'Foreign Subsidies Regulation' - 100 days notification obligation for concentrations

On 12 July 2023, the 'Foreign Subsidies Regulation'¹  ("FSR" or "Regulation"), a new European control regime came into force. The Regulation empowers the European Commission ("Commission") to take action against foreign subsidies that distort the internal market.

A central element of the new regulation is the obligation to notify concentrations, which has been in force since 12 October 2023. This is in addition to concentration control and includes a standstill obligation subject to fines. Even before it came into force, the notification requirement had therefore caused great uncertainty among companies and investors. Not least due to the very broad definition of terms, in particular the concept of a contribution from a third country ("contribution").

In a short dossier the Commission provides an insight into the first 100 days of the obligation to notify. This article shows the results after 100 days and the conclusions that can be drawn from the Commission's initial experiences and clarifications.

1. Subject of the FSR

Brief recapitulation: The control mechanisms created with the FSR are intended to enable the Commission to prevent anti-competitive influences on the EU internal market through third-country subsidies.

With regard to corporate transactions, the Regulation provides for a notification obligation if certain thresholds are exceeded², which applies in addition to concentration control. A concentration subject to notification is subject to a standstill oblogation, i.e. the transaction may not be implemented until it has been authorised by the Commission. Infringements can result in high fines of up to 10% of the total turnover of the previous financial year.

2. Statistics for the first 100 days

In the first 100 days of the notification obligation for concentrations, the Commission entered into pre-notification discussions with notifying parties in 53 cases. In only one of these cases did the notifying parties decide not to pursue the project.

The pre-notification discussions resulted in a formal notification in 14 cases. Of these 14 notified concentration projects, only nine projects were subjected to a full examination by the Commission as part of a Phase 1 investigation. In none of the cases did the Commission find sufficient evidence of foreign subsidies distorting the internal market.

In addition to control under the FSR, 47 of the 53 proposed concentrations were also subject to European and national concentration control proceedings. In addition, 26 of the 53 concentration projects were subject to foreign direct investment control in one or more Member States.

The cases analysed ranged from concentrations within the same Member State to concentrations between EU and non-EU countries. The cases came from a wide range of sectors, from basic industries to fashion retail and high-tech sectors. The Commission emphasises that an investment fund was involved as the notifying party in around a third of the cases.

3. Information from the Commission

3.1 Concentration: Correct allocation of the transaction

Under the FSR, concentrations must be notified if at least one of the companies involved

(i) is established in the EU,
(ii) has a total turnover of at least EUR 500 million in the EU and
(iii) the companies involved have jointly received third-party benefits totalling more than EUR 50 million in the three years prior to conclusion of the agreement, publication of the takeover bid or acquisition of sole control.³

The terms "concentration" and "parties" correspond to those used in the EU Concentration Regulation⁴.

The Commission emphasises the need to correctly determine what type of concentration is realized by the respective transaction. This is essential for determining who the undertakings involved are in the specific case, whose turnover and benefits granted are to be taken into account. For the assessment of the notification obligation, it can make a significant difference whether the turnover of the target company or the merging companies is to be taken into account.

The correct allocation to one of the three types of concentrations (acquisistion of control, merger or establishment of a joint venture company) is also decisive for the question of which foreign financial contributions ("contributions") must be declared for the respective companies involved.

3.2 Reporting obligation: Differences in reporting of contributions in the notification

The notification of a transaction is carried out using the FS-CO form of the Implementing Regulation to the FSR⁵. In this form, foreign financial contributions received by the given company must be stated ("reporting obligation"). A distinction must be made between two categories of contributions:

• Contributions that may fall under one of the categories of Art. 5 para. 1 lit. a-d FSR ("potential Art. 5-contributions").
• Other financial contributions ("other contributions").

Potential Art. 5-contributions must be reported separately in the notification and are subject to strict reporting obligations. They must be notified to the Commission as part of the notification if they exceed EUR 1 million, even if they only affect the target company.

However, other contributions are only subject to the reporting obligation if they

(i) were granted to one of the notifying parties,
(ii) individually EUR 1 million and
(iii) exceed EUR 45 million in total with other contributions per third country.

The background to the distinction between the two categories of contributions in the context of the reporting obligation is that contributions that may fall into one of the categories of Art. 5 para. 1 FSR are potentially foreign subsidies with a distortive effect on competition, which must be taken into account in the substantive assessment.

The decision as to whether a contribution actually qualifies as a foreign subsidy is at the discretion of the Commission. The notification must therefore include all contributions under potential Art. 5-contributions that - assuming they are a foreign subsidy - would fulfil the requirements of Art. 5 para. 1 lit. a-d FSR. It is therefore irrelevant for the reporting obligation whether a contribution was awarded under normal market conditions.

In order to counter uncertainties regarding the correct classification of a contribution, the Commission emphasises that a false declaration of other contributions as a potential Art. 5-contributions in the FS-CO form has no binding effect and does not prejudge the assessment by the Commission. Conversely, a false declaration of a potential Art. 5- contribution as another contribution could, however, result in an infringement of the reporting obligation that is subject to a fine. The Commission therefore recommends contacting the responsible case team in the event of any uncertainties.

3.3 Thresholds: Differences between notification and reporting obligation

Due to the different bases for calculating the contribution-related thresholds for the notification obligation on the one hand and the reporting obligation on the other - all contributions must be taken into account for the notification obligation, while certain contributions in relation to other contributions do not need to be reported in the FS-CO form - the situation may arise in which a concentration is subject to notification, while the individual contributions are not subject to reporting.

In such cases, the Commission expects the notifying parties to explain that the notification threshold has been exceeded and to justify why the contributions are not subject to reporting. This could avoid procedural delays.

3.4 Investment funds

In view of the high participation rate of investment funds in the pre-notification discussions to date, particular attention should be paid to the Commission's clarifications in this regard.

The Commission emphasises that all contributions that are used to finance a transaction or that benefit the transaction must be disclosed in the notification as potential Art. 5- contributions. It is not necessary for the third country in question to have the intention of facilitating the transaction. The disclosure obligation therefore also applies to inducements from third countries that were granted to an investment fund as "limited partner investments", as these typically serve to provide investment funds with financial resources.

3.5 Contributions to a distressed company

With regard to contributions to ailing companies within the meaning of Art. 5 (1) (a) FSR, the Commission states that the question of whether a company is ailing must be assessed individually for each legal entity. Even if the group of companies as a whole is not to be classified as ailing, this could still apply to an individual legal entity.

In addition, the Commission states that contributions to ailing companies are only subject to the reporting obligation under section 5.2 of the FS-CO form if they have potentially contributed to restoring the company's viability. This also included temporary liquidity support to maintain the existence of the legal entity during the preparation of a restructuring or resolution plan.

3.6 The exceptions according to points 6 and 7 of the "Guidance"

The Commission has noted a very positive response to the exceptions to reportable other contributions introduced as part of the consultation process, which are set out in points 6 and 7 of the "Guidance"⁶  of the Implementing Regulation.

Item 6 of the notes essentially comprises tax-related grants, procurement and sales transactions of goods or services at market conditions as well as other grants, the respective amount of which is less than EUR 1 million.

Section 7 of the notes constitutes a special regulation for acquisition transactions by investment funds.

According to the Commission, a significant reduction in the administrative burden can be observed, particularly with regard to contracts on market terms.

At the same time, the Commission emphasises that the exceptions are to be interpreted narrowly and are to be understood conclusively. In the case of exemptions under point 6, the notifying parties must also decide, as part of their self-assessment, whether the benefit in question should be subsumed under this exemption. Exemptions under point 7 of the guidance, on the other hand, must be claimed and justified to the Commission by the notifying parties.

4 Conclusion & outlook

Even after the Regulation came into force, there is still a great deal of uncertainty among companies and investors regarding the scope of application of the Foreign Subsidies Regulation. This is demonstrated not least by the fact that pre-notification discussions were held for 53 projects, of which only 14 were subject to formal notification. It remains to be seen to what extent the Commission's explanations and guidance as well as the continuously updated Q&A allow companies to make a better self-assessment.

The adoption of guidelines is therefore still eagerly awaited. However, these are not expected in the near future, as the Commission has not yet announced a date. The deadline for issuing guidelines is not until 12 January 2026.

^{1 Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market ("Regulation" or "FSR")
2 Art. 20 FSR
3 Art. 20 para. 3 FSR
4 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings
5 Commission Implementing Regulation (EU) 2023/1441 of 10 July 2023 on detailed arrangements for the conduct of proceedings by the Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the 12 Council on foreign subsidies distorting the internal market.
6 Implementing Regulation, Instructions to provide information concerning foreign financial contributions that do not fall into any of the categories of Article 5(1), points (a) to (e) (Section 5.3) ("Guidance")}