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Dawn raids lead to the European Union's first Foreign Subsidies Regulation litigation

29 May 2024
In April  the European Commission launched its first dawn raids under its extensive EU Foreign Subsidies Regulation powers, providing a stark reminder for international businesses with a European presence of the need to be mindful of the requirements of this new area of competition law.  Six weeks later, it was announced that the target of the dawn raid, Nuctech, has brought a case in the European General Court challenging the information which must be disclosed to investigators. Practitioners will be watching the case closely given its potential implications upon the reach of the new regime. 

What is the Foreign Subsidies Regulation?

As set out in our previous article, the EU Foreign Subsidies Regulation (the 'FSR') is a new competition law regime that equips the European Commission with far reaching powers to investigate and take action against businesses which have benefitted from financial assistance outside the control of EU State aid law but which might allow such businesses to trade, at an advantage, within the EU Single Market.

The stated aim of this new law is to ensure a level playing field between businesses trading within the EU Single Market.  In particular, whereas subsidies from EU Member States are subject to the strict EU State aid rules, this is not the case for subsidies and other forms of financial support awarded by countries outside the EU. 

The FSR states that a subsidy foreign subsidy shall arise "where a third 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". 

Therefore the test for a foreign subsidy has some parallels with the State aid test at Article 107(1) of the Treaty of the Functioning of the European Union, but applies to non-EU awards of financial assistance and extends to a wider range of measures (as it uses the term 'financial assistance' rather than 'subsidy').

The European Commission has the following investigative powers under the FSR:

  • a power to investigate notifiable mergers and acquisitions where the relevant parties have received financial contributions from non-EU countries;
  • a power to examine bids in public procurements where the estimated contract value is at least €250 million and the bidder has received financial contributions of at least €4 million from non-EU countries in the last 3 years;
  • a general market investigation tool, which allows the European Commission to investigate situations they have a concern that a foreign subsidy could affect the operation of companies established or active within the EU Single Market.

The FSR also sets out mandatory notification requirements where particular “concentrations” of foreign subsidies are present in transactions.  For mergers and acquisitions, a notification is mandatory where there is a financial contribution from non-EU public sources is at least €50 million and the turnover of the company being acquired exceeds €500m).

Similarly there is an obligation which arises in relation to EU public procurements.  Where there has been a foreign subsidy  to a bidder or its group of at least €4 million in the last three years prior and the estimated value of the procurement is €250 million or greater, the relevant bidder will have to provide details of relevant foreign subsidies received. The declaration has to be made to the authority running the procurement and passed to the European Commission. Failure to provide a declaration can be grounds for exclusion from the tender.

The first EU Foreign Subsidies Investigation

In February 2024, the European Commission announced its first EU Foreign Subsidies investigation looking into whether a subsidiary of a Chinese state owned locomotive manufacturer gained an undue advantage from foreign subsidies when bidding into a transport contract in Bulgaria. The European Commission was alerted to the potential issue by Bulgaria's Ministry of Transport and Communications which received a declaration from the bidder and referred this to the European Commission for consideration. Following the opening of that investigation the relevant bidder withdrew from the relevant procurement competition and the Commission subsequently announced that it has closed its investigation accordingly.  This case therefore already underlines that the existence and use of FSR powers have resulted in the withdrawal from an important procurement of a non EU-backed bidder, which may have changed the outcome of that procurement.

The first EU FSR Dawn Raid

The European Commission announced that it had carried out its first dawn raid under the FSR on 23 April 2024, but did not reveal the name of the business targeted or the EU State in which the unannounced investigation was conducted, other than to state that officials from the national competition regulator were in attendance and that the business produces and sells security equipment.

It has since been reported that the business was Nuctech, a Chinese owned company operating from Rotterdam in the Netherlands and Warsaw in Poland which specialises in security inspection scanners for airports and ports.  A statement issued by Nutch said "Nuctech is cooperating with the European Commission and is committed to defending its reputation of a fully independent and self-supporting economic operator".  

The China Chamber of Commerce to the EU criticised the move, calling for the European Commission to "stop the abuse of  FSR tools".  The European Commission published a statement which said that it " has indications that the inspected company may have received foreign subsidies that could distort the internal market pursuant to the Foreign Subsidies Regulation".

Litigation brought by Nuctech

In late May 2024, Nuctech issued proceedings in the EU’s General Court challenging the decision of the European Commission to initiate the raid and requesting the investigation be suspended. The appeal at the General Court will be the first time judges review the application of the FSR. The case reference is Nuctech Warsaw Company Limited and Nuctech Netherlands v Commission T-284/24.

The court’s treatment of the case will give insight into one element key to the legislation, the extent to which companies are compelled to hand over details of the state support received. 

Under EU law, the Commission can usually access information in other juristictions, not least because digital documents are often accessible from within the EU, even when held outside it.  In this instance though the Commission appears to be seeking information related to the Chinese State, which Nuctech may not be able to disclose.  Lewis Crofts and Tono Gil of MLex regard this to be a serious test of the new regime, noting that "to date, all uses of the FSR have targeted companies backed by China, and without details on the exact nature of any subsidies from Beijing, deployment of the law will be problematic".

Potentially similar situations are encountered in EU anti-subsidy (trade) investigations where questions are asked of exporters as to financial incentives received in the country of manufacture. In those cases questionnaires are addressed to the government of the country of export too.  If the Commission would not receive adequate answers in any such cases then as with anti-dumping cases too it would be expected to proceed on the basis of "best facts available" so as not to reward non-compliance with the investigation.

Do all international businesses need to be aware of the FSR?

Yes, any business which trades within the EU and benefits from financial assistance from outside the EU should monitor its operations to ensure compliance with the FSR when undertaking relevant M&A activity and/or participating in public bids.  The latest case involving a dawn raid suggests that beyond this such businesses should beware that the Commission may start investigating the existence of foreign subsidies and what effect this may be having on their behaviour in the EU, even without a merger or procurement backdrop. 

The above includes businesses that operate within the EU Single Market, but also within the European Free Trade Association, including Norway and Switzerland.

It should be emphasised that the new regime does not merely attach to companies active in the EU that are based in major economies like China.  It also includes businesses that are active in the EU and which receive financial assistance from state sources in the United Kingdom, Saudi Arabia, the USA, Japan and other non-EU economies. 


This first EU Foreign Subsidies Regulation dawn raid should be a wake up call for all businesses which have received financial support outside the EU and which trade in the EU Single Market. 

The Nuctech case suggests that the Commission is using its general investigatory powers under the FSR in this case, rather than looking at something specifically on account of a merger or a procurement.  This is significant in that it underlines that the Commission may use its FSR powers at a general level merely on account of behavioural activity from the apparently subsidised company, ie. there does not need to be a specific merger or large scale public procurement before the Commission will launch an investigation. 

This could have far-reaching consequences in that it means whenever an undertaking active in the EU appears to be (for example) heavily undercutting the EU-based competition in ways that are not otherwise explainable, there may be a suspicion of third country subsidies that have enabled it.  It will be interesting to observe over time just what level of evidence the Commission needs for (i) existence of relevant foreign subsidy; and (ii) the use of it to distort competition in the EU, in order to start an investigation.  This gives companies active in the EU a significant weapon in their armoury when facing difficult competition within EU markets from operators that are supported outside the EU.

Just as far reaching may be the decision of the General Court in this first case, which has the potential to limit in practice the ability  and discretion of the European Commission to wield this instrument.

If you are concerned about a transaction or other activities which you think might be affected by the EU Foreign Subsidies Regulation then we are on hand to advise. 

Further Reading