The EU’s Foreign Subsidy Regulation: What does this mean for GPCA members?
By Arnoud Willems, Dr. Ines Willemyns and Dr. Bregt Natens
On 13 January 2023, the EU’s Foreign Subsidy Regulation (“FSR“) entered into force. The aim of the FSR is to offset distortions to the EU internal market created by subsidies granted by non-EU countries to companies operating on the EU market.
The FSR is a novel, far-reaching instrument. First, the broad scope covers almost any financial contribution, direct or indirect, from a non-EU government that confers a benefit to a company active on the EU market. Examples are a tax benefit or the provision of low-priced energy. Second, the FSR contains several new rules and tools that will affect how companies do business in the EU. Crucially, the FSR gives the European Commission (“Commission“) sweeping powers to initiate investigations into any financial contribution that piques its interest. In addition, the FSR requires companies to disclose financial contributions they have received from a non-EU government in case of certain mergers and acquisitions (“M&A“) and public procurement tenders.
This article briefly sketches the framework of the Commission’s new powers and how GPCA members can prepare to comply with the FSR.
1. The Commission can initiate ex officio investigations
Much reporting on the FSR has focused on the far-reaching notification obligations that will apply with transactions and public procurement (of which we provide an overview below). However, companies should not lose sight of the power for the Commission to initiate ex officio investigations into any foreign subsidy. The Commission can initiate these investigations as from 12 July 2023. Here are four key takeaways.
Any source of information can trigger a review – The Commission can examine information regarding alleged foreign subsidies distorting the EU market provided by any source. That includes EU Member States, natural or legal persons, or associations. The FSR does not set out a procedural framework for the supply and subsequent examination of such information. This entails that even informal ‘whistleblowing’ to the Commission by a competitor, or information found in public sources (e.g., newspaper articles or social media posts) could trigger a review into whether financial contributions received from non-EU governments constitute subsidies that distort the EU market.
A financial contribution under the FSR is defined broadly – The FSR defines “financial contribution” broadly, in line with the definition set out in the World Trade Organization’s Agreement on Subsidies and Countervailing measures. The concept includes:
- The transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, the offset of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling,
- The foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration,
- The benefits received from specific tax regimes or tax incentives, tax deductions/credits for certain investments, etc., and
- The provision or purchase of goods or services.
Examples of financial contributions that might be relevant in GPCA members’ industry include energy rates set by the government, duty drawbacks for raw materials, beneficial tax rulings, granting of captive mining rights, provision of land use rights and tax offsets for R&D activities.
Review by the Commission can be extensive and invasive – Upon receipt of any information that a financial contribution might distort the EU market, the Commission will initiate a preliminary review. Under the preliminary review, the Commission may request “all necessary” information from the company under investigation, but also from other companies, associations, EU Member States, and non-EU governments. In addition, the Commission can carry out on-the-spot inspections (and, in doing so, examine books and business records and seal business premises and books or records for the duration of the inspection). Inspection is also possible of premises in non-EU countries, as long as the non-EU government does not object to that inspection.
When the Commission has sufficient indications that a company has been granted a foreign subsidy that distorts the EU market, or has the potential to distort the EU market, it will initiate an in-depth investigation in which it can seek all information it considers necessary. To find a distortion in the EU market, the Commission takes account of several indicators, including the amount and nature of the subsidy, the situation of the company (e.g., size and sector), the level and evolution of economic activity of the company on the EU market as well as the purpose and conditions attached to and the use of the financial contribution on the EU market.
The FSR has (sharp) teeth – When the Commission finds that a foreign subsidy distorts the EU market, it can impose redressive measures in order to remedy the distortion. The Commission has a wide margin of discretion in choosing a “proportionate but effective” redressive measure, and the FSR provides some (far-reaching) examples: the Commission can order the company to (1) reduce its market presence (e.g., temporary restriction on commercial activity), (2) refrain from certain investments, (3) divest certain assets, or (4) repay the subsidy (plus interest).
2. New notification requirements in M&A transactions and public tenders
The FSR also imposes notification obligations that will apply as of 12 October 2023 to all companies that operate on the EU market. Through these notifications, the Commission will conduct ex ante assessments of M&A transactions and public tenders that exceed certain value thresholds.
Suspensory notification of M&A transactions – Companies that have received financial contributions exceeding EUR 50 million from non-EU governments in the last 3 years must notify transactions for which the target company or one of the merging companies established in the EU has an aggregate EU-wide turnover of at least EUR 500 million. Transactions might only be implementable 25 working days after the Commission has received a complete notification, or after 130 working days if the Commission opens an in-depth investigation.
Suspensory notification of public tenders – Bidders for EU public tenders for which the contract value exceeds EUR 250 million must notify all financial contributions received from non-EU governments. Where at least one bidder and its subsidiaries, main subcontractors and suppliers have received more than EUR 4 million in financial contributions from a non-EU government over the last three years, the EU Member State issuing the tender must notify the bid to the Commission. Following notification, the public tender can only be awarded after the Commission has reviewed the financial contributions.
3. How GPCA members can prepare
The FSR is an important new instrument in the EU’s toolkit for addressing alleged trade distortions. It has created extensive new powers for the Commission to scrutinize financial contributions granted to companies that operate in the EU market. GPCA companies that operate on the EU market and expect to trigger the M&A or public procurement thresholds should prepare for the application of the FSR in order to minimize disruption to their business. Importantly, GPCA members who think someone might ask the Commission to investigate foreign subsidies should also prepare an action plan. Preparations could include the following two actions.
- Map financial contributions from non-EU governments – As noted, the concept “financial contribution” is very broad. This means a broad range of government actions could trigger an investigation or a notification obligation. Companies would do well to understand their potential exposure to the FSR, in order to (1) understand the likelihood that an investigation results in redressive measures, and (2) frontload the administrative burden and minimize delays in the notification of covered transactions and public tender bids that fall within the scope of the FSR.
- Develop strategy to rebut finding of distortive foreign subsidies – Following the mapping exercise, companies who received financial contributions in sensitive areas might want to proactively consider ways to (1) rebut a finding from the Commission that the financial contribution is a specific subsidy distorting the EU market, and/or (2) establish the overall positive effect of the foreign subsidy as a defence.
4. Uncertainty surrounding application and way forward
Questions remain on the FSR’s application – The broad formulation of much of the FSR leaves open the question how certain rules will be applied in practice. For example, at the moment, it is unclear whether the Commission will apply a materiality threshold to initiate ex officio investigations.
In the coming weeks, the Commission will present a draft Implementing Regulation that will hopefully clarify the applicable rules and procedures. In addition, the Commission will publish guidelines that aim to clarify the criteria for determining, among others, the existence of a distortion caused by a foreign subsidy in the EU market, and the application of its power to request a prior notification of any transaction or public tender.
Way forward – Even if the FSR will be challenged in court, it will be on the books for several years. Other countries might also adopt a similar tool. This means that companies caught by the FSR should consider alternative (and less onerous) routes to address subsidies.
One alternative could be for OECD members to agree to something like a Foreign Subsidies Arrangement, similar to the existing OECD Export Credit Arrangement, which contains conditions under which export credits are deemed acceptable. This is especially relevant to areas like the Gulf, as the FSR will likely erode the competitive advantage of abundant energy. A multilateral solution, like an OECD arrangement, could focus on ensuring that instruments like the FSR focus on subsidies that are not the result of natural competitive advantages.