The EU Foreign Subsidies Regulation: What business needs to know

Scrutiny of Foreign Subsidies in Europe

The European Union’s Foreign Subsidies Regulation (the FSR) aims to combat distortions of competition on the EU internal market caused by “foreign” – meaning non-EU – subsidies. It imposes mandatory notification and approval requirements for acquisitions of significant EU businesses and large EU public tenders and gives the European Commission (EC) extensive powers to launch ex officio investigations.

Companies that are active in the EU (or plan to invest in the EU or participate in EU public tenders) and that have received “financial contributions” from non-EU countries need to put in place systems for gathering the information required for FSR purposes. Some companies also need to consider how best to manage cost allocation, transfer pricing and governance issues, and prepare justifications relating to those foreign financial contributions (FFCs) most likely to distort competition in the EU.

What Counts as a Foreign Financial Contribution under the FSR?

Financial contribution under the FSR is an extremely wide-reaching concept that covers any form of direct or indirect contribution from non-EU governments or any public or private entity attributable to a non-EU country.

Examples of FFCs include direct grants, interest-free or low-interest loans, tax incentives (e.g., exemptions/reductions), state-funded R&D, government contracts (regardless of size, whether they qualify as “subsidies” or whether they have any nexus to the EU), and grants of exclusive rights without adequate remuneration.

It is important to distinguish between FFCs and foreign subsidies under the FSR: FFCs can be (i) any transfers of funds or liabilities, (ii) any foregoing of revenue or (iii) any provision or purchase of goods and services, provided by a third country through different levels of government, or by a foreign public entity or by a private entity whose actions can be attributed to the third country. In contrast, a foreign subsidy is a narrower concept which includes only FFCs which confer a benefit to their recipients which is not normally available on the market and that is specific to one or more companies or industries as opposed to all companies or all companies active in a particular industry. It is the presence of FFCs, and not foreign subsidies that is relevant for notifying parties in determining their obligation to notify.

The EC’s Investigative Tools

1. Mandatory Pre-Authorisation Tools

Companies engaging in (a) M&A activity or (b) a public procurement procedure in the EU triggering the thresholds in the FSR must submit a Form FS-CO or Form FS-PP respectively and await EC approval.

a) Filing Obligation for M&A Transactions

Transactions meeting the following (cumulative) thresholds need to be notified to the EC:

i. Turnover threshold: The turnover of the target (in case of acquisitions), the JV (for creation of a JV in the EU), or one of the parties (for mergers) in the EU was at least €500 million in the last financial year; and

ii. Financial contribution threshold: The undertakings concerned (e.g., the acquirer and the target, the merging entities, or the JV and its parents) were granted, from non-EU governments or State-owned entities, “financial contributions” of more than €50 million in the three years prior to the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest. According to the Implementing Regulation (IR) a foreign subsidy should be considered granted from the moment the beneficiary is entitled to receive the foreign subsidy. The actual disbursement of the foreign subsidy is not a necessary condition for it to fall within the scope of the FSR.

An FFC must be notified only if (i) the individual amount of the specific contribution equals or exceeds €1 million and (ii) it belongs to one of the categories of foreign subsidies most likely to be distortive (namely, rescue and restructuring subsidies, unlimited State guarantees, certain types of export financing or subsidies directly facilitating a concentration). FFCs that do not fall under these categories, only need to be described in an aggregated manner in a summary table, for which more limited information is required. Only those third countries where the estimated aggregate amount of all financial contributions granted in the three years prior to the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest is at least €45 million need to be included in the table.

The IR provides a list of FFCs that do not need to be described in the summary table (and which do not count towards the €45 million total). These exceptions include, for example, contributions below €1 million, contracts for goods and services concluded on market terms (except financial services), and certain general tax measures.

The Form FS-CO contains an exemption for investment funds by which they are not required to disclose the FFCs received by their non-acquiring funds under certain conditions, alleviating the burden for private equity firms.

The FSR notification process and timetable are similar to the EU Merger Regulation (EUMR) process, with an initial 25 working day review period followed by an in-depth 90 working day review period (with a possible extension by 15 working days if commitments are offered) from the date of formal notification. Notifiable transactions must receive EC approval under the FSR before they can close, creating a standstill obligation.

The scope of the investigations under EUMR and FSR are different. The EUMR assesses the impact brought about by the concentration on competition in the relevant markets and the FSR analyses distortions in the internal market caused by a foreign subsidy. Consequently, although the same concentration may be analysed under both EUMR and FSR, a merger may be problematic under EUMR and not FSR and vice versa.

b) Filing Obligation for Public Tenders

Companies must notify the EC using the Form FS-PP if they engage in public tenders in the EU, and the following (cumulative) thresholds are met:

i. Contract value: The contract value is not less than €250 million, and in cases where the tender is divided into lots, the aggregate value of the lots applied for is not less than €125 million; and

ii. FFCs: The bidding party (including its subsidiaries and/or holding company and its main subcontractors (or suppliers)) was granted aggregated FFCs of not less than €4 million per third country in the three years prior to the notification. Bidding parties that received aggregate FFCs of less than €4 million per third country must submit a declaration setting out all FFCs received and confirm that they fall below the threshold.

Only those FFCs have to be notified that are equal to or exceed €1 million having been individually granted to the recipient by a third country in the three years prior to notification and that belong to the categories of foreign subsidies most likely to be distortive (namely, rescue and restructuring subsidies, unlimited State guarantees, certain types of export financing or those enabling an unduly advantageous tender to be offered). The threshold of EUR 1 million set out in the Form FS-PP refers to an individual financial contribution granted by a single third country to each of the notifying parties. Therefore, to determine whether the EUR 1 million threshold is reached, foreign financial contributions granted to different notifying parties are not to be aggregated. The EC has confirmed that foreign financial contributions granted by different third countries to the same party are not to be aggregated either (see Q&A DG GROW).

If the contribution does not fall under these categories, it only needs to be described in a summary table. Only those countries need to be included in the table where the estimated aggregate amount of all FFCs per country granted in the three years prior to the notification is €4 million or more. Further exceptions apply (mirroring those described above in relation to M&A transactions), meaning that certain contributions do not even have to be notified in the summary table (and do not count towards the €4 million total).

If companies need to make a declaration that they have received no notifiable FFCs, they still need to provide a summary description of the public procurement procedure, information about the notifying parties, and list all the FFCs received. Those FFCs of a value below €1 million but above the value indicated in the EC’s State aid de minimis regulation can be reported in an aggregate format. In addition, if the total amount per third country for the preceding three years is lower than the amount specified in the State aid de minimis regulation (currently at €200,000) they do not have to be included in the declaration at all.

In relation to public tenders, the EC’s preliminary review will last 20 working days, extendable by ten working days, while the in-depth review should not last more than 110 working days from receipt of a complete notification, extendable by 20 working days in exceptional cases.

The FSR adds uncertainty and complexity to public procurement processes. Failing to report FFCs or benefiting from distortive subsidies could result in disqualification from a public tender.

2. General Tool for Investigating All Other Market Situations

The EC has the mandate to conduct ex officio investigations into all potentially distortive foreign subsidies and its ex officio powers are extensive. They permit the EC to investigate support granted by third countries to companies up to 10 years before the start of the investigation (but not more than five years prior to the application of the FSR).

The EC is also able to request an ad hoc notification for transactions and public procurement procedures that do not meet the thresholds but in relation to which it suspects that the companies concerned were granted foreign subsidies in the three years prior to the concentration/tender submission.

Assessing Distortion in the Internal Market

A distortion in the internal market under the FSR is not presumed merely because a foreign subsidy is granted to a beneficiary engaged in an economic activity in a liberalised sector in the internal market. This contrasts with European State aid law where a distortion in the internal market is presumed when a State grants a financial advantage to an undertaking in a liberalised sector where there is, or could be, competition.

The EC will assess each case on its particular facts to determine whether a distortion can be deemed to exist. The FSR outlines two conditions to determine whether a foreign subsidy distorts the internal market:

• The first condition is that the foreign subsidy is liable to improve the competitive position of an undertaking in the internal market. It is necessary not only that the undertaking benefitting from the foreign subsidy engages in an economic activity in the internal market but also that there is a relationship between the foreign subsidy and that activity.

• The second condition is that, by improving the competitive position of an undertaking in the internal market, the foreign subsidy actually or potentially negatively affects competition in the internal market.

The notion of “distortion of the internal market” and more precisely of negative effects on competition in the internal market will be developed through the EC’s case practice considering that the aim of the FSR, as stated in its recital 6, is “to effectively deal with distortions in the internal market caused by foreign subsidies in order to ensure a level playing field”.

The depth of the EC’s assessment will depend upon whether a foreign subsidy falls within the categories of those most likely to distort the internal market, listed in Article 5 FSR.

1. Subsidies falling under Article 5 FSR

Foreign subsidies that fall under Article 5 FSR will normally be considered distortive, unless the facts specific to the case show that there is unlikely to be a negative effect on competition in the internal market.

The EC does not need to perform a detailed assessment based on indicators as set out in Article 4 FSR. The beneficiary of the foreign subsidy will have the opportunity to prove that the foreign subsidy in question would not distort the internal market in the specific circumstances of the case. Furthermore, even if a foreign subsidy is considered distortive, the balancing test under Article 6 may prove that the distortion to the internal market is offset by the positive effects of the foreign subsidy.

2. Subsidies not falling under Article 5 FSR

The EC will assess each case on its merits and will use the relevant indicators set out in Article 4 FSR, as appropriate, to assess the distortive effect of the subsidy. The indicators listed in Article 4 FSR are not exhaustive and are not mandatory for every case.

Balancing Test

Article 6 FSR introduces the so-called “balancing test,” which the EC applies to determine whether a distortion in the internal market is outweighed by benefits (like the “efficiency defence” in the EUMR context).

In “balancing” those positive effects, the EC needs to weigh them against the distortion in the internal market caused by the foreign subsidies. A positive effect could relate to an EU policy objective (e.g., environmental protection, digital transformation, creating jobs, promotion of R&D). Foreign subsidies deemed presumptively distortive under Article 5 FSR are less likely to see their negative effects outweighed by positive effects.

The application of the balancing test may lead to several outcomes. Following an in-depth investigation, the EC can adopt (i) a no objection decision; (ii) a commitments / redressive measure decision; or (iii) a decision prohibiting a concentration or the award of a public contract. Redressive measures and commitments can be structural (e.g., unwind an acquisition, divest assets or reduce capacity or market presence), or behavioural (e.g., offer access to or licence infrastructure on FRAND conditions, publicise R&D results, repay foreign subsidies with interest or adapt the governance structure). The application of the balancing test cannot lead to a less favourable outcome than if the balancing test had not been applied.

The EC’s Information Gathering and Enforcement Powers

To assist its investigations, the EC can gather information by issuing requests for information, interviewing natural or legal persons, and conducting dawn raids both in and outside the EU. Although there is no formal complaints process under the FSR, competitors may well make submissions to the EC concerning alleged FFCs received by other companies active in their field of operation.

Whether triggered by a third-party submission or the EC’s own monitoring, if a company were to receive a request for information, gathering the necessary information and financial data could be a significant task. In case of a refusal to supply information, the EC can take a decision based on facts available to it – which may be less favourable to the company than if it had provided the information.

If companies breach the standstill obligation by concluding or failing to notify a notifiable concentration, the EC may impose a fine of up to 10% of their aggregate turnover in the preceding financial year. The EC also has powers to subject companies to fines of up to 1% of global turnover and periodic penalty payments of up to 5% of the average daily aggregate turnover for each working day of delay, where companies supply incorrect, incomplete or misleading information.

Practical Considerations

1. Data collection

Companies need to implement systems for the collection of group-wide information relating to relevant contracts, grants of exclusive rights, tax incentives, etc. on a global basis. Given that information going back three calendar years is required, it is not advisable to wait until considering a notifiable transaction or tender. Detailed data on FFCs is not only required to assess whether the obligation to notify transactions and public tenders is applicable. It will also be needed if the EC requests notification of a transaction or public tender below the thresholds or it launches an ex officio investigation (a step we would expect to be preceded by a burdensome request for information or a surprise inspection).

Identifying and quantifying FFCs over a rolling three-year timeframe is time-consuming. Together with our legal-tech team we have developed a solution to streamline information collection in a manner that minimises the burden.

2. Deal planning

Given the standstill obligation for notifiable transactions, M&A transaction documentation (including share or asset purchase or similar agreements) will need to include a condition precedent for the FSR notification and approval, alongside information and cooperation requirements, and provisions dealing with potential remedies and other risk allocation issues. Because an FSR review will consider FFCs that are not specifically connected to the transaction that has triggered the review, the EC may conclude that remedies required differ from the remedies that might be necessary to address lessening of competition resulting from the transaction itself. Consequently, parties may need to consider requirements in the SPA for offering and/or accepting remedies as part of the FSR review that differ from those relating to the merger control review.

So-called “hell or high water” clauses that are often introduced by sellers in controlled auctions to increase deal certainty (a purchaser will need to accept any remedies that may be required to get clearance from the relevant authorities) will have to be considered by purchasers in the context of the potential for broader remedies (for example requirements to repay distortive loans or to dispose of assets acquired before the transaction at hand).

As the FSR creates an additional layer of uncertainty as to whether a deal can ultimately be completed conditionally or unconditionally, parties should also consider the FSR in the context of potential break fees. Apart from its impact on the transaction itself, the FSR will need to be part of due diligence on, and representations & warranties and disclosure schedules relating to, the target (covering information recording systems and compliance with the FSR), not least to enable potential acquirers to understand the risk of remedies relating to FFCs already received by the target that might be found to be distortive subsidies.

M&A transactions that are subject to the FSR notification requirement are highly likely to also require merger control and potentially foreign direct investment approvals. However, although the formal timelines for FSR clearance are similar to those of the EU Merger Regulation, parties cannot count on these processes to fully run in parallel. The focus of the EC in pre-notification will be different, such that the formal “clocks” will potentially start to run at separate times, resulting in different timelines for the formal reviews. Parties will need to factor this into deal timing.

Takeaways from the first year of application

The first year of the FSR was much busier than anticipated. In the initial 100 days following the onset of the notification obligation, the EC engaged in prenotification talks with the notifying parties in 53 M&A cases, which is considerably higher than the anticipated 30 cases per year the EC had initially estimated. To tackle the increased workload and ensure the proper enforcement of the FSR, the EC created a new Directorate K within the Directorate-General for Competition with three separate units responsible for enforcing the FSR in relation to M&A deals.

1. Notable case law

On 9 April 2024, the EC launched its first ex officio investigation under the FSR regime for public procurement, which targets an Asian supplier of wind turbines and investigates the conditions for the development of wind parks in Spain, Greece, France, Romania and Bulgaria (see Speech by Executive Vice President Vestager on technology and politics at the Institute for Advanced Study). In the same month, the EC conducted a dawn raid at an Asian company’s premises in the Netherlands and Poland. The company subsequently brought an appeal against the FSR investigation in May 2024 seeking an interim injunction and an annulment of the EC’s decision. In a judgment delivered on 12 August 2024, the General Court dismissed the company’s suspension request and reinforced that the EC is entitled to request information from all undertakings which carry out commercial activities in the EU to carry out its investigations effectively.

On 24 September 2024, the EC concluded its first ever second phase investigation under the FSR regime for mergers (see our briefing here). The EC cleared the acquisition of assets of a Czech telecommunications company by a Middle Eastern buyer subject to commitments.

2. Formal guidance

While the FSR notification obligations have been applicable since 12 October 2023, guidance has only been issued on a piecemeal basis. The EC adopted the IR on July 2023 that sets out the procedural steps and practicalities of the FSR system. About a year later, the EC published a Staff Working Document (see our briefing here) that supplements guidance the EC has provided in the form of Frequently Asked Questions published by DG COMP and DG GROW, as well as a useful FSR Brief on early lessons from FSR enforcement. Guidelines based on the EC’s enforcement experience are due to be published by January 2026.

The author wishes to thank Amiya Doabia, Trainee Solicitor, Norton Rose Fulbright LLP Brussels, for her contribution