The European Commission has now adopted its long-awaited Implementing Regulation in relation to the EU's new Foreign Subsidies Regulation ("FSR"). The Implementing Regulation includes the notification forms setting out what information must be provided in relation to concentrations and public procurements. The information requirements have been reduced considerably compared to the drafts published earlier this year and should help companies focus their due diligence efforts. The new regime becomes applicable from 12 July 2023 with the notification obligations commencing from 12 October 2023.
Three intervention tools
The FSR is a new EU regulatory regime that is essentially intended to "level the playing field" between EU operators and their competitors from non-EU Member States which are not subject to EU State aid rules and are consequently able to provide their companies with significant State subsidies.
It seeks to do this by creating three new subsidy control tools for the European Commission (Commission) to address foreign subsidies:
- A general ex-officio tool for the Commission to investigate allegedly distortive foreign subsidies. This tool is wide-ranging and covers any foreign subsidy granted during a prior five-year period, including those falling below the notification thresholds for the two notification-based tools in relation to concentrations and public procurements (see below).
- A notification-based tool in relation to potentially subsidised mergers and acquisitions (so-called "concentrations"), with thresholds based on turnover and the amount of foreign "financial contributions" received by the undertakings concerned. Concentrations will need to be notified where: (i) the undertaking to be acquired, one of the merging undertakings (in the case of a true merger), or the joint venture is established in the EU and has aggregate EU turnover of €500 million or more; and (ii) the aggregate amount of the foreign "financial contributions" received by the undertakings concerned is more than €50 million over the three years prior to notification.
- A notification-based tool in relation to potentially subsidised public procurement bids, with thresholds based on the value of the procurement and the amount of foreign "financial contributions" received by the bidder group. Bidders will need to make a notification where the estimated value of the procurement at issue is €250 million or more and the bidder group has received foreign "financial contributions" amounting to at least €4 million from a third country.
The FSR was formally adopted by the EU Institutions on 28 November 2022. It starts to apply from 12 July 2023, with the notification obligations commencing from 12 October 2023.
The notion of "foreign financial contribution" and the draft Implementing Regulation and notification forms
Although the aim of the FSR is to address foreign "subsidies" that distort competition in the EU, it is important to appreciate that the notification obligations are triggered not by foreign "subsidies", but by foreign "financial contributions", which have a much wider scope.
A foreign "financial contribution" essentially may include any transfer of financial resources from non-EU public authorities, including for example, payment by a non-EU public authority for goods and services, even if this is on market terms and therefore there is no real "benefit" and no "subsidy" to speak of. If information in relation to all such foreign "financial contributions" were to be required in notifications, this would have resulted in companies having to provide potentially vast amounts of information that they simply would not ordinarily track as part of their normal processes.
The draft Implementing Regulation and notification forms published by the Commission earlier this year did little to assuage companies' concerns. While the Commission put forward certain de minimis thresholds for reportable foreign financial contributions, these were considered by many as being too low to meaningfully reduce the information requirements to something that would be manageable.
The final Implementing Regulation and notification forms
The Commission has been receptive to the criticism received and has now adopted a revised, final version of the Implementing Regulation and notification forms which significantly reduce the information required in notifications. In particular:
- Detailed information and supporting documents will only need to be provided in relation to foreign financial contributions that fall within the specific categories considered as being most distortive under the FSR. These are: bail outs without an adequate restructuring plan including a significant own contribution; unlimited guarantees; non-OECD compliant export financing; a foreign financial contribution directly facilitating a concentration (for notifications of concentrations); and a foreign financial contribution enabling an unduly advantageous tender to be submitted (for notifications of public procurements).
For each of these types of foreign financial contribution, information only needs to be provided in relation to individual foreign financial contributions equal to or above EUR 1 million.
- For other types of foreign financial contributions, only summary, aggregated information needs to be provided. The only information that needs to be provided is the granting country; the types of financial contribution; a brief description of the purpose of the financial contributions and the granting entities; and an estimated range of aggregated financial contributions granted by each country.
For concentrations, information only needs to be provided in relation to such foreign financial contributions that are individually equal to or above EUR 1 million and where the aggregate foreign financial contributions per third country amount to EUR 45 million or more during the past three years. For public procurements, the relevant aggregate threshold is lower – EUR 4 million or more per third country.
In addition, the following types of foreign financial contributions are excluded altogether:
- Generally applicable tax / social security contributions deferrals, tax amnesties, tax holidays, and normal depreciation and loss carry forward rules (provided they are of general application). However, measures that are limited, for example, to certain sectors, regions or types of undertakings, have to be included (this is an important distinction to keep in mind).
- Tax reliefs for avoidance of double taxation.
- Payments for provision / purchase of goods / services at market terms in the ordinary course of business, except for financial services (such as a State guarantee).
Finally, in the case of concentrations where the acquisition is being made by an investment fund, foreign financial contributions received by other funds within the group can also be excluded in certain circumstances.
Practical impact and due diligence
The information requirements in the final Implementing Regulation and notification forms remain significant, and will continue to cover many types of foreign financial contributions (e.g. tax benefits to attract investments to a particular region). But they have been reduced considerably in comparison to the Commission's earlier draft. In particular, the exclusion of payments for the supply of goods / services to foreign public authorities at market terms in the ordinary course of business will help make the burdens under the new FSR more manageable. More generally, the final notification forms are now more focused on those foreign financial contributions that are more likely to be considered as actual foreign 'subsidies' (i.e. foreign financial contributions which are specific and confer an economic advantage), which is what the FSR seeks to address in the first place.
It should be noted that the notification forms do not affect the primary thresholds for foreign financial contributions under the FSR that determine when a concentration or public procurement is notifiable, i.e. EUR 50 million in the case of concentrations or EUR 4 million per third country in the case of public procurements, during the past three years. The notification forms explicitly state that all foreign financial contributions, including the excluded categories set out above, will be counted against these thresholds.
While this raises the question of how companies would be able to assess accurately the amounts of such wide-ranging foreign financial contributions, given the low levels of these primary thresholds, it is anticipated that they would be easily exceeded by most companies. Therefore, the focus of companies' due diligence can most probably relate to those categories of foreign financial contributions that are reportable under the notification forms.
The Commission will be publishing further Q&A in relation to the Implementing Regulation and notification forms as the FSR starts to apply from 12 July 2023 and the Commission readies itself to receive pre-notifications in relation to notifiable concentrations and public procurements. We will continue to monitor and update in relation to further developments.