The objective of this plan is to provide an internal market with fair playing fields. This proposed rule is an essential next step after the Commission published a White Paper on anti-discriminatory Subsidies in June 2020. The White Paper outlined a number of strategies to overcome the distortions brought on by foreign subsidies. The plan is based on the notion of "increasing strategic autonomy" and is a component of the larger EU 2020 industrial policy.

What does the proposal state?

The objective of this plan is to provide an internal market with fair playing fields. This proposed rule is an essential next step after the Commission published a White Paper on anti-discriminatory Subsidies in June 2020. The White Paper outlined a number of strategies to overcome the distortions brought on by foreign subsidies. The plan is based on the notion of "increasing strategic autonomy" and is a component of the larger EU 2020 industrial policy.

The proposal in detail

The proposed rule gives the Commission the authority to look into financial aid provided to businesses operating in the EU by non-EU governments (often known as "foreign subsidies").

The proposed rule includes corrective measures in cases where the Commission thinks a monetary contribution has a negative impact on the internal market (or commitments by the undertaking concerned). These actions include a reduction in market presence, the divestiture of certain assets, or a payback of the subsidy by the undertaking to correct the distortion.

Since the initial suggestions, further measures have been implemented, such as requiring more reporting and openness and changing governance structures.

The concept of "foreign subsidy" under the proposed law resembles that of "state aid" in many ways. It necessitates a monetary contribution, coming either directly or indirectly from a non-EU government or specific public body, that grants an advantage to an enterprise engaged in an economic activity within the internal market, with the latter advantage being granted sporadically, either in law or in practice. The most recent wording to be agreed upon states that a foreign subsidy shall be viewed as provided as soon as the beneficiary is granted a right to receive the foreign subsidy. A foreign subsidy need not actually be paid out in order for it to be under the purview of the rule. Affected subsidies come in a variety of shapes, including:

  • a transfer of cash or a decrease of obligations, such as debt forgiveness, debt-to-equity swaps, capital infusions, grants, loans, loan guarantees, tax incentives, operational loss set-offs, and compensation for financial constraints imposed by public authorities; 
  • the refusal of money that would otherwise be owed, including tax breaks or the granting of unique or exclusive rights without sufficient compensation; or 
  •  the provision of goods or services or the purchase of goods or services.

Additionally, for a foreign subsidy to be included, the market must be distorted. It appears that there may be a relatively low threshold for potential distortion indicators, as opposed to the initial proposal's €5m barrier, which assumed that overall subsidies would be unlikely to cause internal market distortion if their value is less than €4m over three consecutive years. Three new techniques for assessing distortion are introduced in the draft regulation:

  1. a notification-based method for looking into company mergers, or "concentrations," as the rule is known. These include mergers, acquisitions, and joint ventures involving a financial contribution from a non-EU government, etc., in which the acquired company, one of the merging parties, or the joint venture generates an EU turnover of at least €500 million, and the transaction involves parties who received foreign financial contributions from any number of non-EU countries totaling at least €50 million in the three years prior to the transaction;
  2. a notification-based tool to look into bids in public procurements involving financial contributions from non-EU governments, etc., where the estimated contract value is at least €250 million and the bidder (or different group members, bid subcontractors, or suppliers) received foreign financial tax incentives of at least €4 million per non-EU country in the previous three years; and
  3. An all-purpose instrument to look at any other market circumstances, where the European Commission can commence a review on its own initiative or ask for an ad hoc notification for minor concentrations and public procurement processes.

According to the proposed legislation, parties would have three years to report ex-ante financial contributions they received from non-EU public bodies before finalizing a merger or public procurement process that exceeds the necessary criteria. If it detects the existence of anticompetitive subsidies, the European Commission may also ask for ad hoc notifications for smaller concentrations and public procurement processes. It should be noted that the concentration in issue cannot be finished and the investigated bidder cannot be given the contract awaiting the European Commission's examination.

The further effect

After being formally approved by the European Council and the European Parliament and published in the Official Journal, the rule will go into effect. After six months, the Regulation will be directly applicable throughout the European Union. Given the wide nature of financial contributions and the relatively low limits, the notice duties, which will become effective nine months after the law becomes effective, seem especially onerous in respect to concentrations. So, if the law were to be adopted at the end of this year, it would likely take effect in the middle of 2023, and the notification requirements would begin in the third quarter.

For companies outside the European Union that want to make investments or otherwise access the EU internal market, this plan may result in a greater regulatory burden. A extended public procurement procedure and enhanced scrutiny for mergers and acquisitions are just a few more possible effects. Businesses that may be impacted by the idea should keep an eye on it and think about any additional steps that could be needed if it were to pass.

Want to know in detail how would the new rule affect your business?

Contact EU LAW FIRM lawyers for a more thorough examination of how the proposed rule could impact your business.

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