Since 5 May 2022, EU trilogue negotiations have been underway on the first Regulation to limit the effect of subsidies from third countries to companies active in the EU. That an agreement will be reached can be considered a certainty. The Regulation could be applicable as early as the first half of 2023. The three new tools envisaged by the Regulation also mean new compliance burdens for many European companies.
This article presents the most important amendments to the Commission's draft proposed by the European Parliament and the Council in the trilogue.
First Regulation of its kind
Existing European state aid law only concerns state aid from EU Member States. The new Regulation is intended to close the existing gap by also targeting subsidies from third countries. There are no comparable examples in the world. WTO law regulates subsidies only with regard to a limited number of cases.
The Commission's proposal for the Regulation contains three tools:
Tool 1: A notification-based investigative tool for mergers, acquisitions and joint ventures (concentrations) above certain thresholds.
Tool 2: A notification-based investigative tool for bids in public tenders with a contract value above certain thresholds.
Tool 3: An ex-officio investigative tool for all other market situations as well as for concentrations and public procurement procedures below the thresholds applicable to tools 1 and 2.
It should be noted that the Regulation not only concerns companies from outside the EU. The addressees are also EU companies that receive a subsidy from another state, for example via a branch in Brazil.
Tools 1 and 2 can mean additional obstacles and procedural delays for companies in concentrations and public tenders. Tool 3, in particular, can lead to uncertainties, as the draft authorises the EU to investigate an alleged foreign subsidy granted up to 10 years ago on its own initiative.
The most important amendments which the European Parliament and the Council are proposing in the trilogue are presented below.
What is a foreign subsidy and when does it distort the internal market?
The Parliament and the Council adhere to the Commission's approach concerning the definition of a foreign subsidy.
A foreign subsidy is deemed to be where a third country (including, e.g. private entities whose actions can be attributed to the state) provides a financial contribution which confers a benefit to an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries.
The term "financial contribution" is broad. A list in the draft mentions, among other things, grants, loans and the provision and purchase of goods or services. Both the Parliament and the Council intend for the list to be non-exhaustive.
However, the Parliament is proposing to exclude the provision or purchase of goods and services from the notion of financial contribution if they are the result of a competitive, transparent, non-discriminatory and unconditional tender procedure. Otherwise, almost any contract with a public authority or a public undertaking could be regarded as being a financial contribution.
This is particularly relevant because, for the purposes of calculating whether the thresholds for the notification requirements for concentrations and public tenders have been reached, it is the financial contributions received that matter and not the foreign subsidies received.
Furthermore, the Parliament and the Council are in favour of the fact that the granting of special or exclusive rights to an undertaking without receiving adequate remuneration can also constitute a financial contribution.
According to the draft Regulation, an overall assessment of aspects determines whether a foreign subsidy distorts the internal market. In addition, the draft names some subsidies that are particularly likely to distort the internal market, e.g. unlimited guarantees. The Commission therefore has a wide margin of discretion which the Parliament and the Council support. However, both are calling on the Commission to publish guidelines in a timely manner explaining in more detail when the Commission considers that the internal market is being distorted. The Council is requiring such guidelines to be published from the date of application of the Regulation.
Parliament is requesting that the Commission, when assessing whether a foreign subsidy distorts the internal market, also take into account whether the third country in question has its own subsidy regulation that corresponds to the level of protection of European state aid law and whether the foreign subsidy was granted in accordance with this national system.
Regarding the handling of "smaller" amounts of foreign subsidies, the Parliament and the Council are pursuing different directions. The Parliament wants to reduce the amount that a company can receive over a consecutive period of three fiscal years, and for which it should be considered unlikely that there is a distortion of the internal market, from EUR 5 million to EUR 4 million. The Council not only wants to maintain the EUR 5 million, but also wants to introduce a de minimis clause on the basis of which a foreign subsidy to an undertaking will not be considered a distortion of the internal market if its total amount does not exceed EUR 200,000 per third country over a consecutive period of three fiscal years.
When is a foreign subsidy compatible with the internal market?
The draft provides for the Commission to assess each foreign subsidy to determine whether the positive effects outweigh the negative effects of the market distortion (balancing test). If the positive effects outweigh the negative effects, no measures are required (e.g. commitments by the company to publish certain research and development results to counterbalance the distorting effect of the foreign subsidy).
The draft grants the Commission a wide margin of discretion in this balancing test. The Parliament and the Council do not challenge this, but demand that the Commission provide guidelines on the criteria to be applied for the balancing test. The Council is requiring these guidelines to be introduced as of the date of applicability of the Regulation.
It is noteworthy that both the Parliament and the Council are asking the Commission to only consider the positive effects that occur in the internal market, but not - as foreseen in the draft - also positive effects that occur outside, e.g. in the third country.
Tool 1: Notification-based investigative tool for concentrations
The draft Regulation includes an ex-ante notification and approval requirement for mergers, acquisitions and joint ventures. This is intended, in particular, to prevent companies from non-EU Member States from acquiring companies in the EU or outbidding them with the help of subsidies from non-EU Member States. Nevertheless, this Regulation also applies indiscriminately to companies from the EU. The assessment of the existence of a distortion of the internal market is limited to the concentration in question.
This is an independent procedure in addition to, for example, EU merger control. Notified concentrations may not be implemented during the assessment.
According to the draft Regulation, a concentration only needs to be notified if the acquired company, at least one of the merging companies or, in the case of joint ventures, the joint venture itself or one of its parent companies is established in the EU and has a total turnover in the Union of at least EUR 500 million.
While the Council wants to increase this threshold to EUR 600 million, the Parliament wants to lower it to EUR 400 million. However, both the Parliament and the Council want to ensure that only those joint ventures are covered that have their own link to the EU. According to their proposed amendments, the joint venture itself would have to be established in the EU and meet the relevant turnover threshold on its own.
Neither the Parliament nor the Council is questioning the fact that the notification requirement only applies if the companies involved have received more than EUR 50 million in financial contributions from third countries (not necessarily foreign subsidies) in the three preceding calendar years. Only the financial contributions granted in the previous three years are to be assessed in each case.
Furthermore, the Parliament and the Council see no need for changes to the time limits. According to the draft, the Commission will initially have 25 days to examine the complete notification.After initiating an in-depth investigation, the Commission will have 90 days. The time limit may be extended under certain circumstances.
Tool 2: Notification-based investigative tool for bids in public tenders
The second tool is designed to prevent companies from using foreign subsides to submit an unduly advantageous bid in public procurement procedures. The Commission assesses this and the question of whether there is a distortion in the internal market only in relation to the respective procurement procedure.
According to the draft, tenderers in a procurement procedure with a value of EUR 250 million or more must notify the contracting authority of all foreign financial contributions they have received in the three years preceding this notification.
The Council would like to soften this approach. The Council is therefore calling for the threshold to be raised to EUR 300 million and for special rules for cases where the contract is split into several lots and the bidder only bids on a few lower-value lots. In addition, the Council would like a notifiable financial contribution to only apply if the company (including, e.g. subsidiaries) as well as important subcontractors and suppliers have received financial contributions of EUR 5 million or more per third country from third countries in the last three years prior to the notification. By contrast, the Parliament is calling for the threshold for the contract value to be lowered to EUR 200 million.
According to the draft, financial contributions from third countries to main subcontractors and main suppliers must also be reported. A subcontractor or supplier is deemed to be a main subcontractor or main supplier if its participation ensures key elements of the performance of the contract or if the economic share of its contribution exceeds 30 % of the estimated value of the contract. Among other things, the Parliament and the Council want to reduce the percentage to 20 %. In addition to this, the Parliament, for example, wants to explicitly add a provision establishing that the bidder is not liable for the information received from main subcontractors or main suppliers.
How much time the Commission should have for the assessment once the contracting authority has forwarded the notifications to the Commission is currently under discussion. This is particularly relevant because the contract may not be awarded, as a matter of principle, before the expiry of the time limit if the outcome of the assessment may have an impact on the award decision. The Commission is proposing 60 days for the preliminary review and that a decision to close an in-depth investigation must be taken no later than 200 days after receipt of the notification, with the possibility of an extension. Both the Parliament and the Council consider the procedural durations provided for in the draft to be too long.
The Parliament takes the view that the period for the preliminary review should be reduced to 40 days and that the period for the decision on the closure of the in-depth investigation should be reduced to 120 days, with the possibility of an extension of 20 days. The Council is proposing 20 working days for the preliminary review, extendable by 10 working days if necessary, and 110 working days for the decision on the closure of the in-depth investigation, with the possibility of an extension of 20 working days under special circumstances.
The Council is also calling for further easing, e.g. an exclusion from award procedures according to Article 32(2) (b) and (c) of Directive 2014/24/EU, e.g. if a construction work, a supply or service can only be provided by a certain economic operator for certain reasons.
Tool 3: Ex-officio investigative tool for all other market situations
The third tool allows the Commission to assess on its own initiative information from any source regarding alleged distortive foreign subsidies. The assessment is divided into a preliminary review and an in-depth assessment.
The Parliament and the Council are proposing limited amendments to this tool. It is therefore likely that the Commission will be granted a number of competences, including requests for information, interim measures, inspections both inside and outside the EU (with the consent of the company and the third country). In addition, in the absence of cooperation, the Commission will be free to decide on the basis of the information available.
If the Commission concludes that the foreign subsidy distorts the internal market, the company can offer commitments to eliminate the distortion or the Commission can impose redressive measures. The Parliament is proposing that a company may be obliged to notify the Commission for a period of time of any participation in a public tender, regardless of whether the threshold applicable to the second tool is reached. In addition, fines can be imposed for some infringements. By way of referrals, many of the provisions of the third tool also apply to the other two tools.
The Parliament is proposing that the Commission establish a contact point to which companies can turn, for example, if they suspect that another company is receiving distortive foreign subsidies.
There is consensus that the Commission may investigate foreign subsidies granted up to ten years ago.
However, there are different positions on the extent of a transitional provision. The Commission is proposing that the Regulation should apply to all foreign subsidies granted in the ten years preceding the date of application of the Regulation, if these foreign subsidies distort the internal market after the date of application of the Regulation. Parliament is proposing a reduction from ten years to the past seven years and the Council is proposing five years.
Consequences for companies
Although the positions of the Commission, Council and Parliament are not far apart, relevant uncertainties remain for companies. A lot will depend on how the Commission applies the Regulation in practice.
While the new regulation will give companies in the EU more opportunities to assert fair competition conditions against companies from non-EU countries, EU companies should remember that the additional requirements also apply to them. Companies need to gain clarity about where they receive financial contributions worldwide, when and for what purpose. Companies must also build up this knowledge retrospectively for previous years. This could prove challenging, especially for companies engaging in international activities. The broadness of the definition of a financial contribution makes it even more challenging.
As an agreement in the trilogue procedure is expected so soon that the Regulation can be expected to become applicable in the first half of 2023, companies should not miss the opportunity to prepare themselves in due time. We help companies to prepare for the foreign subsidy Regulation and to assess the related business risks.