Foreign Subsidies, European Obligations The new EU Foreign Subsidiaries Regulation

Foreign Subsidies, European Obligations The new EU Foreign Subsidiaries Regulation

On 12 January 2023 the EU Foreign Subsidiaries Regulation (“FSR”) entered into force, providing the EU with a brand-new tool aimed at ensuring fairer competition within the internal market. For companies, however, this means in turn some new notification requirements and the risk of relevant fines. Written by Francesco Mazzocchi, Manuela Becchimanzi, Christoph Heinrich and Cathleen Laitenberger at European law Verein ADVANT.

Why this new FSR?

The FSR enables the European Commission (“Commission”) to tackle subsidies stemming from non-EU Member States to companies active in the EU that could potentially distort competition in the internal market. By doing so, the Regulation fills a regulatory gap: while subsidies granted by Member States are subject to close scrutiny under European State Aid Law, subsidies granted by non-EU governments were so far going unchecked.

The FSR in a nutshell

The FSR establishes two new (or rather additional) tools by means of which the Commission can review the influence of foreign investments on the European market:

  1. Notification requirements: companies that have received substantial financial contributions from non-EU governments are obliged to notify certain large mergers or public tenders.
  2. Out of office investigations: possibility for the Commission to start investigating foreign subsidies also outside the companies’ notification obligations.

The target of the Regulation – as per its title – are foreign subsidies having distortive effects. Therefore, these concepts shall first be defined:

Foreign subsidy

A subsidy is defined as:

  1. a financial contribution;
  2. which is provided by a non-EU state;
  3. which confers a benefit on the recipient; and
  4. limited to one or more businesses or industries (i.e. it is selective).

The concept of “financial contribution” is broad and covers any transfer of funds, forgoing of revenues, or provision or good or services. A financial contribution is considered to confer a benefit on a company if it could not have been obtained under normal market conditions. The Commission assesses the existence of a benefit on the basis of comparative benchmarks, such as the investment practice of private investors, the financing rates obtainable on the market, a tax treatment applied to similar companies or the adequate remuneration for a given good or service.

A subsidy is distortive if it is liable to improve the competitive position of the recipient company in the internal market. Article 5 of the FSR provide a list of certain categories of subsidies that are likely to have distortive effects, and namely:

  1. subsidies granted to an ailing undertaking, unless there is a restructuring plan in place;
  2. unlimited guarantees for debts and liabilities;
  3. an export financing measure that is not in line with the OECD Arrangement;
  4. support for a specific merger or public tender.

Notification requirements

When a company receives a foreign subsidy, it now has a notification obligation in cases of certain mergers and public procurement procedures.


Companies must notify to the Commission concentrations involving a financial contribution by a non-EU government where:

  1. the acquired company, one of the merging parties or (once established) the joint venture is established in the EU and has an aggregate EU turnover of at least €500 million and;
  2. the parties to the transaction (e.g., the buyer and the target or the undertakings creating the joint venture and the joint venture) received a financial contribution from countries from outside the EU of at least €50 million in the last three years.

The notified concentration cannot be implemented while under the Commission’s review (stand still obligation, risk of fines up to 10% of the annual turnover if not complied).

The same procedure as on EU merger control applies: pre-notification is followed by a Phase 1 review (25 working days), and possible Phase 2 (90 working days), with the possibility for the companies to offer commitments.

The Commission enjoys a wide range of investigative powers. It may send information requests to companies and conduct fact-finding missions within and outside the Union.

The Commission has powers to remedy distortive effects caused by foreign subsidies, by

(i) prohibiting the merger transaction;

(ii) implementing structural remedies (such as divestments or capacity reductions);

(iii) implementing behavioural remedies (such as access commitments for infrastructure, publication of R&D results);

(iv) implementing obligation to inform the Commission of future mergers or public procurement procedures.

The Commission further draws up rules and procedures for merger and public procurement notifications under the FSR (“Draft Implementing Regulation”), which are expected to be adopted by mid-2023. These contain rules regarding the procedures for filing, in particular the required content of notifications, rules for calculating time limits and procedural rules on preliminary reviews and in-depth investigations.

Public procurement

Notification obligations now also apply to public procurement procedures involving financial contributions by non-EU governments where:

(i) the estimated contract value is at least € 250 million and;

(ii) in cases where the tender is divided into lots, the aggregate value of the lots applied for is at least € 125 million; and

(iii) the foreign financial contribution involved within the last three years is at least € 4 million per non-EU country.

These include not only financial contributions granted to the bidder itself, but also contributions received by the bidder’s main subcontractors and suppliers involved in the same tender.

Where the conditions for the notification are met, the bidder notifies to the contracting authority. The contracting authority transfers the notification to the Commission.

The Commission may initiate a preliminary review period (20 days), followed by a possible in-depth review (110 days). An investigated bidder cannot be awarded the public procurement contract while under investigation by the Commission. However, a contract can yet be awarded to a non-subsidized best bidder in certain cases.

Moreover, in the context of notifications within public procurement procedures the Commission can make use of its investigative powers and also implement remedies, including to prohibit the public contract award.

Ex-officio investigations

The Commission may also start investigations on its own initiative (ex-officio) even in cases where the thresholds are not met if it suspects that distortive foreign subsidies are in place. The Commission can thereby examine information from any source regarding alleged distortive foreign subsidies. Also in these events, the Commission enjoys its wide range of investigative powers, including the possibility to send information requests to companies and launch market investigations into specific sectors or types of subsidies.

In case of non-compliance (also concerning the notification requirements), the Commission may impose fines (up to 10% of the annual turnover).

To Dos for companies

The FSR enters into force on 12 July 2023. As of that date, the Commission may launch ex-officio investigations.

The new notification requirement for companies comes into effect from 12 October 2023. From this date onwards, relevant mergers or public procurements must be notified.

As regards the Commission’s wide ranging investigative power, it is advisable to all companies to set up internal reporting systems to gather information on all forms of financial contributions from non-EU governments in the past years – and going on.

As the obligatory notification may affect the timeline on mergers or public procurement procedures, it is further advisable to consider this additional notification requirement in the transaction timeline or the timeline of application to the public procurement. Therefore, companies engaged in mergers or public procurement procedures that meet the relevant thresholds should review in due time whether foreign subsidies have been received.

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