EU Regulation on Foreign Subsidies Distorting the Internal Market

Since 12 July 2023, the Regulation on foreign subsidies distorting the internal market, the so-called Foreign Subsidies Regulation (FSR, Regulation (EU) 2022/2560) is applicable within the EU. Only two days before (on 10 July 2023), the Commission had published the final FSR-Implementing Regulation explaining the application of the new rules.

Aim of the FSR

The aim of the FSR is to keep the internal market free of competition-distorting third-state subsidies (we reported earlier). In addition to the possibility to initiate ex officio investigations of third-state subsidies, the Commission now has essentially two new control powers for this purpose, i.e., in the context of mergers and in the context of public procurement procedures. These new control powers are reflected in the obligation of undertakings

• to notify concentrations (i.e., mergers) in certain cases and
• when applying for larger public procurement contracts
  • to notify foreign financial contributions or –
  • to declare that the foreign financial contributions are below the notification threshold.

These measures are intended to prevent companies from gaining advantages through state support from abroad that distort intra-European competition, for example by expanding their influence in an anti-competitive manner through takeovers or by submitting unduly advantageous tenders in response to public procurement tenders. Thus, mergers may not be carried out and public procurement contracts may not be awarded during the Commission's FSR investigation.

The new rules

Specifically, since 12 July 2023, the following will apply:

• Concentrations which have been entered into ("signing") since 12 July 2023 and will be completed ("closing") after 12 October 2023 must be notified in advance to the Commission for investigation if the following cumulative conditions are met:
  • At least one of the undertakings concerned
    • is established in the Union and
    • has an aggregate turnover in the preceding financial year of EUR 500 million and
  • both undertakings have received, in the three years prior to the conclusion of the contract, aggregate foreign financial contributions of more than EUR 50 million.
• Anyone applying for public procurement contracts newly tendered since 12 July 2023 must declare all foreign subsidies received in the last three years when submitting a tender or request to participate after 12 October 2023. Admittedly, the notification requirement only applies if
  • the estimated value of the procurement contract is at least EUR 250 million and – in the case of a division into lots – the undertaking is targeting lots worth at least EUR 125 million and
  • the applicant has been granted aggregate foreign financial contributions of more than EUR 4 million per third country in the three years prior to the notification.

However, even if the threshold for foreign financial contributions is not met, an applicant must confirm this in a corresponding declaration and prove this by means of a listing of all foreign financial contributions received in the last three years.

Extensive information gathering

With regard to both foreign financial contributions and aggregate turnover, the FSR also takes into account the controlled and controlling undertakings associated with the undertaking concerned.

For undertakings, notification or declaration can therefore entail time-consuming information-gathering measures. Under the FSR, a foreign financial contributions is any direct or indirect financial contribution provided by a third country. This includes not only the transfer of funds or outstanding debts, but also the waiver of revenue due or the provision and purchase of goods or services. Thus, numerous financial transfers are also covered in addition to "classic” cases which as such constitute obvious subsidies. It is specifically this broad definition in combination with the strict enforcement mechanisms (prohibition of implementation, high fines) that make the FSR so important in practice.

Practical implementation of notifications and declaration

During the legislative process and even after the publication of the FSR itself, numerous uncertainties regarding the practical application of the FSR have arisen. Accordingly, the Commission's final Implementing Regulation (adopted on 10 July 2023) was eagerly awaited. It now contains significant easements: The core of the system based on the provision of information by companies remains in place. However, the purchase or sale of goods or the provision of services to or vis-à-vis third countries at arms-length conditions no longer has to be declared (exceptions: financial services). Moreover, certain tax incentives or exemptions do not have to be reported as long as they are granted generally.

In addition, the Commission has significantly raised the de minimis threshold for relevant foreign financial contributions in case of mergers from EUR 200,000 to EUR 1 million in the Implementing Regulation compared to the original draft. Smaller financial contributions no longer have to be notified.

In public procurement procedures, however, the practical burden for a notification or declaration will increase regardless of whether the financial contributions thresholds have been exceeded, even if the scope of content has been reduced with the Implementing Regulation. This is because even in the context of declarations, the tendering undertakings must declare all foreign financial contributions of the last three years. Only foreign financial contributions of up to EUR 200,000 in three fiscal years ("de minimis contributions") do not have to be declared; contributions of > EUR 200,000 and < EUR 1 million can generally be declared in aggregate figures. Against this background, it is important for all undertakings applying for tenders with the volume mentioned at the outset to consider the FSR in any case. At least a declaration will always be mandatory.

Need for action

For undertakings whose activities can even potentially fall within the scope of the FSR, it has thus become indispensable to structure the compilation of group-wide information in such a way that relevant contracts with third countries, the granting of exclusive rights, tax incentives, etc. can be traced on a global basis for the relevant period of three years and that the information can be extracted reliably and completely. This is because violations of the FSR may result in prohibitions of mergers or exclusions from public procurement procedures as well as additional sanctions.

Our competent team will be happy to answer any questions you may have in connection with the FSR.

We would like to thank Moritz Wiechert for his valuable contribution to this article.