EU Commission proposes new investigative review tools to tackle market distortions by foreign subsidies


On 5th May 2021, the European Commission proposed the Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market (Foreign Subsidies Regulation or FSR) to close a “regulatory gap” in existing tools protecting competition and tackling unfair trading practices. The FSR provides for the review and regulation of foreign-subsidised transactions that create distortions in the EU single market.

The Commission will be the designated authority to watch over foreign subsidies and be equipped with 145 new posts (FTE). The FSR will create obstacles for companies that have received foreign subsidies from or attributable to third countries. It will likely have an impact on undertakings from the People's Republic of China, but companies from other countries will likely also be affected.

The FSR foresees a notification obligation at the Commission even for smaller transactions and will facilitate stricter controls for dumping in public procurement procedures. The FSR is complemented by a new ex officio review tool, which will allow the Commission to investigate alleged foreign subsidies distorting the internal market. In practice, this will likely trigger complaints by EU companies to the Commission against alleged foreign subsidies that distort the internal market.

Definition of foreign subsidies

According to Art. 2 FSR, a measure will constitute a foreign subsidy when it fulfils three conditions:

  • A third country provides a financial contribution;

  • Which confers a benefit to an undertaking engaging in an economic activity in the internal market; and

  • The benefit is limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries.

For more legal certainty, the FSR foresees a number of concrete examples for a financial contribution, which include the transfer of funds or liabilities (e.g. capital injections or loans and guarantees), the foregoing of revenue that is otherwise due or the provision or purchase of goods or services. The financial contribution can be provided by the central government or government authorities at all other levels, and also by foreign public entities or any private entity whose actions can be attributed to the third country.

The Commission will determine if the foreign subsidy will lead to a distortion on the internal market according to Art. 3 FSR. To this end, the Commission will take several factors into account, which are explicitly mentioned in Art. 3 (1) FSR. Pursuant Art. 3 (1) FSR, a foreign subsidy is unlikely to distort the internal market if its total is below EUR 5 million of any consecutive period of three fiscal years (Art. 3 (2) FSR). Subsidies granted to ailing undertakings, subsidies in the form of an unlimited guarantee for debts or liabilities, subsidies directly facilitating a concentration and subsidies enabling an undertaking to submit an unduly advantageous tender will be regarded as most likely to distort the internal market (Art. 4 FSR).

In Art. 5 FSR, the proposal foresees a balancing test, meaning that the Commission can balance the negative effects of the foreign subsidy (i.e. distortion on the internal market) with positive effects on the development of the relevant economic activity.

A new tool to investigate the existence and impact of foreign subsidies

The first tool, which is introduced in Art. 7 FSR, is the Ex-Officio Review of Foreign Subsidies. Comparable to investigations in EU state aid control, the Commission can open an ex officio investigation on alleged distortive foreign subsidies. The investigation can have   two phases:

  • During the preliminary review (phase 1), the Commission will seek all the information necessary to assess if the financial contribution constitutes a foreign subsidy and distorts the internal market. At the end of the preliminary review, it will either adopt the decision to initiate an in-depth investigation according to Art. 8 (2) FSR or close the preliminary review according Art. 8 (3) FSR.

  • During the in-depth investigation (phase 2), the Commission will further assess the foreign subsidy distorting the internal market. At the end of the investigation, the Commission will either adopt a decision with redressive measures (Art. 9 (2) FSR), a decision with commitments (Art. 9 (3) FSR) or a no objection decision where it finds that the preliminary assessment is not confirmed or that the distortion on the internal market is outweighed by positive effects (Art. 9 (4) FSR). 

FSR to add further M&A-hurdle to merger and foreign investment control

The second tool will particularly target foreign subsidies having an effect on mergers, acquisitions of single or joint control or the creation of joint ventures (i.e. concentrations).  Under Art. 18 (1) and (3), 19 FSR, mergers and acquisitions resulting in a ‘change of control’ would be notifiable prior to their implementation and following the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest, with leeway for earlier notifications (Art. 19 (2) FSR) if:

  • the acquired undertaking or at least one of the merging entities is established in the EU and generates an aggregate turnover of at least EUR 500 million; and

  • the undertakings concerned received from third countries an aggregate financial contribution in the three calendar years prior to notification of more than EUR 50 million.

The FSR introduces these thresholds to capture only the most relevant concentrations, which also apply mutatis mutandis to the creation of a joint venture (Art. 18 (2) and (4), 19 FSR).

Notifiable concentrations are subject to a standstill obligation under Art. 23 (1) FSR before notification and pending a preliminary review of 25 working days and a potential in-depth investigation with a time limit of 90 working days (phase 2). Phase 2 is subject to further extensions in case of commitment offers or failure to respond to RFIs. Here, the review is also concluded either by a no objectiondecision, a request for commitments or a prohibition decision if the Commission finds that a foreign subsidy distorts the internal market (Art. 24 (3) FSR). In case a prohibited concentration has already been implemented, the Commission may require the parties to unwind the concentration by dissolution or order any other appropriate measure to achieve such restoration as required in its decision (Art. 24 (6) FSR).

A failure to notify will be met by a request for an ex post notification (Art. 19 (4) FSR). Even where the thresholds are not met, the Commission may request prior notification where it suspects benefits from foreign subsidies in the three years prior to the concentration (Art. 19 (5) FSR).

Delays in public procurement procedures expected

The third tool allows the Commission to investigate foreign subsidies in public procurement procedures. The FSR introduces an obligation to notify foreign financial contributions in Art. 28 (1) FSR when the estimated value of the public procurement is equal or greater than EUR 250 million (i.e. notifiable contribution – Art. 27 (2) FSR). The Commission will consider subsidies granted during the three years prior to the notification (Art. 26). The Commission can also request the notification of financial contributions when the relevant threshold is not met under the conditions of Art. 28 (6) FSR. This obligation to notify in Art. 28 (1) FSR extends to economic operators, groups of economic operators, main subcontractors and main suppliers – the last two will be deemed main where their participation ensures key elements of the contract performance and in any case where the economic share of their contribution exceeds 30% of the estimated value of the contract (Art. 28 (2) FSR).

Again, the procedure is divided into a preliminary review with a time limit of 60 days and an in-depth investigation of 200 days (Art. 29 (2) and (4) FSR), both following the receipt of the notification. To close the in-depth investigation, the Commission can adopt a decision with commitments (Art. 30 (1),9 (3) FSR), a decision prohibiting the award of the contract (Art. 30 (2) FSR) or adopt a no objection decision ( Art. 30 (3), 9 (4) FSR.)

During the investigation, the evaluation may continue. However, the contracting authority may not award the contract before the Commission has reached a no objection decision if the time period of the in-depth investigation has elapsed. It can only do so if the tender evaluation has established that the undertaking in question has admitted the most economically advantageous tender. If the Commission prohibited the award, the contract may be awarded to the next best tender not subject to a prohibition decision. Where the commission adopts acommitment or a no objection decision, the contract may be awarded to any undertaking having submitted the most economically advantageous tender including the undertaking, which submitted the notification.

Investigate powers and enforcement

The FSR will equip the Commission with the necessary powers to investigate foreign subsidies and enforce the obligations of the FSR. It can issue RFIs and conduct inspections in the EU and third countries. However, the inspection in a third country depends on the consent of the undertaking concerned and the third country. In case of non-cooperation, the Commission can decide the case based on the facts available.

For providing incorrect, incomplete or misleading information, the Commission can issue fines (not exceeding 1% of the aggregate turnover of the preceding business year) and periodic penalty payments (not exceeding 5% of the average daily aggregate turnover). Where undertakings do not comply with the notification obligation or decision with commitments or redressive measures, the Commission may impose a fine not exceeding 10% of the aggregate turnover or the preceding business year as well as periodic penalty payments.

For more information on the FSR and regulations surrounding unfair trading practices and competition law in the EU, contact your CMS client partner or CMS experts: Michael Bauer, Kai Neuhaus, Roderick Nieuwmeyer, Roxana Kruse and Moritz Pottek.