The EU has now formally adopted its new Foreign Subsidies Regulation (“FSR”), which will start to apply from mid-2023. The European Commission will shortly be publishing a draft Implementing Regulation, which will set out what must be included in notifications under the FSR and further procedural details. This should help companies focus the due diligence work required in order to comply with the notification obligations and more generally, risk-assess their activities in light of the FSR.
Three Intervention Tools
As explained in our previous blog post earlier this year, the FSR is intended to “level the playing field” between EU operators and their competitors from non-EU Member States which are not subject to the same kind of strict subsidies disciplines as EU Member States are under the EU State aid rules. It seeks to do this by creating three new subsidy control tools for the European Commission (“Commission”) to address foreign subsidies:
- A general ex-officio tool for the Commission to investigate allegedly distortive foreign subsidies. This tool is wide-ranging and covers any foreign subsidy granted during a prior five-year period, including those falling below the notification thresholds for the two notification-based tools in relation to concentrations and public procurements (see below).
- A notification-based tool in relation to potentially subsidised mergers and acquisitions (so-called “concentrations”), with thresholds based on turnover and the amount of foreign “financial contributions” received by the undertakings concerned. Concentrations would need to be notified where: (i) the undertaking to be acquired, one of the merging undertakings, or once created, the joint venture, is established in the EU and has aggregate EU turnover of €500 million or more; and (ii) the aggregate amount of the foreign “financial contributions” received by the undertakings concerned is more than €50 million over the three years prior to notification.
- A notification-based tool in relation to potentially subsidised public procurement bids, with thresholds based on the value of the procurement and the amount of foreign “financial contributions” received by the bidder. Bidders would need to notify all foreign “financial contributions” where the estimated value of the procurement at issue is €250 million or more and the bidder has received financial contributions amounting to at least €4 million from a third country over the three years prior to notification.
Practical Impact and Due Diligence
The FSR was formally adopted by the EU Institutions on 28 November 2022. It will start to apply from mid-2023, with the notification requirements commencing slightly later, from around October 2023.
The FSR has the potential to significantly increase the regulatory risk and burdens for non-EU entities operating or investing in the EU, in particular, due to the notification requirements for concentrations and public procurements. Failure to notify when required creates deal exposure and could also, in principle, result in significant fines from the Commission.
A wide notion of “financial contribution”
In this context, it is important to appreciate that although the aim of the FSR is to address foreign “subsidies” that “distort” competition in the EU, the notification obligations are triggered not by foreign “subsidies”, but by foreign “financial contributions”, which have a much wider scope. A foreign “financial contribution” essentially may include any transfer of financial resources from non-EU public authorities, including for example, payment by a non-EU public authority for goods and services, even if this is on market terms and therefore there is no real “benefit” and no “subsidy”. The result is that the notification obligations may be wide-ranging and therefore onerous in practice.
Companies should therefore now be using this time to prepare and undertake the due diligence required in order to identify the foreign “financial contributions” they have received during the past three years and therefore the financial contributions that will be within the scope of the two notification tools. Companies could also go further and assess the extent to which these foreign “financial contributions” might be considered as “subsidies” that could “distort” competition in the EU. This due diligence will allow companies to be best placed to comply with the notification obligations under the FSR and also risk-assess the extent to which their investments and activities in Europe could actually be the subject of Commission intervention.
Commission Draft Implementing Regulation Will Hopefully Shed More Light
Given the potential breadth of what is covered by a foreign “financial contribution”, the scope of the due diligence that may be required could be significant. Such foreign “financial contributions” would not typically be highlighted separately in companies’ accounting systems and therefore a dedicated exercise may be required in order to identify and track foreign “financial contributions” going forward.
The Commission, however, will soon be publishing a draft Implementing Regulation which may help narrow things down. The draft Implementing Regulation will set out the detail of what must be included in notifications, in other words, the end-result that companies should be seeking to be able to work towards with their due diligence. This may serve as a useful starting point for companies to work backwards from in terms of focusing the due diligence.
The Commission has confirmed that the draft Implementing Regulation will be published for consultation around the start of 2023. We will continue to monitor and provide an update in relation to this key development. It is hoped that the draft Implementing Regulation will provide for a more proportionate approach which will reduce unnecessary burdens for companies and better facilitate their compliance with the notification obligations under the FSR.
For further information, please contact:
Kyriakos Fountoukakos, Partner, Herbert Smith Freehills
kyriakos.fountoukakos@hsf.com
