As anticipated in our Notice, the Commission adopted a Proposed Regulation to address distortions in the EU market arising from foreign subsidies. The proposed Regulation is fully in line with the June 2020 Foreign Subsidies Commission White Paper to address distortions arising from foreign subsidies (see Commentary by Jones Day EU “Club” becomes more exclusive: Closing the doors to foreign subsidies? (July 2020) for more details. White paper analysis).
The distorting effects of foreign subsidies have highlighted an important vacuum in EU legislation, ie. Significant restrictions on government subsidies under the EU state aid regime apply only to EU member states, allowing non-EU countries to leave. The proposed Regulation aims to fill this vacuum. Some stakeholders question the consistency between World Trade Organization rules and the proposed foreign subsidy instruments. The Commission tried to address some of these problems and indicated that no action taken under the Proposed Regulation would amount to specific action against a government subsidy under the WTO Agreement on Subsidies and Countervailing Measures (Article 32.1). However, it is not known how broadly the Commission would interpret such an exception.
The following discusses the Proposed Regulation and, in particular, its general rules (Section B), ex officio an overview covering all distorting foreign subsidies on the EU internal market (Section C) and specific procedures regarding distorting foreign subsidies in the context of concentration (i.e. mergers and acquisitions) as well as public procurement (Section D).
B. General rules
The proposed Regulation provides a set of general provisions applicable to all instruments contained in the proposal.
Sphere: The proposed Regulation deals with foreign subsidies granted to an enterprise that does business in the domestic market and distorts the domestic market. It provides tools to address all such distortions, especially with a focus on concentration and government procurement.
Competence: The Commission has exclusive competence in the application of the Proposed Regulation. While the earlier White Paper foresaw the role of Member States, this approach was not followed in the Proposed Regulation due to concerns about the potentially inconsistent application of the instruments.
Definition of a foreign subsidy: Foreign subsidy defined as:
- Financial contributions such as capital injections, grants, loans, loan guarantees, tax breaks, offsetting operating losses, compensation for financial burdens imposed by government agencies, debt cancellation, debt-for-equity swaps or schedule changes, waiver of income that is otherwise paid. the provision of goods or services and the purchase of goods or services;
- Provided by a third country, which includes a foreign central government, foreign government bodies at all other levels, foreign government organizations whose actions can be attributed to a third country, as well as any private person whose actions can be attributed to a third country;
- Providing benefits;
- An enterprise conducting economic activities on the domestic market; as well as
- Specially limited legally or de facto an enterprise, industry or several enterprises and industries.
Thus, this very broad definition of foreign subsidies covers any type of contribution by public or private entities, if such action “can be attributed to a third country”.
Distortion of the domestic market: It is believed that distortions in the domestic market occur in the following cases:
- A foreign subsidy “is capable of improving the competitive position of the relevant enterprise” in the domestic market; as well as
- A foreign subsidy “effectively or potentially adversely affects competition” in the domestic market.
Misstatements (actual or purely potential) should be assessed on the basis of “metrics” which may include the size and nature of the subsidy, the position of the enterprise and relevant markets, and the relevance of the enterprise. in the domestic market, as well as the purpose, conditions and use of the subsidy.
It is important to note that the threshold below which a foreign subsidy is considered “unlikely to distort the domestic market” has now been raised significantly. While the White Paper proposed a threshold of € 200,000, the Proposed Regulation sets the total amount at “€ 5 million for any consecutive period of three fiscal years”. The proposed regulation, however, does not completely exclude subsidies below 5 million euros. For subsidies below this threshold, the Commission must provide stricter evidence of misstatement. As a result, operators face uncertainty even when receiving a limited number of subsidies.
Blacklisted subsidies: The Commission identified the following set of subsidies as “most likely to distort the domestic market”:
- Subsidies for bankrupt enterprises;
- Unlimited debt or liability guarantee;
- Subsidies that directly facilitate concentration; as well as
- Subsidies that allow for an unjustifiably profitable tender.
Balancing Assessment: As anticipated in the White Paper, the Proposed Regulation establishes a balancing act in the assessment of subsidies: the Commission should balance the negative effects in terms of distortions with a positive impact on the development of the respective economic activities. This balance needs to be considered when deciding whether to apply remedial (i.e. corrective) measures and commitments, and when determining the nature and level of such possible measures or commitments. This rule would have given the Commission broad powers and thus once again darkened legal certainty.
Commitment and remedial action: In accordance with the Proposed Regulation, the Commission may impose corrective measures to correct actual or potential misstatement. An enterprise can also offer commitments. The proposed Regulation lists possible obligations or remedial measures such as access to infrastructure, refusal of investments, granting licenses, publication of R&D results, divestment of assets, etc. Notably, the list includes “reduction in capacity and market presence”, which implies, that the Commission may even impose a reduction in the presence of the EU market (or even exclusion from it) of the enterprise concerned.
The list of measures also includes the payment of a foreign subsidy to a third country. It does not include compensation payments provided for in the White Paper by the EU or Member States. According to the current proposal, payments to a third country should be transparent and take into account the risk of circumvention.
The proposed Regulation also provides that the Commission may establish general accountability and transparency requirements for commitments and remedial measures. For non-compliance with the decision with the obligations adopted by the Commission, the company may be subject to fines up to 10% of the total turnover and periodic fines up to 5% of the average daily total turnover.
FROM. Ex Officio Overview of foreign subsidies
The proposed Regulation empowers the Commission to investigate any distorting subsidy with a 10-year limitation period commencing on the date the foreign subsidy is awarded. It is important to note that ex officio an analysis of subsidies that have already been reported and considered in accordance with the specific procedures of the Proposed Regulation for concentrations and public tenders (detailed in section D) can also be initiated, and can be used to address situations beyond the thresholds of these specific instruments …
Preliminary review and in-depth investigation: IN ex officio The review procedure is a two-step system consisting of (i) a preliminary analysis to assess whether a financial contribution made to an EU enterprise is a subsidy and distorts (actually or potentially) the EU internal market, possibly followed by (ii ) a thorough investigation if a foreign subsidy is suspected of such a distortion of the domestic market. There is no obligation to notify.
Interim measures: The Commission can take interim measures if there is prima facie proof of the existence of a distorting subsidy and a serious risk of material and irreparable damage to competition in the domestic market.
Information requests: The Commission may request information from the enterprise concerned, other enterprises, the enterprise association, the Member States, as well as the interested third country. The Commission may impose fines (up to 1% of the total turnover) or recurring fines (up to 5% of the daily average total turnover) for the failure of the company or business association concerned to provide the requested information.
Inspections: The Commission can inspect premises of enterprises in the EU. For example, he can enter any premises and the territory of the corresponding enterprise; check ledgers and other business records and make / request copies; ask any company representative to explain facts or documents related to the audit and record the answers; and seal any commercial premises and books or records for the period and to the extent necessary for verification). The Commission may impose the same fines as outlined above for refusing to pass an EU audit or for breaking sealed premises, books or records in the context of an audit.
The Commission may also carry out such checks described above outside the EU, but with the consent of the enterprise concerned and the third country. However, in the event of a refusal to grant such consent, the Commission may take a decision based on the available facts.
Refusal to cooperate: If the enterprises or business associations concerned do not provide the information requested, provide incomplete, incorrect or misleading information, do not respond in a timely manner to such information request, or refuse to accept checks within or outside the EU, or otherwise obstruct the investigation, the Commission may decide on the basis of the available facts. whether there is a foreign subsidy that distorts the domestic market, and eventually proceed to a thorough investigation. When the assessment is limited by the available facts, its result may be less favorable for the interested enterprise than if it cooperated.
Such non-cooperation is also subject to the same penalties discussed above.
D. Mandatory Notification of Concentrations and Public Procurements
With regard to concentration and public procurement, foreign subsidies awarded three calendar years prior to the relevant transaction will be subject to revision triggered by the notification system.
Thresholds: The proposed Regulation sets thresholds for triggering notification systems.
- One of the relevant enterprises (acquired or merged; established joint venture or its parent companies) must be established in the EU and generates a cumulative turnover in the EU of EUR 500 million; as well as
- The companies concerned were to receive a total financial contribution of over 50 million euros from third countries.
For public procurement:
- The threshold for the public procurement procedure is estimated at 250 million euros;
- There is no threshold for foreign subsidies as all foreign subsidies must be notified. Failure to do so will result in exclusion from the competition. This obligation applies to subcontractors whose contribution exceeds 30% of the contract value.
Penalties and periodic interest: In addition to the previously mentioned fines and recurring fines, the Commission may impose fines of up to 1% of the total turnover for failure to provide correct information in both concentration notifications and public procurement notices. In addition, the Commission will have the power to impose fines of up to 10% of the aggregate turnover if businesses fail to notify the concentration to be notified, concentrate in violation of the suspension, or introduce a prohibited concentration or fail to notify a subsidy. in the public procurement procedure.