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With its recent White Paper on Foreign Subsidies, the European Commission is seeking to strengthen control over subsidies from foreign states in the EU. The proposed new toolbox allows for ex-ante and ex-post control measures to intervene where foreign subsidies potentially distort the level playing field of the EU single market. If implemented, the new powers would heavily affect M&A transactions in the EU that are supported by foreign governments as well as the activities of foreign-subsidised companies operating in the EU.

This new push is in line with the Commission’s New Industry Policy agenda and follows the recently tightened EU rules on foreign direct investments that will enter into force in October 2020. Strengthening the level playing field in the EU single market is and will remain a top priority of the EU, as highlighted by Commissioner Vestager: “Europe’s economy is open and closely interlinked to the rest of the world. If this is to remain a strength, we must stay vigilant. […] The Single Market is key to Europe’s prosperity and it only works well if there is a playing field.” 

On 17 June 2020, the European Commission (Commission) published its long-awaited White Paper on Foreign Subsidies in the Single Market (the White Paper) proposing new tools to control the activities and acquisitions of foreign-subsidised companies in the EU.1

The new tools comprise (i) a general (ex-post) control mechanism to review distortions caused by foreign subsidies to companies active in the EU; (ii) a mandatory (ex-ante) notification mechanism to review foreign-subsidised acquisitions of EU companies, including certain non-controlling minority investments; and (iii) adjustments to EU public procurement rules to exclude bidders benefitting from distortive foreign subsidies from public tenders in the EU. The White Paper also sets out a general approach to foreign subsidies in the context of EU funding.

If the current proposals were to become law, the new tools would have significant implications for foreign-subsidised companies operating in the EU and foreign investments in the EU that are financed by foreign subsidies. The Commission has opened a public consultation and invited stakeholders to give their views until 23 September 2020 with a view to publishing legislative proposals in the course of 2021.

Potential risks of foreign subsidies distorting the EU single market

The proposed new tools aim at strengthening the competitiveness and level playing field of the EU single market, one of the key policy objectives under the Commission’s New Industry Policy agenda.2 Although the new instruments will apply to subsidies from all non-EU governments, this initiative was pushed by the increasing concern amongst certain member states and the EU’s industrial sector that, without additional rules, EU companies would be significantly disadvantaged in their competitiveness vis-à-vis businesses supported by foreign subsidies, in particular from China.

Foreign subsidies can potentially distort the level playing field in the EU single market in several ways, by (i) supporting businesses active in the EU at the expense of more efficient and innovate operators; (ii) facilitating acquisitions of EU companies by allowing the subsidised buyers to outbid other bidders through excessive purchase prices; (iii) helping foreign companies to outbid rivals in public tenders by submitting bids at below market price or even below cost, allowing them to win public procurement contracts that they would otherwise not have been awarded; or (iv) enabling companies to unfairly obtain access to EU funding.