Control of subsidies: Challenges for companies in the EU Internal Market

In 2023, the EU adopted a new set of rules aimed at preventing subsidies from third countries from distorting competition on the internal market. The new notification requirements and powers granted to the Commission pose various challenges for companies.

Background

Competition is an indispensable element of the European internal market. Various control instruments help maintain and protect competition in the EU, such as rules on the conduct of undertakings on the market, the merger of undertakings, and the award of public procurement contracts within the EU Member States. Until this year, there was no way to control and prevent the distorting effects of subsidies from third countries (i.e., states that are not members of the EU) on competition in the internal market.

The EU reacted and closed this gap with the adoption of two Regulations. These are Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market (which we will refer to as the FSR) and the related Implementing Regulation (EU) 2023/1441 on detailed arrangements for the conduct of proceedings (Implementing Regulation). The two regulations establish a system designed to prevent the distorting effects of subsidies from third countries on competition in the internal market in all economic activities. These new rules are particularly important for mergers between undertakings and the participation in public procurement proceedings.

The implementing Regulation recently entered into force and establishes detailed procedural rules. This article explains those new procedural rules and what companies must now do.

Overview of the procedures

The new control procedures have multiple phases. Once a merger or participation in a public procurement procedure has been notified to the Commission, the Commission will perform a preliminary investigation. Where it has information on alleged foreign subsidies distorting competition, the Commission can conduct a preliminary investigation ex officio in relation to any economic activity.

When the Commission reaches the preliminary conclusion that there is a subsidy that is distorting the internal market, it will open an in-depth investigation. At the end of this phase, the Commission will adopt its final decision on whether the subsidy distorts competition. The Commission can impose redressive measures on the undertakings involved to prevent the distortion of competition. The undertakings may also offer the Commission commitments appropriate to fully remedy the distortive effects of the subsidy on competition.

What rules apply now to undertakings?

These new controls mean that some undertakings will face new obligations. The notification obligations are especially important for companies because failure to comply can result in fines of up to 10% of the aggregate turnover in the previous financial year. However, requests for information from the Commission, on-site inspections, and the protection of the confidential interests of parties are also relevant.

A) MOST SIGNIFICANT: NOTIFICATION REQUIREMENTS

The new controls introduce notification requirements similar to those for other controls on competition. Given the significant fines for failing to comply with the obligation (up to 10% of the aggregate turnover in the previous financial year) and the significant efforts required to provide information, companies should be aware of the new obligations.

I) NOTIFICATION REQUIREMENT FOR MERGERS
Concentrations must be notified under the new system when
- one of the merging undertakings, the acquired undertaking or the joint venture generates an aggregate turnover in the Union of at least EUR 500 million,
and
- the undertakings concerned were granted combined financial contributions of at least EUR 50 million from third countries in the three years preceding the concentration.

Where these conditions are fulfilled, the concentration must be notified by completing and submitting the form set out in the Implementing Regulation. Various information must be provided, including on the concentration and the parties.

Providing the information about the financial contributions will take the most effort. The FSR identifies three types of contributions or subsidies, each of which requires differing information to be provided to the Commission.

The highest level of information is required where the subsidies granted in the three years before the concentration amount to at least EUR 1 million and, by nature, fall under one of the critical categories listed in the FSR (grant to an ailing undertaking, an unlimited guarantee for debts and liabilities, export credits that do not conform to OECD Arrangements, or contributions that facilitate the concentration). Detailed information and relevant supporting documents must be submitted for every subsidy (e.g. on the amount, origin, an exact description, and the possible conditions), which means increased effort for companies.

The requirements are less strict where the subsidies granted over the previous three years amount to at least EUR 1 million but where the nature of these contributions is not one of the critical types listed in the FSR. Such contributions must be listed in the table in the form, sorted by applicant and country. There are some exceptions even for contributions which fall within this group (e.g. general deferments or tax exemptions, tax deductions to avoid double taxation, or the acquisition of goods or services in the proper course of business).;

Where contributions amount to less than EUR 1 million, they will be exempt from the obligation to provide information. However, the Commission can still demand information on all contributions, including those under EUR 1 million.

II) NOTIFICATION REQUIREMENT WITH RESPECT TO PROCUREMENT PROCEEDINGS
Companies may also have notification obligations where they wish to participate in procurement proceedings fall under EU procurement law in accordance with the 4 Part of the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen), except for the award of contracts in defence and security. This is because competition in a public procurement proceeding can be affected when a foreign subsidy allows one of the bidders to submit an unduly advantageous tender. In procurement procedures which fulfil the thresholds outlined below, undertakings that have received foreign financial contributions over the three years preceding the participation in the tender will need to notify the Commission of these contributions (so-called “notification”).

Where the estimated value of the public procurement contract exceeds certain thresholds, but the undertaking has not received any notifiable foreign financial contribution in the last three years, the undertaking must provide the Commission with limited information and make a declaration that any foreign contributions received in the last three years are not notifiable (so-called “declaration”). Foreign contributions do not require notification where the aggregate amount received over the past three years is less than EUR 200,000 (so-called “de minimis aid”).

The relevant thresholds are exceeded where:
a) the estimated value of the public procurement agreement is at least EUR 250 million (net), and
b) the undertakings involved in the tender (including the main contractor and main suppliers) were granted aggregate foreign contributions in the three years prior to notification of at least EUR 4 million per third country.

Where the procurement is divided into lots, the foreign subsidy will require notification if the estimated value of the procurement exceeds the threshold of EUR 250 million (net) and the lots for which the tenderer applies have an aggregate value of at least EUR 135 million (net). Here, the foreign contribution must also amount to at least EUR 4 million.

In public procurement procedures, companies submit notifications or declarations of subsidies together with the tender or request to participate to the contracting authority and not to the Commission directly. The contracting authority must state in the contract notice that the obligation to notify or declare foreign subsidies applies and must forward any documents it receives to the Commission.

Companies should use the “FS-PP” (“Public Procurement”) standard form set out in the Implementing Regulation for the notification. This specifies which information must be provided and includes:

a) A short description of the public procurement procedure,
b) Information about the notifiers (undertakings),
c) Information on the foreign financial contributions,
d) Where necessary, an explanation of why the offer is not an unduly advantageous tender,
e) Where necessary, information on the possible positive effect of the foreign subsidies,
f) A list of supporting documentation, and
g) A signed declaration that the information provided is true, correct, and complete.

If the parties are only submitting a declaration and not a notification, they must provide information on the procurement proceedings and the undertaking(s), as well as the signed declaration about the correctness of the information provided.

If an undertaking would need to make unreasonable efforts to obtain some of the information required by the FS-PP, it can ask the Commission to dispense with the obligation to provide that information.

For public procurement procedures, the Commission shall complete its preliminary investigation at the latest 20 working days after it receives a notification, after which it can, where necessary, initiate an in-depth investigation. Upon receipt of a declaration, the Commission can initiate an investigation ex officio. During the preliminary investigation and any in-depth investigation, the public procurement procedure can continue. However, the contracting authority cannot award the procurement contract.

If the Commission concludes during either the preliminary or the in-depth investigation that there is no foreign financial contribution that would distort competition, it shall adopt a no-objection decision for the award of the procurement contract. If, instead, the Commission concludes that there is a contribution that distorts competition, it may adopt a decision with commitments which fully and effectively remedy the distortion, or – where commitments are not considered – a decision prohibiting the award of the public procurement contract to the undertaking in question.

III) NEED FOR ACTION
As explained above, companies may be subject to the obligation to provide information about financial contributions received from third countries. The three-year time limit means that the period covered by this obligation is not negligible.

To avoid the need to make significant efforts to prepare the relevant information in a short time period in the future, as well as the related high costs, companies should identify the necessary information on contributions they have received, keep that information readily available and establish a system that continually records and saves the information on all future contributions, ready to use when needed.

The Commission also has the power to initiate a preliminary investigation ex officio. This can not only affect companies planning a merger or planning to participate in a public procurement procedure. All companies should therefore prepare.

The Commission also encourages companies to contact it in advance to gauge how much work is required in the case. There is also the possibility that the Commission will, upon request, exclude certain information so that the parties need not submit it.

B) OTHER NEW RULES

The Implementing Regulation provides time limits for various actions throughout the procedure. These range from five to 65 days, and, in some cases, the Commission has some flexibility when setting time limits.

In some instances, marking information as confidential will avoid dissemination. However, companies may have to justify the claim of confidentiality. If the Commission deems such information not to be confidential, it will inform the parties and may make the information public.

After the conclusion of an in-depth investigation, the undertakings may be required to report to the Commission on compliance with the commitments, contributions received, and participation in other public procurement procedures for a period.

Summary

The Implementing Regulation introduces new obligations and challenges for companies. Perhaps the most important of these is the obligation to notify concentrations and the participation in public procurement procedures. This is because of the possible fines for failure to comply and the significant amount of effort involved in meeting these obligations.

We therefore recommend that you identify any relevant information about past contributions and keep it handy, and establish a system for recording such information for the future.

Tassilo Klesen
Christopher Theis