Filing thresholds: A notification obligation will arise for tenders in public procurement procedures in the EU where the following thresholds are exceeded:

a) Contract value threshold: The estimated contract value is at least €250 million.

b) Financial contribution threshold: The economic operator participating in the tender was granted aggregate foreign financial contributions in the three financial years prior to the notification of at least €4 million per third country. If financial contributions remain below the €4 million threshold, no notification is triggered, but companies participating in tenders must declare foreign financial contributions and must confirm in a declaration that foreign financial contributions received are under €4 million.

Attention: any company wishing to participate in a tender for a government contract in the EU will need to proactively deal with the FSR, either through a notification or through a declaration.

Declaration: An obligation to declare all foreign financial contributions received and to confirm that they are not subject to notification requirements exists, if either

• Procurements are not covered by the Procurement Directives (for insistence because they are subject to the Defence Directive); or
• The contract value is below €250 million; or
• The aggregate financial contribution in the three financial years prior to the notification was less than €4 million per third country.

Please note that the declaration needs to be substantiated. This will require careful preparation, identifying any financial contribution received as well as an evaluation of such contributions. The EC might ask additional questions or order the parties to file a full notification if it considers that a notification will be required. The EC might further impose fines for the provision of incomplete or misleading information. Finally, even after the award of the contract, the EC might, within a period of up to 10 years, open an ex officio investigation.

Wide scope of financial contribution

The term “financial contribution” is very broad and includes any transfer of funds or liabilities, the foregoing of revenues or the provision or purchase of goods or services to or from non-EU states. 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.

The aggregate financial contribution comprises all financial contributions provided by third countries to the undertaking concerned, as well as all companies directly or indirectly controlled by the undertaking concerned (subsidiaries) and those directly or indirectly controlling the undertaking concerned (ultimate parent).

Standstill obligation: If a bidder is under investigation by the EC, under the new regime, a contract cannot be awarded prior to the completion of the EC’s review.

Process: When submitting a tender or a request to participate in a public procurement procedure, bidders are required to notify the contracting authority or entity of all foreign financial contributions received up to three years before the notification or confirm in a declaration that no foreign financial contributions were received in the same period. The notifying party will have the possibility to engage in pre-notification discussions with the EC. During these discussions it can ask for waivers to submit certain information required by the notification form. While the pre-notification may result in a reduction of the amount of information to be submitted it can also lead to delays, as the case team might require additional data to consider a filing complete. The pre-notification phase must therefore be planned carefully. The contracting authority shall then promptly transfer the notification to the EC. Upon receipt, the EC has 20 working days for review (which can be extended by 10 working days in certain cases), and, if the EC opens an in-depth investigation, it must close the investigation within 110 working days after receipt of the complete notification (subject to a possible 20-working-day extension). Special rules apply to multi-stage public procurement procedures.

Fines/prohibition: If the EC finds that a company participating in public procurement tenders benefitted from a foreign subsidy distorting the EU internal market, it can prohibit the award of the contract to the company. The EC can also impose fines of up to 10 percent of the company’s aggregate worldwide turnover if a company fails to notify foreign financial contributions during the public procurement procedure or circumvents or attempts to circumvent the notification requirement.

4. General (ex officio) market investigation of any other subsidized activity

As of June 12, 2023, the EC also has the power to investigate, on its own initiative, all market situations. It can also request an ad hoc notification of 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. Unlike the mandatory review regime outlined above, the EC’s (ad hoc) market investigation is not subject to any formal timeline.

5. The EC’s substantive assessment

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 the conditions attached to the foreign subsidy.

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 EC has wide discretion on how to apply this test and what measures/commitment it will consider appropriate to outweigh negative effects. We anticipate that with respect to foreign subsidies, the EC will largely mirror the approach it applies to recipients of state aid granted by EU member states.

6. Enforcement powers

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 repayment of the foreign subsidy (including interest). The EC also has the power to prohibit the award of a contract (see above).

Investigatory powers

The FSR grants the EC 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.

7. Implications and outlook – issues to consider

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 contributions provided by not only 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. FSR as a tool for competitor complaints: We expect that third parties will increasingly use the FSR as a sword to oppose deals that are not in their strategic interests by launching complaints and/or taking legal actions.
3. Preparatory steps for public procurement bids: Certain bids in public tenders will require mandatory notification as of October 12, 2023. To assess possible filing requirements for future 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 by way of an ex officio investigation to examine all financial contributions 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) regardless 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 which may result in the EC remedies or the prohibition of 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 a possible justification and defense against EC intervention.

(d) When planning for a notification consider engaging in pre-notification discussions with the EC. During these discussions the notifying party can ask for waivers to submit certain information required by the notification form. While the pre-notification may result in a reduction of the amount of information to be submitted it can also lead to delays, as the case team might require additional data to consider a filing complete. The pre-notification phase must therefore be planned carefully.

1. The FSR (Regulation (EU) 2022/2560 of the European Parliament and of the Council of December 14, 2022 on foreign subsidies distorting the internal market) builds on the EU Commission’s White Paper of June 17, 2020 and its legislative proposals of May 5, 2021. The European Parliament and the Council reached political agreement on the final draft of the FSR on June 30, 2022, and it was formally adopted by the European Parliament on November 10, 2022. Please note that the EC is currently preparing an Implementing Regulation, which will provide further clearance in the procedure to be applied.

In-depth 2023-105