Foreign Subsidies Regulation – Expanded EU State aid rules

On 12 January 2023, the new regulation on foreign subsidies (Foreign Subsidies Regulation, “FSR”) agreed by the European Parliament and the Council entered into force. The FSR is intended to enable the identification and redress of possible distortions in the EU internal market caused by foreign subsidies to companies operating in the EU.

According to the European Commission, the FSR is filling a regulatory gap: Foreign subsidies have not been subject to investigation to this point, while subsidies granted by Member States were subject to in-depth investigations. The FSR therefore supplements existing EU subsidies regulations governing subsidies granted by EU Member States and extends the EU subsidies regime to include foreign countries.

The term foreign financial contribution as defined in the regulation covers a relatively broad range: Subsidies in the context of the US Inflation Reduction Act, for example, might be subject to the FSR (cf. PwC Newsletter). However, it is to be noted that the aim is not to generally prohibit foreign subsidies.

The FSR is applicable as of 12 July 2023 and entails notification requirements (as of October 2023) for certain transactions and procurement procedures. Moreover, it gives the Commission general power to investigate distortive foreign subsidies with significant penalties possible in cases of infringement.

When are entities obliged to notify authorities?

• • • M&A transactions: If at least one of the companies involved is established in the EU, generates sales of at least EUR 500 million within the EU, and the companies involved received aggregated financial contributions of more than EUR 50 million over the last three years.
    • Public procurement procedures: If the estimated contract value is at least EUR 250 million and the companies involved were granted aggregated financial contributions of at least EUR 4 million per non-EU country over the last three years.

Moreover, the EU Commission may require ad-hoc notifications of M&A transactions or public procurement procedures with amounts below the thresholds mentioned above and investigate these.

Furthermore, there is a waiting period after the notification during which the Commission may perform a preliminary review or in-depth investigation. This waiting period may be between 20 and 105 working days. Transactions may not be conducted until after such a review.

If there is a breach of the notification obligation or the waiting period, fines in the amount of up to 10% of a company’s prior year total revenues could be imposed.

If the Commission concludes that a transaction in the form of a foreign subsidy creates a distortion on the internal market, it may deny the subsidised merger or impose commitments or redressive measures on the participating companies.

In addition to the notification obligations described above, the Commission may independently investigate any type of economic activity (ex-officio).

The EU is currently working on an implementing regulation, which is to include procedural guidance. It will include but not be limited to registration forms and explanations on procedures concerning notification and access to files. The implementing regulation is expected to be adopted in the second quarter of 2023.

This regulation covers a broad scope of applications (Commission inquiries are not limited by sales and subsidy amounts), and we therefore recommend that your company review the applicability of the FSR and document it accordingly. We are happy to support you with this matter.

Authors: Daniela Stastny, Anna Kraus, Nina Ridder