The EU Foreign Subsidies Regulation[1] (the "FSR") entered into full force in October 2023. We take a detailed look at what this means for foreign transactions in the EU.

In essence, the FSR seeks to ensure that foreign subsidies (i.e. subsidies granted to undertakings[2] by non-EU Member States) do not undermine the "level playing field" of the EU internal market.

For example, if a business active within the EU received a high value subsidy from a non-EU government, this foreign subsidy could have a distortive effect upon the EU internal market.

Subject to limited exceptions, the FSR therefore enables the European Commission (the "Commission") to:

  • investigate whether a foreign subsidy actually or potentially distorts the EU internal market; and
  • impose proportionate measures to remedy any distortive effects resulting from the foreign subsidy, which in the context of a transaction, could include the Commission prohibiting the transaction.

The FSR also introduces specific notification requirements in relation to certain transactions, and in the context of public procurement procedures.

Where a transaction triggers a notification requirement under the FSR, that transaction cannot be implemented until it has been approved by the Commission.

A failure to observe this "standstill" requirement under the FSR may result in the Commission imposing a fine upon the undertaking concerned of up to 10% of its group worldwide turnover.

The thresholds that need to be satisfied for a transaction to trigger a notification requirement under the FSR are considered further below.

Importantly, the FSR operates in addition to: (i) the existing EU competition law, State aid and merger control regimes; and (ii) any applicable regimes in EU Member States (e.g. domestic foreign investment screening laws).

With this in mind, parties planning transactions will need to carefully consider whether any notification and "standstill" requirements arise under the FSR, in addition to any other relevant notification and "standstill" requirements, and factor all such relevant obligations into the transaction timeline.

Even where a transaction does not trigger a notification requirement under the FSR, parties should have in mind the possibility of the Commission opening an investigation of its own volition (a so-called ex officio investigation, as outlined further below), and ensure that any associated risks are considered and mitigated insofar as possible when planning the transaction.

Notification Thresholds

The following thresholds apply to determine whether a transaction triggers a notification requirement under the FSR.

Relevant transaction

Is there a relevant transaction, specifically: (i) a merger; (ii) an acquisition; or (iii) the creation of a full-function joint venture ("JV") within the meaning of the EU Merger Regulation[3] ("EUMR ")?

If the transaction does not result in a change of control on a lasting basis, or does not constitute the creation of a full-function joint venture, then it will fall outside of the notification requirement.

Relevant value of EU turnover

Depending upon the relevant transaction, are any of the following established in the EU with an aggregate EU turnover of at least EUR 500 million in its most recently completed financial year?

  • In the context of a merger, at least one of the merging undertakings.
  • In the context of an acquisition, the target undertaking.
  • In the context of a JV, the JV itself.

The Commission has confirmed that an entity is "established in the EU" if it has a subsidiary within the EU, or has a permanent place of business within the EU.

If not, then the transaction will fall outside of the notification requirement.

Relevant value of financial contributions provided by non-EU countries

Depending upon the relevant transaction, does the value of the combined aggregate financial contributions provided by non-EU countries to the relevant entities exceed EUR 50 million in the three years prior to: (i) the conclusion of the agreement; (ii) the announcement of the public bid; or (iii) the acquisition of a controlling interest?

  • In the context of a merger, the relevant entities are the merging undertakings;
  • In the context of an acquisition, the relevant entities are the acquirer (or acquirers), and the target; and
  • In the context of a JV, the relevant entities are the undertakings creating the JV and the JV itself.

If the relevant value does not exceed EUR 50 million, then the transaction will fall outside of the notification requirement.

In this context, financial contributions will include: (i) transfers of funds or liabilities (e.g. capital injections; grants; loans); (ii) the foregoing of revenues that are otherwise due (e.g. tax exemptions), or the granting of special or exclusive rights without receiving adequate remuneration; and (iii) the provision or purchase of goods or services, even where these have been purchased by a public authority following a genuinely competitive, transparent, and non-discriminatory tender procedure.

Financial contributions provided by a non-EU country will include financial contributions provided by:

  • the central government of a non-EU country, or a public authority at any level within a non-EU country;
  • a foreign public entity the actions of which can be attributed to a non-EU country, having regard to elements including: (i) the characteristics of the foreign public entity; and (ii) the legal and economic environment in the jurisdiction within which the foreign public entity operates, including the role of the relevant government in the economy; and
  • a private entity the actions of which can be attributed to a non-EU country (e.g. where the private entity has been directed or entrusted by a non-EU country to undertake certain actions).

A financial contribution is provided by a non-EU country from the time at which the beneficiary obtains a legal entitlement to receive the financial contribution; the actual receipt of a financial contribution is not required to bring this within the scope of the FSR.

Notification and "standstill" requirement under the FSR

A relevant transaction will therefore trigger a notification and "standstill" requirement under the FSR where:

  • the relevant EU turnover achieved in the most recently completed financial year was at least EUR 500 million; and
  • the relevant value of the financial contributions provided by non-EU countries in the three years prior to:
    • the conclusion of the agreement;
    • the announcement of the public bid;
    • or the acquisition of a controlling interest exceeds EUR 50 million.

Where these thresholds are satisfied, the transaction must be notified to the Commission using a Form FS-CO, which sets out the information and supporting documentation to be provided (with the supporting documentation including certain of the parties' internal documents).

As noted above, the transaction cannot be implemented until it has been approved by the Commission, and a failure to observe this "standstill" requirement may result in the imposition of a fine upon the undertaking concerned of up to 10% of its group worldwide turnover achieved in the preceding financial year.

Pre-notification discussions

Parties are encouraged to engage in pre-notification discussions with the Commission, focussing upon a draft Form FS-CO completed by the parties.

Pre-notification discussions enable the parties to raise issues with the case team, and provide additional information in response to the case team's requests, so as to seek to ensure that the finalised Form FS-CO will be accepted as complete by the Commission.

The FSR does not set out any timelines for pre-notification discussions, and each notification will be subject to its own facts and circumstances.

However, the Commission's case team will aim to conclude pre-notifications discussions as promptly as possible, in order to enable the Commission to commence its review of the transaction (once formally notified and accepted as complete).

Timelines in relation to a notification

Once a notification has been accepted as complete (usually following pre-notification discussions with the case team):

  • the Commission has a preliminary period of 25 working days from receipt of a complete notification[4] within which to decide to:
    • close its preliminary assessment; or
    • open an in-depth investigation; and
  • if the Commission decides to open an in-depth investigation, it has an additional period of 90 working days[5] (which will be extended by an additional 15 working days if commitments are offered to remedy any distortion of the EU internal market, and which may be extended by up to a further 20 working days) within which to:
    • approve the transaction by adopting a "no objection" decision;
    • approve the transaction subject to the acceptance of legally binding commitments to remedy any distortion to the EU internal market; or
    • prohibit the transaction.

While the timelines under the FSR (at least in theory) broadly align with those under the EUMR , in practice there is no certainty that an FSR assessment will run in parallel with an assessment under the EUMR , particularly as the two regimes address different concerns.

Ex officio investigations

Outside of the notification requirement, the Commission can open an ex officio investigation if it receives information regarding alleged foreign subsidies distorting the EU internal market.[6]

In the context of an ex officio investigation, the Commission is able to request information from various sources (e.g. the undertakings under investigation, trade associations, EU Member States, and non-EU countries), and proceed to conduct a preliminary assessment.

The FSR also permits the Commission to exercise powers to attend and gather information, including: (i) undertaking physical inspections of business premises; (ii) examining business records; and (iii) asking individuals for explanations of facts or documents.

The Commission can exercise these powers in the context of ex officio investigations (as well as investigations into notified transactions), and these powers are exercisable by the Commission: (i) within the EU; and (ii) outside of the EU, provided that the Commission has officially notified the government of the non-EU country in question, and the government has not objected.

If the Commission proceeds to open an in-depth ex officio investigation following its preliminary assessment of the transaction, the Commission may subsequently decide to:

  • approve the transaction by adopting a "no objection" decision;
  • approve the transaction subject to the acceptance of legally binding commitments to remedy any distortion to the EU internal market; or
  • impose measures to remedy any distortion to the EU internal market, including, for example, undoing a completed transaction, or requiring the divestment of assets,

and the Commission will endeavour to adopt a decision within 18 months of opening this in-depth investigation.

Assessment of whether foreign subsidies distort the EU internal market

While the FSR uses financial contributions provided by non-EU countries to determine whether a notification is required (as outlined above), the substantive focus of an investigation is upon the extent of any foreign subsidies provided by non-EU countries, irrespective of whether the transaction is notified to the Commission, or is the subject of an ex officio investigation by the Commission.[7]

For the purposes of the FSR:

"a foreign subsidy shall be deemed to exist where a [non-EU country] provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries".[8]

Therefore, if a non-EU country purchased services from an undertaking in accordance with normal market conditions (e.g. following a genuinely competitive, transparent, and non-discriminatory tender procedure), the income that the undertaking received from those sales:

  • would constitute a financial contribution provided by a non-EU country; and
  • would not be a foreign subsidy under the FSR, as no "benefit" has been conferred on the undertaking, due to the fact that the non-EU country purchased the services in accordance with normal market conditions.

Where a foreign subsidy exists (e.g. if a non-EU country purchased services from an undertaking on conditions that were clearly more favourable than normal market conditions), the Commission will assess whether that subsidy would actually or potentially distort the EU internal market.

A distortion in the EU internal market will be deemed to exist under the FSR where:

"a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market".[9]

The Commission is able to conduct its assessment by reference to a range of factors, including:

  • the value and nature of the foreign subsidy;
  • the position of the undertaking receiving the foreign subsidy, including its size, and the markets or sectors upon which it is active;
  • the level and evolution of the activities conducted on the EU internal market by the undertaking receiving the foreign subsidy;
  • the purpose of the foreign subsidy, and the conditions relating to the provision of the foreign subsidy; and
  • the use of the foreign subsidy with the EU internal market.

Foreign subsidies most likely to be considered distortive

Examples of foreign subsidies that are most likely to be considered distortive for the purposes of the FSR include where the subsidy in question is:

  • granted to an ailing undertaking;
  • in the form of an unlimited guarantee for the debts or liabilities of an undertaking;
  • an export financing measure that does not accord with the OECD Arrangement on officially supported export credits; and
  • directly facilitates a transaction.

Balancing test under the FSR

If the Commission considers that a foreign subsidy would actually or potentially distort the EU internal market, it may proceed to balance the effects of that subsidy against any positive effects of the subsidy (e.g. in relation to the development of the relevant economic activity within the EU internal market).

The Commission may also consider any other positive effects of the subsidy in the context of relevant policy objectives, including EU-level policy objectives.

Where the Commission has undertaken this balancing test, it shall bear in mind the outcome when deciding whether to impose remedies, or to accept any offered commitments.

Any questions?

If you have any questions surrounding the information discussed in this article, please contact Samuel Beighton or Bernardine Adkins.

Footnotes

[1] Regulation (EU) 2022/2560.
[2] The concept of an "undertaking" exists within EU competition law, and "covers any entity engaged in an economic activity, irrespective of the legal status of that entity and the way in which it is financed, and thus defines an economic unit even if in law that economic unit consists of several persons, natural or legal …That economic unit consists of a unitary organisation of personal, tangible and intangible elements, which pursues a specific economic aim on a long-term basis". See, Case C‑882/19 Sumal SL v Mercedes Benz Trucks España SL ECLI:EU:C:2021:800.
[3] See, Article 3, Council Regulation (EC) No. 139/2004.
[4] Commencing the working day after receipt of the complete notification.
[5] Commencing the working day after its decision to open an in-depth investigation.
[6] Where there are sufficient indications that a financial contribution constitutes a foreign subsidy and distorts the EU internal market, and there is a risk of serious and irreparable damage to competition on the EU internal market, the Commission may decide to impose interim measures (e.g. pending the outcome of an investigation) in order to preserve competition and prevent irreparable damage.
[7] Foreign subsidies that fall within the scope of the WTO Agreement on Subsidies and Countervailing Measures cannot be remedied under the FSR. However, where such subsidies constitute financial contributions provided by non-EU countries, then they must be taken into account when determining whether the notification thresholds are satisfied.
[8] See, Article 3(1), FSR.
[9] See, Article 4(1), FSR.