Foreign State Aid is Now Subject to Regulation

Foreign State Aid is Now Subject to Regulation

Author: Miha Hočevar

On 28 November 2022, the European Union (“EU”) formally adopted its Regulation on foreign subsidies distorting the internal market (the “Regulation”), with which it aims to effectively address the issue of foreign subsidies that may cause unequal competitive conditions in the internal market.

The EU single market enables European and foreign companies to compete against each other in conditions of pure competition on the basis of their performance, i.e. provided that a level playing field is guaranteed. A special area of ​​anti-competitive behaviour is state aid, which is generally prohibited. Although EU law provides for a system of state aid control enshrined in Articles 107 and 108 of the Treaty on the Functioning of the EU, the latter can only apply where the disputed financial support is granted by an EU member state.

Despite the general lack of reliable data on subsidies granted by third countries, there has been an increasing number of cases in recent years where foreign subsidies appear to have facilitated the acquisition of EU undertakings, influenced investment decisions, distorted trade in services or otherwise influenced the behaviour of their beneficiaries in the EU market, to the detriment of fair competition.[1] For instance, a recent report by the European Court of Auditors notes that certain subsidies granted by the Chinese state would constitute State aid if granted by an EU Member State and concludes that such difference in treatment can distort competition in the EU’s internal market.[2]

In order to eliminate the considered regulatory gap, the aforementioned Regulation was adopted, which should contribute to the proper functioning of the internal market by establishing a harmonized framework to address distortions caused, directly or indirectly, by foreign subsidies, namely by laying down the rules and procedures for investigating such subsidies and redressing such distortions.

The Regulation initially defines the concepts of a foreign subsidy and a distortion on the internal market and prescribes the indicators for determining its existence, and also prescribes the categories of foreign subsidies that are most likely to distort the internal market (e.g. a foreign subsidy directly facilitating a concentration).

The new regulatory framework envisages three instruments for the European Commission (the “Commission”) to investigate questionable financial contributions from third country public authorities, namely:

  • prior authorisation in cases of “large” mergers;
  • prior authorisation for “large-scale” public procurement procedures; and
  • a general tool for investigating all (other) market situations on its own initiative.

Pursuant to the Regulation, companies are obliged to notify the Commission of concentrations and foreign financial contribution in an EU public procurement procedure, if the circumstances thereof reach the prescribed thresholds,[3] namely the obligation to notify arises in the case of:

  1. a concentration, where:
  • the acquired company or at least one of the merging companies is established in the Union and generates an aggregate turnover in the Union of at least EUR 500 million; and
  • all companies involved were granted from third countries combined aggregate financial contributions in the three financial years prior to notification of more than EUR 50 million.

 

  1. a foreign financial contribution in an EU public procurement procedure, where:
  • the estimated total value of that public procurement is equal to or greater than EUR 250 million; and
  • the economic operator involved in the respective tender in the public procurement procedure was granted aggregate financial contributions in the three financial years prior to notification equal to or greater than EUR 4 million per third country.

If the company fails to comply with the notification rules, the Commission may impose a fine and examine the transaction as if it had been notified.

In addition to the aforementioned control within the framework of notifications, the Regulation also provides for an ex officio review of foreign subsidies. The Commission may on its own initiative examine information from any source regarding alleged distortive foreign subsidies. For this purpose, procedures for a preliminary review, in-depth investigation, issuance of interim measures or information requests and inspection procedures (within or outside the Union) are prescribed. In the event of non-cooperation, the Commission may issue a decision ordering the payment of a fine or periodic penalty payments.

In the event that the Commission establishes the existence of a foreign subsidy and distortion of competition, it may balance the negative effects of the foreign subsidy in terms of distortion in the internal market and the positive effects on the development of the relevant economic activity. If the negative effects prevail, the Commission can prescribe redressive measures or accept commitments to remedy the distortion caused by the foreign subsidy.

The Regulation will enter into force 20 days after its publication in the Official Journal of the EU. Most of the new rules will start to apply six months after its entry into force, while certain provisions governing the obligation to notify concentrations and foreign financial contributions in public procurement procedures (Articles 19 and 28) will only start to apply nine months after the date of entry into force. In certain cases, the Regulation also applies retroactively. Namely, the Commission will generally (and subject to applicable exceptions) also be authorized to investigate foreign subsidies granted up to five years prior to the entry into force of the Regulation, where the subsidies in question will distort the internal market (also) after the Regulation’s entry into force.

[1] See: Proposal for a Regulation on foreign subsidies distorting the internal market COM(2021) 223 final 2021/0114(COD) (available at: https://eur-lex.europa.eu/legal-content/SL/TXT/HTML/?uri=CELEX:52021PC0223&from=EN).

[2] See: European Court of Auditors, The EU’s response to China’s state-driven investment strategy (available at: https://www.eca.europa.eu/Lists/ECADocuments/RW20_03/RW_EU_response_to_China_EN.pdf).

[3] In addition, under certain conditions, the Commission may request notification even if the prescribed thresholds are not reached.

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