New EU foreign subsidies regulation starts to apply

The Commission has also adopted legislation that sets out procedural, notification and other requirements that relate to the implementation of the FSR, including in relation to the new mandatory notification regime that will take effect on 12 October 2023.

The FSR allows the Commission to investigate financial contributions granted by non-EU countries – including EEA countries – to businesses operating in the EU. The FSR was added to EU statute books on 12 January but its substantive provisions take effect in two stages: as of 12 July, the Commission can launch ‘ex officio’ investigations; and from 12 October, new mandatory prior notification and approval rules will apply to M&A deals and public procurement procedures involving the EU that trigger certain jurisdictional thresholds.

The FSR’s implementation creates new substantive obligations on businesses operating in the EU Single Market, compliance with which will require careful planning and monitoring.

Ex officio investigations – from 12 July 2023

The Commission is now able to use its ex officio powers under the FSR to investigate foreign subsidies that have been granted to businesses involved in certain M&A transactions or “concentrations” (i.e. mergers, acquisitions or joint ventures), public procurement procedures and other market situations, that were concluded on or after 12 July 2023, if it suspects that these might have distorted competition in the EU. The investigation includes consideration of the negative and positive effects on the EU Single Market of the foreign subsidies that have been granted.

Such ex officio investigations may be opened by the Commission on its own initiative, including in response to complaints it receives from third parties. When conducting an ex officio review the Commission can consider a foreign subsidy up to 10 years since it was granted, but cannot look back further than five years prior to the start of application of the FSR (i.e. 12 July 2018). If the Commission finds that the foreign contributions in question constitute subsidies which distort the EU market, it can require the relevant parties to provide certain commitments or impose redressive measures consisting of structural or behavioural remedies. For example, it could require a completed transaction to be unwound if no other measure can address adequately the Commission’s concerns.

On 10 July, the Commission adopted the Implementing Regulation (IR) which was published in the Official Journal of the EU on 12 July 2023. The IR sets out important rules that relate to the procedural, notification and certain other aspects of the FSR regime including, for example, the procedures that the Commission will follow when carrying out investigations. The Commission has also published Q&As covering the IR as well as the broader FSR regime.

Mandatory notifications regime – from 12 October 2023

From 12 October, M&A transactions (i.e. mergers, acquisitions or joint ventures) and public procurement procedures which have an EU nexus and trigger certain jurisdictional thresholds will be subject to mandatory and suspensory prior notification and approval requirements.

Qualifying M&A transactions signed on or after 12 July which are not implemented before 12 October, and which meet the notification thresholds, must be notified and subject to the standstill obligation (i.e. the transaction must not close without prior Commission approval). The notification obligation will not apply to M&A transactions for which the agreement was concluded on or after 12 July but which are implemented before 12 October. Parties to M&A transactions are encouraged to commence pre-notification discussion with the Commission from September, to facilitate the submission of completed M&A notifications from 12 October.

The IR provides the notification forms for M&A transactions (Form FS-CO) and for public procurement procedures (Form FS-PP). The IR was adopted following the Commission’s public consultation on a draft version earlier this year. That consultation revealed a range of concerns among stakeholders, in particular regarding the volume of detailed information that parties were required to provide under the notification forms contained in the draft IR. The Commission sought to address these criticisms by paring back the most burdensome information requirements in the final version of the IR and the notification forms it contains. 

M&A notifications

The final IR materially simplifies and reduces the information required to be reported.

Detailed information must now be provided only for foreign financial contributions (FFCs) of individual amounts totalling at least €1 million granted to the transacting parties over the past three years (i.e. three years prior to the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest), where the FFC is of a type considered under article 5 of the FSR to be most likely to distort the internal market (e.g. corporate bailouts, unlimited guarantees, export financing, payments directly facilitating M&A deals). Previously, the draft IR required detailed information for all FFCs falling under article 5, regardless of their value.

FFCs that are not considered distortive under article 5 of the FSR need only be listed in summary table format, and only for third countries where the estimated aggregate amount of all FFCs in the preceding three years totals €45 million or more. Although it is difficult to reconcile this higher figure in the IR with the much lower €4 million ‘de minimis’ figure set out in the FSR itself, it is likely that this apparent inconsistency reflects the Commission’s attempt to address some of the concerns that businesses had expressed about the burdensome nature of requirements set out originally in the draft IR. These FFCs can be grouped by country and type, and provided in ranges, with a brief description of the purpose for each type of FFC.

The following FFCs do not need to be reported in the summary table:

• deferrals of payment of taxes or of social security contributions, tax amnesties and tax holidays as well as normal depreciation and loss-carry forward rules that are of general application; unless these are limited, for example, to certain sectors, regions or (types of) undertakings;
• application of tax reliefs for avoidance of double taxation in line with applicable bilateral or multilateral agreements, as well as unilateral tax reliefs for avoidance of double taxation under national tax legislation that align with relevant bilateral or multilateral agreements;
• provision/purchase of goods/services (except financial services) at market terms in the ordinary course of business;
• FFCs below the individual amount of €1 million over three years (the draff IR previously set this reporting requirement much lower, at €200,000 or more).

For investment funds involved in M&A transactions, some FFCs made to other investment funds within the group (or their portfolio companies) do not need to be reported in the notification under certain conditions specified in the IR.

It is important to distinguish between the FFC value threshold specified in the FSR that is used, together with an EU turnover threshold, to determine if an M&A transaction is notifiable in the first place (i.e. total EU turnover of at least €500 million in the last financial year and FFC(s) totalling €50 million or more in the preceding three years); and the FFC values specified in the IR – described above – which are used to identify what particular information should be provided in the notification form for a notifiable M&A transaction. The Commission has sought to explain this in its Q&A by stating that, even if certain FFCs are not reportable in the M&A notification form under the IR, the total value of all FFCs granted in the preceding three years must be considered when calculating whether or not the €50 million FFC value notification threshold under the FSR is triggered.

Parties should also be aware that the Commission may require additional information on notified transactions at any stage of the assessment, based on a case-by-case assessment.

All this means that, in practice, business still need to internally identify and track all FFCs on a rolling three-year basis, irrespective of their value or distortive potential.

The Commission has also clarified that the relevant moment in time for determining which FFCs are relevant for a given notification is the date on which the financial contribution is granted (i.e. the moment the beneficiary obtains a legal entitlement to receive it), not the date on which it is received - the date the actual disbursement of the funds occurs is not relevant. As expected, this approach is consistent with the rules that apply under EU State aid rules. The Commission has provided certain helpful illustrative examples on this point in its Q&A.

Public procurement notifications

The IR, as finally implemented, differs in several important respects with the draft version.

The final IR takes a less strict approach as regards the circumstances in which a bidder may request permission to omit from its notification any information which is “not reasonably available”. Under the draft IR, this provision was characterised as being relevant only in “exceptional circumstances” but this wording has now been removed, suggesting requests can be made under normal circumstances and without special justification. The final IR also softens the originally proposed requirement for parties to provide best estimates for the missing data when making such waiver requests to a requirement to provide such estimates “where appropriate and to the extent possible”. These changes will make it easier for bidders to rely on this exemption and lowers the threshold of the effort bidders must expend to obtain estimates.

If a bidder has received FFCs that are considered more likely to be distortive under article 5 of the FSR, the final IR only requires the bidder to provide details for the FFCs which are individually worth at least €1 million, rather than – as was the case in the draft IR – details of every subsidy of this nature. This will further reduce the reporting burden for bidders in these situations. This also mirrors changes to corresponding requirements in the M&A notification form.

As regards ‘regular’ FFCs – that is, not those deemed under article 5 of the FSR to be most distortive – the final IR requires bidders only to provide an overview of each FFC worth at least €1 million where the total FFCs received from that country is over €4 million. This will be welcome relief to bidders as the draft IR required, in line with the FSR, details of every FFC once the €4 million threshold was reached. This had been the cause of much anxiety for businesses around the world and the subject of many complaints in responses to the consultation on the draft IR. In addition, certain FFCs do not need to be detailed at all now: certain tax leniencies, tax reliefs, and the provision or purchase of goods and services (other than financial services) on market terms. This final carve out would cover any contract won through a competitive, transparent and non-discriminatory public procurement process. Nonetheless, bidders will still need to collect data on their revenues from such contracts to determine if and when they surpass the €4 million threshold per third country.

While it is difficult to see how the final IR is consistent with the FSR on the scope of FFCs to be detailed in a notification – the latter requires notification simply of “all foreign financial contributions” once the €4 million threshold has been reached – businesses will likely choose to follow the significantly less burdensome approach in the final IR unless and until further Commission guidance is published or a legal challenge is raised.

In circumstances where the bidder has not received FFCs exceeding €4 million over the past three years from any non-EU country, the bidder must complete a declaration to this effect. The final IR also reduces the burden for bidders here compared to the draft IR: bidders now do not need to provide the individual values of contributions totalling less than €1 million per third country and can simply provide an aggregate total, and they do not need to provide any information at all where the total FFC amount from that country is less than €200,000. There is no change where the total contributions received is between €1 million and €4 million for any third country – every FFC must continue to be listed.

Practical considerations and next steps

Businesses which have received FFCs that are considered more likely to be distortive under article 5 of the FSR, or where the FFCs have been received from particular non-EU countries in relation to which the Commission had previously expressed concerns, should already be taking steps to prepare for the possibility of ex officio investigations. It is understood that the Commission does not presently intend to adopt formal procedures for receiving complaints about parties allegedly receiving foreign subsidies that could be distortive under the FSR, although such complaints could potentially lead to ex officio investigations. The Commission has included two dedicated email addresses in its Q&A – one for public procurement procedures and another for M&A deals and other market situations – that any interested party may use to contact the Commission directly about possible foreign subsidies.

The Commission has wide investigatory powers under the FSR, including the ability to conduct dawn raids within and outside the EU – although inspections outside the EU can be conducted only if the government of the third country has been officially notified and does not object. The Commission may additionally seek consent of the third-country business before carrying out such inspections. The practical implications for businesses facing FSR dawn raids are expected to largely mirror those that apply to competition law dawn raids.

As already noted, the mandatory prior notification and approval rules for certain M&A transactions and public procurement procedures linked to the EU will start to apply from 12 October. However, businesses should have already begun preparing for this new regime. While the final IR reduces the volume and detail of information that parties must provide when notifying M&A deals or public procurement procedures, the overall administrative burden for businesses that receive FFCs will remain considerable under the FSR. 

In practice, business will still need to internally identify and track all FFCs on a rolling three-year basis, irrespective of their value or distortive potential. This is because all FFCs granted in the preceding three years will need to be counted when calculating whether or not notifications threshold under the FSR are triggered, even if certain FFCs will not need to be reported in the actual notification form. Businesses also need to be aware that the reportability of certain FFCs in notification forms will vary depending on whether they are made on market terms or in the ordinary course of business, or otherwise. Further, the Commission may require additional information when examining notified transactions or public procurements.

In an attempt to provide businesses with greater certainty, the Commission has committed to “start clarifying” the concepts of “distortion” and “balancing test” under the FSR, no later than one year after the regime started to apply – that is, by 12 July 2024. The Commission will also publish formal guidelines on certain key concepts included in the FSR within three years after its the entry into force – by 12 July 2027. This considerable delay may, however, cause legal uncertainty for businesses that can already face ex officio investigations and, in less than three months’ time, may be obliged to navigate complex new M&A or public procurement notification procedures. 

As the new FSR regime beds down, it is hoped that the Commission will engage with businesses in an open and constructive manner and that it takes a flexible and pragmatic approach - particularly in relation to the notifications regime - to overcoming ‘teething’ issues through the effective use of pre-notification discussions and waivers.

Co-written by Tadeusz Gielas and Hector Denfield of Pinsent Masons.