Regulation on foreign subsidies

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European markets are open to both European Union (“EU”) entities and those coming from third countries. Within the EU, there are strict State aid regulations which prevent the creation of advantages and distortions of competition. However, there are no such rules for non-EU entities. This situation threatens competition in the internal market by making it possible to favour certain market players through foreign subsidies. As a consequence, Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (“the Regulation(s)”) entered into force on 22.12.2022.

The subject of this article will be the basic concepts of the Regulation, the competent authorities and the procedure for countering market infringements.

At the very beginning of the Regulation, it is explicitly stated that its purpose is to contribute to the proper functioning of the internal market by establishing a harmonised framework for dealing with distortions caused directly or indirectly by foreign subsidies, in order to ensure a level playing field. In addition, the Regulation lays down rules and procedures for the investigation of foreign subsidies distorting the internal market and for the correction of infringements.

Competent authority

Recital 8 of the Regulation states that “in order to ensure a level playing field throughout the internal market and consistency in the application of this Regulation, the European Commission (‘the Commission’) will be the sole authority competent to apply this Regulation.”

Subsidies-definition. Moment of granting

The Regulation defines a subsidy as financial assistance which is granted directly or indirectly by a third country, which confers a benefit and which is limited to one or more companies or sectors. These conditions apply cumulatively. The Regulation attempts to provide an illustrative list of the more likely hypotheses of such aid. This may include:

⦁ transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, offsetting of operating losses, compensation for financial burdens imposed by public authorities, waivers, debt-for-equity swaps or rescheduling);

⦁ the waiver of revenues otherwise due, such as tax exemptions or the granting of special or exclusive rights without appropriate consideration; or

⦁ the provision of goods or services or the purchase of goods or services;

It is clear that the definition is quite broad and includes a range of incentives, not limited to the receipt of direct remittances, but for example it could be the granting of special or exclusive rights to an entity without the receipt of adequate remuneration in accordance with normal market conditions, etc.

To be a foreign subsidy, the financial assistance must be granted by a third country to an entity that carries out business within the EU. Article 3, par. 2 of the Regulation specifies that the aid may be granted through:

central government and public authorities at all other levels;

a foreign public entity whose actions may be relevant to the third country, taking into account elements such as the characteristics of the entity and the legal and economic environment prevailing in the country in which the entity operates, including the role of the government in the economy; or

a private entity whose actions may be relevant to the third country, taking into account all relevant circumstances.

The recitals to the Regulation specify that a foreign grant should be deemed to have been made from the moment the beneficiary is entitled to receive it.  Actual payment is therefore not a necessary condition for falling within the scope of the Regulation.

Material scope

The material scope of the Regulation covers all economic sectors, including those of strategic interest to the Union and critical infrastructures. The Regulation also applies to:

Concentrations (mergers and acquisitions) – where at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the Union and generates an aggregate turnover in the Union of at least EUR 500 million. It is a condition that the undertakings concerned have received combined aggregate financial assistance of more than EUR 50 million from third countries in the three years preceding the concentration.

In public procurement procedures – where the estimated value of the contract is at least EUR 250 million and the foreign financial assistance is at least EUR 4 million from a non-EU country. Where an ex officio inspection is carried out in the hypothesis of a procurement study, the EC should limit itself to the specific procurement. This examination does not suspend or cancel the procurement itself.

⦁ It is important to note that the Commission may, on its own initiative, carry out checks and examine information from any source, including Member States, a natural or legal person or association, concerning alleged foreign subsidies that distort the internal market. The Commission may carry out such inspections in any market situation where there is information or suspicion of a foreign subsidy that may distort the fundamentals of competition in the EU.

Obligation to notify

Two of the above-mentioned impact tools are based on notification – in mergers and public procurement. Entities involved in this type of legal action are obliged to notify the Commission in advance of receiving financial aid in connection with concentrations or public procurement, from countries outside the EU, where such aid falls within the thresholds mentioned above.

Furthermore, according to Art. 24, par. 1 of the Regulation, a notifiable concentration shall not take place before it has been notified.

The same rule applies to public procurement – where the criteria are met – the estimated value of the contract must be at least EUR 250 million and the foreign financial aid must be at least EUR 4 million from a non-EU country. In these cases, a notification must be submitted to the Commission. Before the Commission has ruled on the case, the procurement is not awarded.

In both hypotheses there are mandatory time limits for the Commission’s decisions.

Consequences of non-compliance with the notification obligation

Where a company fails to comply with the obligation to notify the Commission in relation to concentrations or procurement contracts meeting the criteria for the need for notification to arise at all – the Commission may impose fines/pecuniary sanctions and consider the case as if it had been notified. The amount of the fine/pecuniary sanction varies depending on the infringement.

Redressive measures and commitments

Where there is a foreign subsidy to an EU market participant that meets the criteria for triggering the notification obligation – the Commission carries out a check. This check is called the balancing test and is a comparison of the positive and negative effects of the subsidy on the market. If the result of the check shows that the foreign subsidy distorts the fundamentals of competition, the Commission may impose redressive measures or accept commitments from the companies concerned to remedy the infringement.

The Commission may accept either redressive measures or commitments, but not both cumulatively. The methods must be proportionate and aimed at remedying the infringement fully and effectively.

Redressive measures and commitments may include an obligation to comply with certain market conduct, the sale of assets, a temporary restraint of trade, etc.

The Regulation will apply from 12 July 2023 and the obligation for companies to submit prior notifications in the above-mentioned circumstances will apply from 12 October 2023.

In conclusion, with Regulation (EU) 2022/2560 the European Parliament and the Council are taking a decisive step towards achieving a level playing field within the internal market. At the same time, it closes an existing loophole in EU law on foreign investment that can negatively impact competition.

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