: Foreign subsidies that the EC will most likely consider distortive include unlimited guarantees, foreign subsidies directly facilitating a concentration or those that facilitate the submission of an unduly advantageous tender.

Less problematic foreign subsidies include (i) foreign subsidies not exceeding €200,000 per non-EU country in any three-year period, which are not considered to be distortive; (ii) foreign subsidies not exceeding €4 million in aggregate over the previous three years, which are ‘unlikely’ to be distortive; and (iii) a foreign subsidy aimed at making good the damage caused by natural disasters or exceptional occurrences, which may not be considered to be distortive.

Balancing test: If a foreign subsidy is found to distort the EU internal market, the EC may consider the potential positive effects of the foreign subsidy (e.g., on the environment or social security) and balance these effects with its negative effects. The FSR does not further clarify how the balancing test applies in practice, and the EC therefore has wide discretion on how to apply this test and what measures/commitment it will consider appropriate to outweigh negative effects. While we anticipate that the EC’s practice with respect to foreign subsidies will largely mirror the approach it applies to recipients of state aid granted by EU member states, there remains a significant risk that the EC could apply stricter standards to foreign subsidies going forward, in particular for EU industrial policy considerations. The EC has committed to providing additional clarifications on the application of the new rules within the FSR’s first year of application, which will hopefully increase legal certainty for investors.

Redressive measures and commitments: If the EC finds negative effects to prevail, it may impose redressive measures or accept appropriate commitments from the companies that remedy the distortion. This may include structural or behavioural measures, such as the divestment of assets, the reduction of capacity or market presence (including by means of temporary restriction on commercial activity), granting access to infrastructure (including, for example, research facilities, production capabilities or essential facilities), repayment of the foreign subsidy (including interest), etc. In case of mandatory filings of M&A transactions and in bids in public tenders, the EC also has the power to prohibit a transaction or the award of a contract (see above).

Investigatory powers

The EC will have far-reaching powers to assess alleged distortions, including the power to request information, conduct unannounced inspections within and outside the EU and impose fines and periodic penalty payments on companies if they provide incorrect, incomplete or misleading information or take interim measures.

If a company fails to provide the necessary information, the EC may take decisions based on the facts available, a concept imported from trade defence investigations, in effect enabling the EC to make adverse inferences as soon as parties fail or are unable to provide the requested information in the required quality. In practice, this could have far-reaching implications for many businesses controlled by a state or a sovereign wealth fund as they will not always have the means to obtain the necessary information.

Implications and outlook

1. Wide scope of the new regime: The FSR tackles all foreign subsidies that have a potentially distortive effect on the internal market. The new regime applies to foreign and EU companies (and their respective groups) alike, provided they benefitted from foreign subsidies. Financial contributions provided by a non-EU country include not only contributions provided by a country’s central government and government authorities at all other levels but also all foreign public or private entities whose actions can be attributed to a third country. ‘Foreign subsidies’ captures subsidies granted from all non-EU countries.

2. M&A transactions: Once in force, the new regime will significantly increase red tape for closing M&A transactions by state-supported investors in Europe. The new review procedure will be costly and time-consuming, and businesses will potentially have to file parallel notifications under EU or national merger control rules, foreign direct investment rules and/or possibly sector-specific rules (e.g., for certain energy infrastructure under the EU’s Third Energy Package). The new regime will further bring legal uncertainty for M&A transactions falling below the notification thresholds but for which the EC has the right to request notification prior to closing. All this will need to be addressed in transaction documentation (conditions precedent, representations and warranties, break fees, etc.), deal timing/planning and due diligence reviews.

We expect that third parties will increasingly use the FSR as a sword to oppose deals that are not in their strategic interests (both in competitive M&A and public tenders) as well as by launching complaints and/or taking legal actions.

3. Public procurement bids: Today, public tenders in the EU are already subject to strict procurement requirements under EU and national law, and stricter rules apply to tenders organised by entities operating in the water, energy, transport and postal services sectors in the EU. The new rules will add another (thick) layer of complexity to procurement processes and lead to delays in awarding contracts.

4. Preparatory steps: Certain M&A transactions and bids in public tenders will require mandatory notification as of nine months after the entry into force of the FSR (i.e., from some time in the second half of 2023). To assess possible filing requirements for future M&A transactions and public tenders in the EU, businesses with direct or indirect commercial or other links with non-EU states, irrespective of whether they are based in or outside the EU, are advised to take the following steps:

(a) Start identifying and compiling a record of financial contributions received from non-EU states since at least 2020 (ideally 2018). The term ‘financial contribution’ is very broad and includes any transfer of funds or liabilities, the foregoing of revenues (including tax exemptions) and the provision or purchase of goods or services to or from non-EU states. Businesses are therefore advised to establish systems for the collection of group-wide information relating to relevant contracts, grants, tax incentives, etc., on a global basis to ensure that financial contributions can be tracked and quantified. Ideally, businesses should keep a record going back to 2018, as the EC has the power and discretion to investigate all financial contributions by way of an ex-officio investigation that were granted up to five years prior to the entering into force of the Foreign Subsidies Regulation (i.e., ideally, the relevant records should go back to 2018).

(b) Check whether financial contributions were/are received on market terms. The financial contribution threshold can be exceeded (and a notification can be required) irrespective of whether the financial contribution was granted on market terms. Financial contributions granted on market terms will, however, avoid classification as foreign subsidies, which the FSR aims to prevent, and may result in the EC remedies or the prohibition of an M&A transaction or the award of a contract.

(c) Where it is not clear whether a financial contribution qualifies as a foreign subsidy or has distortive effects in the EU, consider its impact on any activities in the EU and whether the policy aims of the non-EU state are supported in the EU as this could serve as possible justification and defence against EC intervention.

5. Future EC guidance: The EC has announced that it will publish draft implementation acts, including notification forms, by early 2023 at the latest with a view to adopting them before the FSR’s new notification regimes enter into force in the second half of 2023. Detailed guidelines on the application of the new rules will be published at the latest three years after the FSR’s entry into force. However, the EC has committed to publishing initial clarification on the application of the new rules within the first year of their application. At least until that point in time, there will remain a significant legal uncertainty for businesses as to how the EC will apply its new powers in practice. 

1. The FSR builds on the EU Commission’s White Paper of 17 June 2020 and its legislative proposals of 5 May 2021. The European Parliament and the Council reached political agreement on the final draft of the FSR on 30 June 2022, and it was formally adopted by the European Parliament on 10 November 2022.

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