In the following we provide an overview of what has happened since the entry int…
In the following we provide an overview of what has happened since the entry into force of the FSR.
The new EU regulation on foreign subsidies 2022/2560 ("Foreign Subsidies Regulation" or FSR) has become an important tool of subsidy control since its entry into force. The FSR contains rules that enable the European Commission to address distortions caused by foreign subsidies, and thereby allows the EU to ensure a level playing field for all companies operating in the EU internal market comprising 27 countries, while remaining open to trade with and investment from third countries. The FSR applies to foreign subsidies granted to companies engaging in economic activities in the EU, regardless of their ownership, legal structure or origin, and this to merger and acquisitions as well as participation in public tenders. The rules complement those concerning imports of subsidized goods.
There has been a greater number of cases than expected and the attention has primarily focused on merger and acquisitions. The European Commission expected some 30 notifications in the year 2024 but was dealing within the first 100 days with pre-notification discussions in over 50 M&A cases. The cases examined ranged from mergers within the same Member State to mergers between EU and non-EU countries. The cases came from a wide variety of sectors, ranging from basic industries to fashion retail and high-tech sectors; for instance the planned acquisition of a telecommunication provider's pension fund by a State-controlled actor telecommunications provider domiciled in the United Arab Emirates.
The Commission highlights the fact that an investment fund was involved as the notifying party in around a third of the cases. (It should be noted that M&A projects may also be subject to EU- or national merger control rules and the screening rules concerning foreign investment in sensible sectors.)
As regards the participation of non-EU companies in public tenders, to date, the Commission has opened: in-depth investigations following public tenders notifications for solar photovoltaic supplies in Romania and electric “push-pull” trains in Bulgaria, ex officio investigations in wind turbine supplies for wind parks in Romania, Greece, Bulgaria, Spain, and France; and security equipment, including a dawn-raid at the producer’s premises in the Netherlands. The Commission decision ordering the inspection in the security equipment case is contested by the company in court.
All but a few of the Commission's in-depth investigations concerned Chinese companies that may have received potential subsidies from China. While the FSR is designed to be country-neutral, as a matter of fact mostly Chinese subsidies were scrutinized, as the Chinese economy is the world's second biggest with Chinese companies investing in the EU and participating in public tenders.
Chinese officials and industry groups have nevertheless repeatedly criticized the EU’s FSR, arguing the regulation is just another protectionist tool created by the EU to target Chinese businesses. In July China's Ministry of Commerce announced that it launched a trade and investment barrier investigation into EU's related practices in its investigations of Chinese enterprises based on the FSR.
The outcome of the investigations so far is mixed. In some cases, the companies withdrew or modified their projects. In March 2024, Chinese train maker CRRC withdrew from a EUR 610 million public tender for a Bulgarian railway project, after the EU launched an investigation into the bid under the FSR framework. In other cases, offers were even withdrawn without a formal investigation opened.
In a speech in April 2024, Competition Commissioner Margrethe Vestager outlined the direction for the Commission's enforcement efforts and criticised distortions of competition caused by subsidies granted by non-EU countries. She emphasised that in some markets, Chinese companies repeatedly offer significantly lower prices than EU companies, which are allegedly financed by State aid from third countries and often include payment deferrals that are not granted to EU companies. This practice leads to a considerable competitive disadvantage for EU companies, especially in sectors such as solar or wind energy.
In July 2024 the European Commission published a Staff Working Document providing preliminary guidance concerning the distortion test under the new rules.
The Commission mentions that in the context of M&A transactions, different standards of review apply under the FSR and under the European Merger Regulation, as the two procedures serve different purposes. Consequently, the two procedures can also lead to different results.
In the context of public procurement procedures, the Commission's review is however limited to the specific public procurement procedure and the distortion test applied is different for M&A deals than it is for public tenders. The Commission only examines whether the respective public procurement procedure is potentially distorted by the foreign subsidies. Only those third-country subsidies are relevant that enable a specific economic operator to submit a bid that is unjustifiably favourable in relation to the tendered services.
Beyond that nothing new emerges from the clarifications.
A major challenge for companies remains obtaining and preparing the right data for an eventual review of their bid. In particular, companies potentially subject to the obligations under the FSR must consider preparing and setting up a comprehensive and complete information gathering process to collect the necessary FSR data on a global and group-wide basis for the last three years at the same time or before launching a bid or participating in a tender. The correct identification of reportable foreign financial contributions, their precise differentiation from those categories that are most likely to distort competition, as well as a prudent interpretation of the exemptions granted, is essential in this context. Legal tech solutions and the early involvement of experts can help.
As the FSR consists of a novel legal framework, companies face significant uncertainty in assessing when non-EU subsidies may be problematic. Pending further guidance, it is more likely that certain case characteristics will require detailed questioning or a longer-term review based on EU enforcement practice.
The establishment of information systems will continue to pose challenges for companies. At this point, we recommend that affected companies plan to collect and organize information at an early stage. We will continue to monitor further developments in the area of FSR and are ready to assist companies concerned.
Prof. Dr Rainer Bierwagen
Lucas Nowottny
