European Commission seeks feedback on draft procedural rules on screening foreign subsidies

Under the Foreign Subsidies Regulation (FSR), from mid-2023, the European Commission will have the power to investigate foreign financial contributions granted to companies operating in the EU and where necessary, to address distortive effects these contributions may have on the Single Market. As of 12 October 2023, firms planning concentrations with an EU dimension and participating in large-scale public tenders will have to disclose to the Commission information about foreign contributions received in past three years.

Introduction

On 6 February, in connection with the recently adopted Foreign Subsidies Regulation (FSR), the European Commission published a draft implementing regulation setting out procedural rules for the notification and review of subsidies granted by non-EU countries to companies operating in the Single Market. The rules clarify the scope of foreign contributions which need to be reported by companies taking part in concentrations and public procurement procedures, and introduce exemptions and thresholds intended to help focus the review on what is considered the most distortive support. The industry and the public are invited to provide feedback on the draft rules until 6 March 2023.

Guidance, flexibility and (a lot of) discretion

The draft implementing rules specify the scope of information that needs to be reported in the notification forms for concentrations and public procurement procedures, rules on the calculation of time limits, on access to the file, the rights of parties and defines several pre-established concepts. The rules also propose some limitations to the significant reporting burden by introducing reporting thresholds, discretional waivers, and the possibility to clarify the scope of required reporting in pre-notification discussions.

Waivers from reporting

In the draft notification forms forming the basis for pre-notification discussion, the companies will have the option to request a dispensation from the obligation to notify any information if that information is either not ‘reasonably available’ to them or they consider it unnecessary for the examination of the notification. While in the case of concentrations the decision on the granting of the waiver will be at a discretion of the Commission, in tender procedures, the Commission will need to coordinate with the contracting authority in charge of the procedure.

Notifiable contributions

The notification forms annexed to the draft Implementing Regulation specify thresholds above which financial contributions need to be included in the notification. In the case of concentrations, companies are required to report contributions of the individual amount of the contribution equals at least EUR 200,000; and (ii) the total amount of contributions per third country and per year amounts to at least EUR 4 million. The reporting scope is broader in the case of public procurement procedures and includes all contributions if their aggregate amount is equal or exceeds EUR 4 million.

Pre-notification discussions

The Implementing Regulation also provides further details on the pre-notification phase, which is known and standardly used in merger and state aid control proceedings. Also in the case of foreign subsidies review, this phase is not mandatory but recommended and in practice a very helpful element of the process used, e.g., to identify information requirements.

Notification forms provide further clarifications regarding the scope and level of detail required in notifications. As a non- mandatory element, companies are invited to support the review and explain the any possible positive effects of the subsidy on the development of the relevant subsidised economic activity as well as other positive effects in relation to the relevant policy objectives, in particular those of the Union.

While the limitations in the notification forms are likely to somewhat ease the reporting burden, no clear criteria are provided to guide the assessment of what contributions are to be considered ‘necessary’ for the review and when information is ‘reasonably’ available.

Thus, the discretionary application of reporting waivers introduces an element of uncertainty. Also, as the implementing rules do not narrow down the list of notifiable ‘financial contributions’, multinational companies face the burden of identifying relevant contributions obtained in the past several years.

Next steps

First guidelines on how the Commission will approach the assessment the subsidies and their effects on the Single Market are to be expected not sooner than within first 12 months after the FSR entry into force. More complete guidance which will take account of the Commission practice from first cases will be shared approximately two years later.

Background

Foreign subsidies control

Under the FSR, the European Commission will be empowered from 12 July 2023 to investigate any foreign subsidies (e.g., grant, tax incentive, preferential loan/ guarantee/capital increase, etc.) and apply far-reaching measures to prevent any company operating in the EU from unfair foreign benefits.

The new rules require companies active in the EU to notify the Commission from 12 October 2023 about planned mergers and acquisitions if the parties together received in the past three years foreign financial contributions of at least €50 million and one of the merging parties, the target or joint venture is established in the EU and has an EU turnover of at least €500 million. The Commission will also investigate tenders in public procurements if the bidder benefitted from foreign public support of €4 million in the past 3 years and the value of a procurement is at least €250 million.

Further, the Commission will enjoy the right to investigate ex officio any other market situations where potentially distortive foreign subsidies facilitate operations of certain companies in the EU.

The new rules are applicable to companies active in all sectors, regardless of their ownership or nationality, and to all subsidies granted 5 years prior to the adoption of the FSR.It is critical for companies benefiting from incentives and entering into or involved in transactions with public entities in countries outside the EU to assess if these are caught by the FSR, what the impact on their business will be and what further actions, if any, are required. This requires establishing requisite internal processes, identifying and quantifying respective incentives, assessing their impact on the EU market, defining a strategy, and initiating and following the respective procedures (such required
EC notifications).

Deloitte has set up a global multidisciplinary team of legal experts, economists and specialized business and tax consultants, led by the EU Law & State Aid Center of Excellence based in Brussels, which can carry out these types of assessments and provide advice on how to proceed and guide companies through the necessary internal and external processes.

How can Deloitte's help?

It is critical for companies benefiting from incentives and entering into or involved in transactions with public entities in countries outside the EU to assess if these are caught by the FSR, what the impact on their business will be and what further actions, if any, are required. This requires establishing requisite internal processes, identifying and quantifying respective incentives, assessing their impact on the EU market, defining a strategy, and initiating and following the respective procedures (such required EC notifications).

Deloitte has set up a global multidisciplinary team of legal experts, economists and specialised business and tax consultants, led by the EU Law & State Aid Center of Excellence based in Brussels, which can carry out these types of assessments and provide advice on how to proceed and guide companies through the necessary internal and external processes.