According to the Foreign Subsidies Regulation1 (FSR), as of 12 October 2023 all companies operating in the EU must notify concentrations and participations in public procurement procedures which meet certain thresholds where such companies have received foreign subsidies (FS) i.e., subsidies from a third country (i.e., not a Member State of the EU).
Under the new rules companies, regardless whether they are EU-based or not, may be made subject to interim measures, redressive measures, requests for information and inspections as well as be fined up to 10% of their turnover in case of infringement. Absent notification, complaints by rivals are a likely possibility.
In the following sections, we explain (1) when a company must notify FS, (2) what triggers the obligation to notify, (3) how to identify a subsidy, (4) when a subsidy is granted by a third country, (5) the procedure for notification, and (6) the powers of the European Commission.
The objective of this document is to identify all risks to avoid pitfalls and to recommend best practices in relation with the new EU system of control of foreign subsidies.
Each section of this document addresses some of the main points that you and your organisation should know about the FSR. To receive further information or guidance on these or any other questions related to the FSR, do not hesitate to contact us.
Is my company obliged to notify?
The so-called "notifying party" varies according to whether the underlying situation relates to a concentration or to participation in public procurement procedures (see 2, below). Besides, as the term "company" relates to the group to which a company belongs, a remote subsidiary in the corporate chart may trigger the notification obligation for its holding company.
The notifying party in a concentration varies depending on whether it is a merger, an acquisition, or a JV.
The notifying party in public procurement procedures includes the bidders to the contract and, under certain conditions, the main subcontractors, and main suppliers.
What triggers the obligation to notify?
Companies that enter into concentrations and companies that bid in public procurement contracts in the EU are obliged to submit a notification to the Commission (concentration) or to the contracting authority/entity (public procurement) provided the following thresholds are met.
A concentration is deemed to occur where a change in control results from either a merger, the acquisition of control of another company or the creation of a full-function JV.
Concentrations must be notified to the European Commission when the following thresholds are met:
a One of the merging companies, the acquired company or the JV is established in the EU and has an EU turnover above 500M, and
b Any of the following: the merging companies, the acquirer(s), the acquired, the JV parents and the JV, received foreign financial contributions (FFC) of at least 50M in the last three years.
Notification in a public procurement procedure is compulsory if the following thresholds are met:
a The value of the public procurement is at least 250M, and
b The bidder, including its subsidiaries, its holding companies and, under certain conditions, its main
contractors and suppliers were granted FFC of at least 4M in the last three years. In a public procurement procedure, a notification may be required, or, under certain circumstances, a declaration may suffice. In addition, two types of notification are possible, a detailed notification or a lighter notification consisting of an overview of FFC of at least 1M.
What is an FS?
A pre-requisite for an FS is that an FFC exists, but not all FFCs are necessarily an FS. The identification of an FS requires a complex assessment but in essence, an FS is an FFC by a third country that confers an advantage and is limited to one or more companies/sectors of the economy.
The notification obligation under the new EU system of control of foreign subsidies relates to FFC and not to FS.
An FFC is any (i) transfer of funds (ii) foregoing of liabilities, and (iii) provision or purchase of goods or services to/by a foreign country to an undertaking.
If you get in touch with us, we would be happy to explain, by way of example, what are transfer of funds or liabilities (e.g., capital injections, grants, loans, guarantees, fiscal incentives, setting off of operating losses, debt forgiveness and debt to equity swaps and rescheduling) and the foregoing of revenues.
The provision/purchase of goods or services is most controversial because interpreted extensively, any company that supplied/procured goods/services to/from a third country in the last three years' worth 50M (concentrations) or 4M (public procurement procedures) is obliged to notify. There are exceptions to the obligation of notification in cases where the goods/services were supplied/procured in open, transparent and non-discriminatory procedures (i.e., at market prices).
When is a subsidy "foreign"?
Only foreign contributions from a third country (i.e., not a Member State of the EU) are caught by the new system of the EU of control of foreign subsidies.
A third country includes the central government and public authorities of all levels (region, local...). In addition, actions by "public entities" and "private entities" can also be attributed to the third country.
The notion of public undertaking refers not only to companies whose capital is owned by the public sector (publicly controlled companies) but also to companies over which the state exerts a direct or indirect dominant influence. However, not every decision taken by a publicly owned/controlled company can be attributed to the third country. The State must be involved in the decision to adopt the measure and certain conditions be satisfied.
The action of a private entity can also be attributed to the State:
When acting as an intermediary (indirect aid). A transfer of funds from the State to a private company, who then transfers the funds to the ultimate beneficiary. An example of this situation may exist when public funds are provided to airports, but the indirect recipients are the airlines using that airport.
When a stringent regulatory framework regulates certain transfers between private companies. An example of this situation may exist when the State mandates certain compulsory financial contributions to be made to the beneficiary. The resources are not managed or administered by the State at any point, but the transfer was ordered by it.
The reference in the FSR to "elements such as the (...) economic environment prevailing in the State in which the entity operates, including the government's role in the economy" coupled with the fact that no impact on the public budget is required by the FSR, will likely result in actions by private companies constituting an FFC under the FSR more easily than their equivalent under EU State aid law.
Bird & Bird can support companies with the entire notification process, including:
- how to fill in the relevant Form (Form FS-CO and Form FS-PP),
- the conditions for notification or declaration in public procurement procedures,
- the type of information required,
- how to negotiate pre-notification discussions and waiver requests,
- how to deal with confidential and personal data,
- the submission of supporting documentation, and
- the possibility of exceptions to the obligation to notify.
Powers of the Commission
The European Commission is the competent authority to apply the FSR and can act in three situations: (i) ex officio review of foreign subsidies, (ii) notification of concentrations and (iii) notification/ declarations of foreign financial contributions in the context of public procurement procedures.
According to public statements by high-ranking Commission officials, ex officio cases will not be a priority in the early stages of application of the FSR but rather the treatment of notifications2.
The Commission is competent to balance the negative distortive effects of an FS in the internal market against its positive effects on the development of the subsidised economic activity (balancing test).
The Commission is entitled to order redressive measures, such as reducing capacity, publication of results of R&D, divestment of assets, dissolve the concentration, repayment of the foreign subsidy and adaptation of the governance structure of the company.
The Commission is entitled to accept commitments offered by the undertakings under investigation where such commitments fully and effectively remedy the distortion in the internal market of the EU and make the commitments binding on the companies.
The Commission is equally competent to adopt interim measures, such as offering access to infrastructure, production facilities, refraining from certain investments and licensing of IP or assets.
Companies can be made subject to requests for information and interviews with their staff as well as inspections within the EU and, under certain conditions, outside the EU. During inspections the Commission may request explanations in the form of oral statements from officials and external representatives of companies.
The Commission is competent to impose fines up to 1% of a company's turnover and periodic penalty payments up to 5% of the daily average turnover for infringements of a procedural nature such as the provision of incorrect or misleading information, refusal to provide complete answers on facts, refusal to submit to inspections, etc. Fines for substantive infringements such as not compliance with commitments, interim measures or redressive measures can be up to 10% of a company's annual turnover.