In this article Jonathan Branton and Alexander Rose, Partners in DWF's EU/Competition team, consider the scope of the Regulation on Foreign Subsidies distorting the Internal Market including its potential to affect a wide range of commercial markets.
The EU Regulation 2022/2560 on Foreign Subsidies is a radical new law which empowers the European Commission to investigate, challenge and take action against organisations that have received financial assistance from third (non-EU) countries deemed to distort competition within the EU's Single Market. International businesses trading in the EU will need to adapt their practices to take account of the new rules. This includes those who have received certain levels of subsidy outside the EU having to make additional filings to the European Commission when engaging in M&A within the EU and in bidding for certain public contracts.
What is the European Union's Foreign Subsidies Regime?
The EU Foreign Subsidies Regulation is a new system of protection of competition and trade under which the European Commission will have powers to investigate, challenge and take action against organisations in receipt of subsidies from outside the EU, which then trade within the EU's Single Market. In practice this is a means of targeting competition from businesses which have received financial assistance from countries outside the reach of its own State aid rules that is deemed to be unfair. More than this however, it places a positive burden on companies that have benefited from subsidies from outside the EU to make formal notifications in certain M&A and public procurement situations, from which the European Commission may then form a view which in theory might exclude them from those competitions.
What is the objective of the EU Regulation on Foreign Subsidies?
The objective of the EU Foreign Subsidies Regime is to create a level playing field between businesses in the Single Market that are subject to EU State aid rules and those which trade within the EU, but who have received financial support from countries outside EU State aid law.
The EU has noted that the existing legislative frameworks to deal with competition in the EU's home market from companies benefiting from subsidies abroad has been limited to use of the EU Anti-Subsidy Regulation (based on the WTO Agreement on Subsidies and Countervailing Measures) and in other cases bilateral consultations with the third countries concerned. The Anti-Subsidy Regulation is there to combat imports of goods into the EU from third countries that might have benefited from subsidies in those third countries and which then proceed to cause injury to the domestic (EU) industry producing the like product. This is used sparingly and is a trade defence remedy limited to dealing with imports into the EU. What it does not do is address a situation whereby a foreign company, possibly a State owned company from abroad, can seek to buy EU businesses on the back of subsidies it receives at home, or compete in public procurement markets and undercut the competition based on subsidies it receives at home. The EU believes those situations are happening at present or at risk of happening, and that a legislative tool is required to combat this and protect fair competition in the EU's home markets,
The situation is considered exacerbated by the number of State owned enterprises from countries such as China and Russia. According to the World Economic Forum in 2019, China was reported to have 109 corporations listed on the Fortune Global 500, of which only 15% were privately owned. Russia has many State owned businesses, albeit the influence of these in the EU Single Market has waned considerably as a result of sanctions following the invasion of Ukraine.
What steps have been taken to create the EU Regulation on Foreign Subsidies?
The EU has adopted the EU Foreign Subsidies Regulation and published this in the Official Journal of the European Union. The Regulation enters EU law on 12 January 2023, with the new regime applying from 12 July 2023.
The Foreign Subsidies Regulation rests on two main pillars: the existence of subsidies in foreign markets, and the potential for a distortion of competition in the EU. What is a subsidy is generally the subject of relatively well-defined and accepted international norms, derived in part from the WTO Agreement on Subsidies and Countervailing Measures. The EU equivalent in its domestic law of what is a subsidy is of course EU State aid law and what is a State aid. The definition of foreign subsidy in the Foreign Subsidies Regulation is wider than the definition of State aid but the main thrust of "financial contribution which confers a benefit to an undertaking engaged in economic activity" is largely consistent.
What will be held to be a distortion of competition for the purposes of the Foreign Subsidies Regime is less clear and it is instructive that the European Commission appears to have reserved itself a very wide discretion here. It is plain that the EU runs its own State aid regime precisely to manage potential distortions of competition, and that all Member States within the EU are frequent deployers of subsidies themselves. At this stage it is not possible to say reliably how will the European Commission determine whether a given foreign subsidy would be capable of causing a distortion of competition to the extent that it would wish to take action against it. For example, if a foreign subsidy would be readily deliverable within the EU under State aid law, would the EU still be anxious to declare it as distorting competition under the Foreign Subsidies Regime?
Powers to Investigate Foreign Subsidies
Under the Regulation, the European Commission will have three main new powers to investigate financial contributions granted by public bodies outside the EU, these being:
- a power to investigate notifiable mergers and acquisitions (ie. "concentrations" defined in similar terms to the EU Merger Control Regulation) which involve a financial contribution from non-EU public sources (where the turnover of the company being acquired exceeds €500m and the public funded contribution is at least €50 million) (1). Notifiable concentrations must be notified to the European Commission prior to their implementation, and shall not be implemented for a period of at least 25 working days from the Commission receiving a confirmed complete notification. Within the initial period the Commission has the power to initiate an in-depth investigation for a further 90 working days, following which it may raise no objections, adopt a decision including commitments from the parties or prohibit the concentration;
- a power to examine bids in public procurements where there has been a financial contribution to a bidder and its group by a non-EU government of at least €4 million in the last three years prior to the date of submitting a tender or the first stage of the competition, and the estimated value of the procurement is €250m or greater (2). Bidders shall provide details of relevant foreign subsidies received either (in an open procedure) at the time of submission of tenders, or in any other procedure at the first point of initial selection and thereafter at the point of final tender if relevant. The declaration shall be given to the public authority in the EU Member State which is running the procurement and where the above thresholds are passed shall then be passed to the European Commission swiftly. Failure to provide such declarations following one reminder can be grounds for exclusion. The Commission shall carry out expedited reviews within 20 working days (extendable by another 10) and seek further information where relevant. Should the Commission decide an in-depth investigation is required then it will conduct the same within not more than 110 working days. Ultimately the Commission may adopt a decision finding no concerns, allow the bidder to continue subject to commitments or prohibit the award of the contract to the bidder concerned. Public procurements may continue while the Commission is making evaluations under this procedure but not awards, unless the authority concerned concludes that the most economically advantageous tender is from a bidder who has submitted a relevant declaration and for which the Commission has not sought an extended review; and
- a general market investigation tool, under which the European Commission may investigate any situation in which it suspects that a distortive foreign subsidy may affect the operation of companies established or active within the European Union Single Market (3) (the "Investigatory Tool"). This could cover any scenario in which companies involved in business in the EU have benefited from subsidies elsewhere.
In pursuing the above investigations the Commission will have wide ranging powers to seek information and even conduct inspections, and to issue fines for certain elements of non-cooperation.
The above creates a series of obligations and risks which will cause substantive changes to the operation of M&A and procurement in particular, while also creating a situation in which all companies active in the EU but benefiting from subsidies will have pause for thought in terms of what they should or should not do in accepting foreign subsidies.
How will the EU Regulation on Foreign Subsidies change the way businesses operate in the EU Single Market?
The EU Foreign Subsidies regime will mean that businesses which intend to trade in the EU Single Market will need to check subsidies received outside of the EU, especially if they are engaging in M&A and joint ventures in the EU or looking to participate in EU public procurement procedures. We anticipate that this area of what is in effect an amalgamation of competition and trade law will become a regular consideration in corporate transactions. The burdens described above will become a regular feature of all significant procurements across the EU (ie. whenever contract value exceeds €250m) and companies engaged in regular tendering for such opportunities will need to get used to making relevant declarations.
In M&A the new rules will need factoring in law to all due diligence of transactions as an additional check to see if the relevant triggers are crossed, and companies which have benefited from foreign subsidies will be at arguably a competitive disadvantage in bidding competitions. Notifications under the Foreign Subsidies Regulation will run separate to and in parallel with other merger control (or also national security) based) notifications.
How might the EU Foreign Subsidies Regulation disrupt a particular market?
Using the example of professional football, the EU Regulation on Foreign Subsidies could affect the way major clubs such as Manchester City, Paris Saint-Germain and Newcastle United operate in future.
As pointed out in this Law in Sport article, under EU State aid law the Spanish Government was challenged for providing financial assistance to football clubs such as Barcelona and Real Madrid. However the takeover of Paris Saint Germain by Qatar Sports Investment (subsidiary of Qatar Investment Authority, this being Qatar’s sovereign wealth fund) and subsequent funding of operations of the club was not caught by EU State aid law.
The EU Foreign Subsidies Regulation aims to close this perceived loophole. Clubs in England, including Premier League Champions, Manchester City and Newcastle United, which was acquired by the Sovereign Wealth Fund of Saudi Arabia in the 2021/2022 season, will be monitoring the EU's Foreign Subsidies Regulation closely and taking specialist advice on what steps can be taken.
What are the practical implications of the Foreign Subsidies Regime?
Whilst the European Commission's rationale for the new rules is to ensure subsidies from outside the EU do not undermine the functioning of the Single Market, the powers under the proposed Foreign Subsidies Regulation are wide ranging and give weight to those who argue the EU might be attempting to make other countries follow EU State aid standards or something very similar through the "back door".
Jonathan Branton, Head of EU/Competition at DWF said "It is understandable that the EU wants to close a loophole whereby only financial assistance from EU and EFTA Member States is caught by EU State aid law but not awards from countries outside the EU. However the new regime needs to be conservative in scope, so as not to catch subsidies which in practice have little bearing on the market".
Alexander Rose, a Subsidy Control and State aid lawyer at DWF said "During the Covid-19 pandemic the European Commission approved over €1.5 trillion of State aid measures to Germany alone. Therefore the reference to subsidies over €4m as being potentially distortive seems disproportionate. At the very least, the thresholds should align with the General Block Exemption Regulation and other measures that have previously been approved as compatible with the Single Market by the European Commission."
Of course, much depends on the EU's appetite to use its new powers. The EU will be conscious of the likely effects (in particular potential retaliatory measures against EU interests) should it be considered in future to be abusing any new powers for no good reason. It is to be remembered in this context that the Member States of the EU make regular use of their own powers to grant subsidies on a regular basis, and would not wish their companies to be the target of similar retaliatory measures in foreign markets.
It is also to be noted that the world trading order already has an international agreement on subsidies in the context of the World Trade Organisation (WTO) and its Agreement on Subsidies and Countervailing Measures. If the EU would go beyond what this envisages, as the new Regulation does, then although the proposed Regulation will be deemed more a domestic antitrust law than an international trade measure, it will inevitably attract international trade scrutiny and set off inter-governmental consultations. Jonathan Branton, commented that "the first test cases will be fascinating to observe - if the EU is too enthusiastic in its use of these powers it should not be surprised to see some significant reactions if not retaliations. In particular, given that these new powers will be there to combat the results of activities of State authorities in foreign countries (ie. the EU's trading partners) then cases involving these powers will inevitably take on a political dimension."
Conclusion
The EU Foreign Subsidies regime has the potential to disrupt the way businesses that receive subsidies outside the EU approach trading within the European Union's Single Market. Many markets have the potential to be impacted, including high profile markets such as professional football, technology and automotive manufacture. Those businesses which have been heavily subsidised will be eager to obtain specialist advice on how to adopt new structures or face the disruption of European Commission's redressive measures. Our view is that unless handled carefully and sensitively (and used sparingly) that these new powers may offer protection at home but are unlikely to assist EU companies striving for greater access to non-EU markets. The EU may however conclude that is a price worth paying for the full protection of competition in its own markets.
References:
(1) Article 20 of Regulation 2022/2560
(2) Article 28 of Regulation 2022/2560
(3) Article 36 of Regulation 2022/256
