Foreign subsidies may cause distortions and harm the level playing field in the Single Market. By promoting a fair and competitive Single Market, the Foreign Subsidies Regulation (‘FSR’) is setting the right conditions for the European industry to thrive.
Why are foreign subsidies a problem?
In recent years, there has been a growing number of instances where foreign subsidies appear to have distorted the Single Market, including by providing their recipients with an unfair advantage to acquire companies or to obtain public procurement contracts in the EU. Foreign subsidies may also give companies an unfair advantage in other market situations, crowd-out non-subsidised companies, harm innovation and damage the quality and choice of goods and services for consumers.
EU rules on competition, public procurement and trade play an important role in ensuring fair conditions for all companies competing on the Single Market. Until now, however, these tools did not apply to subsidies from non-EU countries, which provide their recipients with an unfair advantage when acquiring companies, participating in public procurements or engaging in other economic activities in the EU.
In May 2021, the Commission proposed a new Foreign Subsidies Regulation (‘FSR’) to address the issue and close this regulatory gap, whereby aid granted by EU Member States is subject to close scrutiny, whereas subsidies granted by non-EU governments have gone largely unchecked until now. Following the legislative procedures in the Council and the Parliament, the final text of the FSR was adopted in November 2022 and entered into force on 12 January 2023.
The new Regulation is designed to effectively tackle foreign subsidies that distort the Single Market and harm the level playing field in any market situation.
Scope of the Regulation
The FSR allows the Commission to investigate financial contributions granted by non-EU authorities to companies active in the EU. If the Commission identifies the existence of foreign subsidies, which distort competition in the EU, it may redress their distortive effects.
The Regulation introduces three new tools, which will be enforced by the Commission:
An ex-ante notification obligation for concentrations involving a financial contribution by a non-EU government, where (i) the EU turnover of the company to be acquired, at least one of the merging parties or the joint venture is of at least €500 million and (ii) the foreign financial contribution reaches at least €50 million.
An ex-ante notification obligation for public procurement procedures where (i) the contract value is at least €250 million and (ii) the bid involves a foreign financial contribution of at least €4 million per non-EU country.
For all other market situations, the Commission can start investigations on its own initiative (ex-officio), including the possibility to request ad-hoc notification for smaller concentrations and public procurement procedures.
With respect to the two notification tools, the acquirer or bidder will have to notify ex-ante financial contributions received from non-EU governments and public authorities in relation to concentrations or public procurements meeting the relevant thresholds. Pending the Commission’s review and approval, the concentration in question cannot be completed. In public procurement procedures, the investigated bidder cannot be awarded the contract (standstill obligation) until the end of the investigation or the time limit elapses.
The Commission will also be able to request ad-hoc notifications for concentrations and public procurement procedures below the relevant thresholds if it suspects that foreign subsidies may have been involved in the transaction and the transaction is not yet concluded. In public procurement procedures, this also applies if the Commission receives new information leading it to suspect that a submitted notification or declaration was incomplete, or where such a notification or declaration is not transferred to the Commission. In case of an ad-hoc notification, the concentration or public procurement procedure concerned will be subject to the same standstill obligation as described above.
The general investigation tool (ex-officio) will allow the Commission to investigate on its own initiative any type of economic activities and market situations, such as greenfield investment or the provision of services, when it suspects that a foreign subsidy may be involved.
Examples of distortive foreign subsidies
A ‘foreign subsidy' is a financial contribution provided directly or indirectly by a non-EU country which is limited to one or more companies or industries and which confers a benefit on a company engaging in an economic activity in the EU.
A company wishes to acquire an EU target. Such acquisition is supported by a non-EU government through a direct grant and a beneficial State guarantee on a loan to the acquirer. These subsidies make it easier for the acquirer to finance the acquisition and to outbid potential competitors who also want to acquire the EU target company.
A company intends to submit a bid in a public tender organised by a contracting authority in an EU Member State for a major project. The company is supported by the government of a non-EU country through direct subsidies. As a result, the company is able to make an offer at a low price/high quality that it would not have been able to make without the subsidy, thereby outbidding competitors.
An EU subsidiary of a non-EU-country parent company has access to cheap, State-supported financing in the non-EU country of the parent company, for example in the form of unlimited State guarantees or direct financial grants. The cheap financing allows the EU subsidiary to set up factories in the EU and crowd out competitors that do not benefit from subsidies.
Structure of the assessment
The procedure to investigate foreign subsidies will involve a preliminary review and, if there are indications of the existence of a subsidy, an in-depth investigation.
- The Commission will assess whether a financial contribution by a non-EU government constitutes a foreign subsidy within the meaning of the FSR and whether it distorts the Single Market.
- If it does, the Commission will balance the negative effects in terms of the distortion with the positive effects of the foreign subsidy on the development of the relevant subsidised economic activity.
- When the negative effects outweigh the positive effects, the Commission can impose redressive measures or accept commitments from the companies concerned to remedy the distortion.
- Interest-free loans
- Unlimited guarantees
- Capital injections
- Preferential tax treatment
- Tax credits
- Foregone revenue
Specific ex-ante notification
- Concentrations (>€500m EU turnover and > €50m foreign contribution)
- Bids in procurement (>€250m and > €4m contribution per non-EU country)
General screening tool
- Ex officio
- Any market situation
Categories of subsidies most likely to be distortive- Unlimited guarantees
- Subsidies to an ailing company without a restructuring plan
- Subsidies directly facilitating a concentration
- Subsidies enabling an unduly advantageous tender
- Export financing not in line with OECD Arrangement on officially supported export credits
Indicators of a distortion
- Amount and nature of subsidy
- Situation of the company, including its size, and the market or sectors concerned
- Level and evolution of economic activity on the internal market
- Purpose, conditions and use of the subsidy
Subsidies unlikely to be distortive
- The amount is less than €4 million/3 years
Subsidies considered non-distortive
- The amount is less than the thresholds for de minimis aid under EU State aid rules
- Subsidies aimed at making good damages caused by natural disasters or exceptional occurrences
This test considers whether distortive effects of a foreign subsidy are mitigated by the positive effects on the development of the relevant subsidised economic activity. It helps to decide whether to impose redressive measures or to accept commitments, as well as the nature and level of possible redressive measures or commitments.
- Impose structural or non-structural redressive measures (e.g. divestment of assets, access to infrastructure, prohibition of certain market behaviour)
- Accept commitments offered by the company
- Prohibit subsidised concentration or award of procurement to the subsidised bidder.
Milestones of the initiative
- 21-22 March 2019
In its conclusions, the European Council asked the Commission to identify new tools to address distortive effects of foreign subsidies on the Single Market.
- February 2020
In its report on competition policy, the European Parliament called on the Commission to explore new tools to address distortions due to subsidies.
- 17 June 2020
Commission adopts a White paper on foreign subsidies to launch a public debate
- 23 September 2020
14-week public consultation ends, 150 respondents submitted their views
- 6 October 2020
Commission publishes Inception impact assessment for a legislative proposal
- October 2020 – January 2021
Commission gathers stakeholder feedback in a targeted consultation
- 3 March 2021
Regulatory Scrutiny Board issues a positive opinion on the Impact Assessment report
- 5 May 2021
The Commission adopts a Proposal for a Regulation on distortive foreign subsidies
- 30 June 2022
The European Parliament and the Council reach a political agreement on the text of the Foreign Subsidies Regulation
- 12 January 2023
The Foreign Subsidies Regulation enters into force
- January 2023
The Commission presents a draft Implementing Regulation and notification forms, followed by a 4-week stakeholder feedback period
- 12 July 2023
The Foreign Subsidies Regulation starts to apply. The Commission can start ex officio investigations
- 12 October 2023
The notification obligation for concentrations and public procurement above certain thresholds starts to apply