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EU Foreign Subsidies Regime

EU Foreign Subsidies Regime

Our experience in EU Foreign Subsidies includes team members working within the European Commission, Central Government, Local Government and with private sector bodies receiving funds. We have worked on a wide range of European Commission State aid investigations, national and European court challenges, different funding audit investigations and on structuring different funds, schemes and individual awards towards compliance. We also have extensive experience of handling European Union anti-subsidy (trade defence) investigations under the WTO Agreement on Subsidies and Countervailing Measures, and representing affected exporters and sovereign governments in such cases before the European Commission.

The EU Foreign Subsidy Regime - FAQs

The European Commission is planning to adopt new Regulations in Summer 2021 designed to tackle the perceived unfair and damaging effects on competition within the European Union caused by undertakings acting with the benefit of subsidies from third country nations. This is the subject of a White Paper published in June 2020. See our FAQs for information on the details of the White Paper.

What is the White Paper seeking to achieve?

 
What is the White Paper seeking to achieve?

Currently, EU State aid rules only apply to support granted by EU Member States. They do nothing to combat the harm caused by undertakings active within the EU that benefit from foreign subsidies.

Under the WTO’s Agreement on Subsidies and Countervailing Measures and the resulting EU Anti-Subsidy Regulation the EU is able to combat subsidised imports of goods from third countries found to have caused material industry to the domestic (EU) industry producing the like product. This works as a trade defence instrument much in the style of anti-dumping measures. However there are no tools to restrict foreign subsidised entities providing goods and services inside the EU single market. Therefore, this has left a perceived regulatory gap to be filled.

The Commission has highlighted two specific areas where the lack of an EU tool to address the market impact of foreign subsidies may have a particularly damaging effect:

  • "the acquisition of EU-based companies by overseas competitors using subsidies provided by their domestic authorities, because this practice distorts the allocation of capital and "undermines the possible benefits of the acquisition for example in terms of efficiency gains"; and
  • "the ability of non-EU companies to use foreign subsidies to outbid EU-based competitors to obtain procurement tenders issued by public authorities within the EU".

How does the White Paper propose to overcome these issues?

 
How does the White Paper propose to overcome these issues?

The White Paper outlines future anti-subsidy "level playing field" tools which could be used to address these problems. These are built around three "modules" that would allow the European Commission and Member States to investigate, and intervene to mitigate, market distortions arising from the activities of companies subsidised by non-EU governments.

The three "modules" are as follows:

Module 1: General instrument to capture foreign subsidies

To allow either the European Commission or a national supervisory authority of a Member State to investigate cases where foreign subsidy may be "creating a distortion".

Following an investigation, the investigating body could either:

  • seek binding commitments from the beneficiary company to mitigate the negative effects of the subsidy; or
  • impose redress measures unilaterally to offset those effects (for example forced divestment of certain assets, prohibiting an acquisition or penalty payments); or
  • close the case without seeking commitments or imposing redress measures (where no distortion is found).
  • Module 1 has a broad scope and could be used in "all market situations", including goods, services or investments within the EU.

Module 2: Foreign subsidies facilitating the acquisition of EU targets

Module 2 is narrower than Module 1 in that it aims to ensure that foreign subsidies do not give an unfair advantage to their recipients when acquiring stakes in other undertakings. The procedure put forward for comments by way of consultation is as follows:

  • Notification: any party intending to make an "acquisition of interest" in the EU would have to notify the European Commission of the existence of any financial contribution it has received from a non-EU government in the three previous years, or expects to receive in the year ahead.
  • Review: The Commission would then review the facts of the case to determine whether this in effect constituted a subsidy giving the beneficiary a market distorting advantage. The review process would happen in two steps: a preliminary review phase and, where relevant, an in-depth investigation.

If a distortion was found, the Commission could then either "accept commitments by the notifying party which effectively remedy the distortion", such as divestment of assets, or "as a last resort prohibit the acquisition".

This Module would naturally exist in parallel to existing merger control rules both at EU and national level.

Module 3: Foreign subsidies in public procurement

Module 3 contains a proposed new rule that EU tendering authorities "would be required to exclude from public procurement procedures those economic operators that have received distortive foreign subsidies". This would, in particular, be the case where such government support "enables the recipient to submit an offer that would otherwise — without the subsidy — be economically less sustainable, especially in case of bidding significantly below market price or below cost". The onus would be on the company bidding for a tender to disclose such government support to the contracting authority. If found that a company had not properly disclosed the existence of a subsidy, an awarded tender could be terminated and fines imposed.

What is considered a "foreign subsidy"?

 
What is considered a "foreign subsidy"?
An Annex to the White Paper sets out general proposed principles for establishing whether a "foreign subsidy" exists in a given case. In short, it is classified as a "financial contribution by a government or any public body of a non-EU State, which confers a benefit to a recipient and which is limited, in law or in fact, to an individual undertaking or industry or to a group of undertakings or industries."

Why is this politically important?

 
Why is this politically important?

The White paper would create new powers to halt or hinder business in the EU from foreign undertakings on an unprecedented scale.

The White Paper is a forerunner of an upcoming EU legislative proposal in 2021 to establish a "level playing field" mechanism. This would be a new area of law for businesses trading in the EU Single Market to consider. The Commission would have a new tool to penalise non-EU undertakings active within or exporting to the EU’s Single Market, provided it can be shown they are in receipt of government subsidies or other forms of "State aid" from a non-EU country.

While the White Paper is understood to be predominantly aimed at addressing Chinese activity and investment in the EU Single Market, the level playing field mechanism could also have implications for British businesses with activities in the EU that are in receipt of UK government support. We explain this in further detail below.

What are the implications for the UK post transition period out of the EU?

 
What are the implications for the UK post transition period out of the EU?

The new rules could apply to the UK businesses following the end of the Brexit transition period (31 December 2020). Its precise implications will depend on:

the final shape of the legislation establishing the foreign subsidy regime; and the nature of any subsidy control commitments the UK and EU make to each other as part of a new free trade agreement.

During Brexit negotiations, the EU has repeatedly expressed concerns about UK State aid giving UK businesses an unfair competitive advantage within the EU internal market. If the proposals outlined in the White Paper are adopted into law, this could mean that the EU may be able to scrutinise, and impose barriers to, UK businesses in receipt of State aid, which seek to enter the single market by acquiring a European business.

Having noted all the above, if UK businesses do no more than receive State aid in the UK that would be compatible under EU State aid law it is difficult to see the European Commission taking the defensive remedies contemplated in the White Paper, particularly given the potential for retaliation.

What are the implications of the White Paper for Northern Ireland?

Following the EU referendum result of 2016 and the serving of the Article 50 notice, the UK withdrew from the European Union at 11:00pm on 31 January 2020. The '"Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community" (the "Withdrawal Agreement") entered into force upon the UK's exit from the European Union on 1 February 2020 and provides for a transition period during which EU law continues to apply to and in the UK in accordance with that Agreement. This period will end at 11:00pm on 31 December 2020.

The UK’s Withdrawal Agreement on its exit from the EU contains a specific Protocol dealing with the border between Ireland and Northern Ireland, to avoid the need for customs and regulatory infrastructure to be re-built. In essence, this Protocol requires the UK to continue applying EU legislation on the production, trade and sale of goods in respect of Northern Ireland beyond the end of the transitional period, subject to consent by the members of the Northern Ireland Assembly.

It remains to be seen whether the EU and UK can conclude a new trade agreement which avoids the need for the Northern Ireland Protocol from the Withdrawal Agreement to enter into force.

What are the next steps?

 
What are the next steps?

The Commission intends to table formal legislative proposals in 2021, having completed a public consultation on its plans that runs until September 2020. In so doing the EU will also need to consider the WTO compatibility of the measures contemplated and whether it is prepared to run the risk of the retaliatory measures as might conceivably ensue if the new remedies are invoked.

DWF has one of the largest dedicated State aid law teams in UK private practice and can draw upon market leading experts in our UK and other international offices. We have advised and continue to advise many of the leading public authorities within the UK and beyond, alongside a wide spectrum of the recipients of public funding, from multi-national manufacturers, to large and small scale real estate developers, urban regeneration specialists, SMEs, higher education institutes and research organisations, and charitable trusts.

We are on hand to discuss issues raised in these FAQs or any other element of State aid and subsidy law.

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