Emerging challenges for Turkish investors eyeing EU market entries

As Turkish investors continue to set their sights on EU-based companies, attracted by market expansion opportunities and the transfer of cutting-edge technology, they now encounter a transformed regulatory landscape under the EU's recent Foreign Subsidies Regulation (the FSR). The FSR, aimed at safeguarding fair competition within the single market, scrutinizes foreign investments empowered by state subsidies, particularly those potentially distorting market dynamics. Such scrutiny is not just limited to Turkish investors but extends to other non-EU investors, including sovereign wealth funds from the GCC region. This evolving scenario introduces a critical dimension for external investors: understanding and navigating the complexities of the new regulatory framework to ensure compliant and strategic investments in EU enterprises. The key question now is, how will these regulatory shifts shape the investment strategies of Turkish investors, and what implications do these “new rules of the game” hold for their future ventures in the EU market?

New processes

Published in December 2022 and entered into force in July 2023, the FSR provides for additional notification and review processes in cases where a target company or joint venture, or any of the parties to the transaction, is located in the EU and whose earnings exceed certain thresholds has received public subsidies in a country outside the EU in the last three years.

First things first:

• For the FSR notification obligation to be triggered, the aggregate revenues generated within the EU by any of the parties to the transaction or by the target company or joint venture established in the EU, must exceed €500mn.
• A further requirement for the FSR notification is that the party or parties exceeding the above threshold have received financial support from non-EU states in the last three years in an aggregate amount exceeding €50mn, referred to in the FSR as a financial contribution.
• If both of these thresholds are exceeded, the parties to the transaction must notify the European Commission (the Commission) immediately after signing the transaction documents, but before executing the transaction.
• Parties that can provide satisfactory evidence to the Commission of the seriousness of their intention to carry out the transaction may also notify before the signing of the relevant contracts.
• The Commission may also require parties to notify if a notifiable transaction is not informed or if it suspects the existence of material assistance in a transaction that the parties have decided is not notifiable.
• It is not possible to carry out the transaction for 25 business days following the submission of the complete notification to the Commission. If the Commission initiates an in-depth investigation, this period can be extended to 90 working days.
• Following its investigation, the Commission may also decide not to execute the relevant transaction or to impose various measures on the parties to the transaction.

The FSR contains detailed provisions on the calculation of the thresholds that trigger the notification obligation, the method of the notification and the review processes. However, the precise definition of “financial contribution” remains a particularly intriguing aspect in practice, as it is not comprehensively defined in the FSR. Given the variability of contribution types, the FSR does not enumerate a complete list of financial support elements that should be considered in assessments.

What is certainly a financial contribution?

The FSR clearly stipulates that the following elements should be considered within the definition of financial contribution; however, it leaves the definition open-ended:

• the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling
• the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration
• the provision of goods or services or the purchase of goods or services

Given the significance of the new regime introduced by the FSR and the Commission's firm stance, it would be prudent to adopt an interpretation as broad as possible of the concept of financial contribution.

What should Turkish investors pay particular attention to?

The regulatory framework introduced by the FSR is a critical consideration at every stage of investments Turkish investors plan to undertake in EU member states.

Initially, a Turkish company looking to invest in the EU should compile a comprehensive inventory of any financial contributions it has received, as this will inform their investment decisions. Elements such as tax amnesties, incentives, discounts, or reduced fees and charges can be included in this inventory.

Furthermore, since an FSR notification obligation may be activated if also the target company or joint venture in the EU has received financial support from non-EU countries, acquiring detailed information on this aspect is crucial during the due diligence phase of the transaction. This information should be meticulously analyzed by the finance and legal teams at the outset of the transaction.

In determining whether an FSR notification obligation is triggered, verifying the completeness and accuracy of the information provided by both the target company or joint venture and the transaction parties is essential. The transaction documents should clearly outline the responsibilities and potential consequences of providing misleading information.

In cases where an FSR notification is necessary, transaction parties will likely exchange a considerable amount of confidential information. Therefore, it is equally important to ensure that the transaction documents include protective provisions. These provisions should facilitate cooperation during the information sharing and application process with the Commission and prevent any unauthorized disclosure of confidential information shared.

Last but not least, since a potential FSR notification may cause delays in the closing date, it is important to factor this into the transaction timing. Additionally, the transaction documents should detail the costs associated with the FSR notification and the impact of any possible delays. This approach can aid the parties in ensuring transaction certainty and in managing both time and costs more effectively.