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Briefing

European Commission targets foreign government subsidies with wide-ranging new tool

The European Commission’s controversial ‘White Paper on levelling the playing field as regards foreign subsidies’ published on 17 June identifies a regulatory gap which it looks to fill. That gap relates to distortions of competition occurring in the EU as a result of State subsidies granted by non-EU States. The Paper proposes an extremely far-reaching new legal instrument to tackle the issue. The Regulation envisaged would target foreign-subsidised acquisitions, but also any kind of subsidised commercial activity affecting EU markets, including participation in public procurement and access to EU funding. The Commission seeks views on the various options set out in the Paper, to inform its subsequent choice of precisely what kind of legal instrument to propose.
 
The Paper raises a vast number of questions as to the exact scope and content of the new instrument which will ultimately be adopted, and how it will work in practice. Below we summarise its content and then consider in more detail some aspects of the proposal and its potential implications for different types of businesses.
 
We also explore some of the points that companies looking at this proposal from different perspectives may consider drawing to the Commission’s attention when responding to its consultation, which is open until 23 September.
 

Summary of Proposals

 

Why is a new instrument needed?

 
The Commission observes that State subsidies granted by EU Member States are controlled under State aid rules, but that in many situations similar subsidies granted by non-EU governments escape control. Existing EU and international regulatory tools (multilateral and bilateral trade defence instruments, Member State foreign direct investment rules, and EU antitrust, merger control, State aid and public procurement rules) only deal with the issue to a partial and unsatisfactory extent. 
 

In what sectors and situations will it be used?

 
The new instrument will apply to all sectors and a wide variety of situations. The Commission proposes a three-part framework, to address foreign subsidies (i.e. subsidies granted by a non-EU government): 
 
  • to businesses established, or maybe just active, in the EU market (Module 1);
 
  • facilitating acquisitions of EU targets (Module 2); and
 
  • providing an unfair advantage in public procurement (Module 3).
 
In addition to Modules 1, 2 and 3 described below, measures are also proposed in relation to foreign access to EU funding.
 

How would Module 1 work?

 
Module 1 would be a general instrument empowering the Commission or Member State authorities to act on their own initiative to investigate possible distortions of the proper functioning of the EU internal market caused by a foreign subsidy to a business established, or maybe even just active, in the EU (there would be a cooperation mechanism for case allocation). There would be a preliminary review to decide whether an in-depth investigation was warranted, and this in turn could lead to the imposing of ‘redressive measures’ (ordering repayment of the subsidy, behavioural or structural changes, or payment by the undertaking concerned to the EU or Member States), or alternatively the taking of binding commitments, with financial penalties for non-compliance.
 
Certain types of subsidy would normally be considered distortive, and there would be a de minimis threshold of €200,000. Other cases would be assessed on the basis of criteria such as the size of the subsidy and the situation of the beneficiary. Distortive effects found would then be weighed against a possible positive impact within the EU (for example on job creation or environmental goals), with the Commission having exclusive competence to apply this ‘EU interest test’. All enforcing authorities would have information gathering powers backed by strict sanctions. 
 

And Module 2?

 
Module 2 would require prior notification to the Commission of a ‘potentially subsidised’ acquisition of control of, or a specified percentage of shares or voting rights, or otherwise ‘material influence’ in, an EU undertaking. A preliminary review would establish whether the acquirer may benefit from direct or indirect foreign subsidies facilitating the acquisition. If so, it would be followed by an in-depth investigation into whether there are subsidies distorting the internal market, which could lead to the taking of commitments or prohibition of the transaction. Completed deals could also be investigated and unwound.
 
A two-step notification process is envisaged, with a short information notice required at the outset. Notification thresholds could be set, which might be quantitative or qualitative, or a combination. Criteria, similar to those in Module 1, would be set for evaluating whether subsidies distort the EU market. Again, there would be a balancing of any distortion against positive effects, and also information gathering powers backed by financial sanctions.
 

And Module 3?

 
Module 3 would require public procurement bidders to declare certain foreign subsidies and would set up a two-stage investigation procedure. If it was found that a foreign subsidy made the procurement procedure unfair this could result in the bidder being excluded from either that specific tender or from tenders generally for a period of up to three years.
 
For more in-depth analysis of points we consider noteworthy, please click on the link below.