On December 23, 2022, the European Union adopted Regulation 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (Foreign Subsidies Regulation or FSR).¹

The new rules set regulatory impediments for foreign companies in public tenders and M&As in the EU. Once the FSR comes into effect on July 12, 2023, it will allow the European Commission to investigate financial contributions granted by non-EU governments and prohibit foreign subsidies that it considers distortive to competition in the single market.

The Foreign Subsidies Regulation was proposed (for more on this, see our previous Client Alert) by the Commission back in May 2021. According to EU lawmakers, the new instrument will address a gap in EU market regulation whereby subsidies provided by non-EU governments remained relatively unregulated, while those provided by EU member states were subject to scrutiny under the EU State Aid regime.

New tool

The purpose of the Foreign Subsidies Regulation is to provide the Commission with authority to investigate financial contributions granted by foreign governments to businesses operating within the EU and which may thus create internal market distortions. The FSR provides a broad definition² of what is meant by a financial contribution and includes the following:

• State funding, such as capital injections, grants, loans, guarantees, fiscal incentives, compensation for financial burdens, debt forgiveness, debt to equity swaps or rescheduling, etc.;
• Foregoing of state revenue, such as capital tax exemptions or the granting of special or exclusive rights without adequate remuneration;
• Provision of goods or services or the purchase of goods or services.

A distortion in the internal market will be deemed to exist if the foreign subsidy can improve the competitive position of an undertaking in the EU market and if, in doing so, such foreign subsidy actually or potentially adversely affects internal market competition.³

The FSR foresees three tools for dealing with financial contributions that potentially cause internal market distortions. They are (1) M&A transactions notification requirement; (2) Public tenders notification requirement; and (3) Ex-officio investigations.

M&A transactions notification requirement

In M&As where one of the parties receives foreign financial contributions, the M&As must be notified⁴ to the Commission if the criteria set out below for the transaction are met:

1. At least one of the merging undertakings, the undertaking being acquired or a joint venture is established in the Union and generates aggregate turnover in the Union of at least €500 million; and
2. The combined aggregate foreign financial contributions to the undertakings concerned exceed €50 million in the three years preceding the conclusion of the agreement, the announcement of the public bid or the acquisition.⁵

M&As meeting the above criteria will be notified to the Commission. Before it approves the transaction, the Commission will then consider whether the foreign financial contributions constitute a subsidy and whether that subsidy distorts/ has a negative impact on the EU market. The Commission may request prior notification on any M&As before their implementation if it considers it necessary to investigate the foreign financial contributions granted to the parties involved in the transaction.

Public tenders notification requirement

When engaging in public procurement procedures, an economic operator that has received foreign financial contributions must notify⁶ the Commission when the following conditions are met:

1. The estimated value of that public procurement or framework agreement net of VAT is equal or above €250 million. If the procurement is divided into lots, the aggregated value net of VAT is equal to or greater than €125 million; and
2. The bidder, its subsidiaries without commercial autonomy, its holding companies, its subcontractors and suppliers involved in the same tender in the public procurement procedure received aggregated financial contributions equal to or greater than €4 million per third country in the three years prior to notification.⁷

If the foreign financial contribution is below the threshold, the FSR still requires bidders to provide a declaration to the contracting authority confirming that their foreign financial contributions received during the last three years are not notifiable.

Under the public tender procedure, the Commission will ensure that bidders for public contracts that have received foreign financial contributions do not submit undervalued proposals in such tenders.

Ex-officio investigations

For all other transactions, the Commission may on its own initiative investigate any foreign financial contribution that has potentially a distortive effect on the EU market. In such a case, the Commission may rely on information from all available sources, thus having ample discretion and diverse resources to investigate foreign subsidies.

Draft implementing rules of the Foreign Subsidies Regulation

On February 6, 2023, the Commission circulated its Draft Implementing Regulation⁸ (Draft IR) laying down more detailed practical and procedural aspects related to applying the FSR. The Draft IR sets out the rules and procedures for notification of M&As and public procurement procedures, it also details the various stages to be followed by the Commission in its investigations.

In particular, the Draft IR clarifies procedural elements, such as (1) the form of notifications for M&As and public procurement procedures;⁹ (2) effective dates of notifications;¹⁰ (2) the Commission’s investigatory powers;¹¹ (3) the parties’ commitments offering;¹² (4) a party’s right to submit its comments;¹³ (5) handling of confidential information;¹⁴ (6) access to the case file by the parties;¹⁵ and (7) procedural time limits.¹⁶ It further provides drafts of notification forms for M&As¹⁷ and public procurement procedures.¹⁸

The consultation period for the Draft IR is open until March 6, 2023 and all interested parties are invited to submit their comments.

Next steps and the main takeaways

The bulk of the Foreign Subsidies Regulation will begin to apply on July 12, 2023. It will target foreign subsidies granted within the last five years prior to July 12, 2023 (i.e. all foreign financial contributions granted to businesses beginning from July 12, 2018 onwards), if such foreign subsidies distort the Union market after July 12, 2023. The notification obligations provisions for M&As and public tenders will apply as of October 12, 2023.

Companies that receive foreign subsidies in non-EU countries and operate in the Union market should be particularly cautious about the EU’s new legal instrument. Our team considers it extremely important for companies to collect and keep information on all their foreign financial contributions. This recommendation can be relevant not just for companies considering an M&A and/or participating in EU tenders but also in case the Commission decides to request information in any other cases through the ex-officio procedure envisaged by the FSR.

Dentons’ Competition and Trade team will continue to monitor the EU legislative process and report as events unfold. Please feel free to reach out to your Dentons partner if you have any questions or require assistance in respect of the EU’s Foreign Subsidies Regulation or the Draft Implementing Regulation consultation stage.

1. Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, OJ L 330, 23.12.2022, p. 1–45
2. See Article 3 of FSR
3. See Article 4 of FSR
4. See Article 21 of FSR
5. See Article 20 of FSR
6. See Article 29 of FSR
7. See Article 28 of FSR
8. See details at Distortive foreign subsidies – procedural rules for assessing them (europa.eu)
9. Articles 4 and 5 of Draft IR
10. Articles 6 and 7 of Draft IR
11. Chapter III of Draft IR
12. Chapter IV of Draft IR
13. Articles 18 of Draft IR
14. Article 20 of Draft IR
15. Article 21 of Draft IR
16. Chapter VIII of Draft IR
17. See Annex 1 to Draft IR
18. See Annex 2 to Draft IR