Foreign subsidies: European Commission clarifies key concepts

Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market (the Foreign Subsidies Regulation or “FSR”, available here) entered into force on July 12, 2023. Its main purpose is to control subsidies granted by non-EU countries to companies operating in the internal market. To this end, the FSR granted the European Commission investigative powers to prevent or redress any distortions that such subsidies may cause to the functioning of the market—and ultimately to ensure fair competition and a level playing field for all companies.

Since its entry into force, the European Commission has carried out several investigations under the FSR, including unannounced inspections at company premises (see our post), mainly in relation to tenders in public procurement procedures (see our Legal Flash | EU regulation on foreign subsidies and public procurement).

The European Commission has not yet adopted any decision—at least public—clarifying substantive aspects of the implementation of the FSR, nor has it defined its position or the relevant interpretative criteria.

On July 26, the European Commission published a staff working document (“SWD”) with preliminary guidelines on two elements relevant to the implementation of the FSR: the notion of “distortion” of the internal market and the “balancing test.”

The SWD is not legally binding, but it anticipates the Commission’s approach to assessing distortions caused by foreign subsidies, particularly in the context of mergers and public procurement procedures. The SWD is available here.

Distortion

The SWD focuses on the notion of distortion of the internal market as the substantive criterion to determine whether a foreign subsidy is compatible with the internal market. For the purposes of the FSR, this concept is different from that applied both to State aid and merger control.

In relation to merger control, the SWD points out that the FSR and the Merger Regulation pursue different objectives. Therefore, the same concentration may be problematic under one regulation but not the other, and vice versa. Under the FSR, a foreign subsidy could be deemed to distort the internal market if the acquirer is allowed to offer a higher price than other potential acquirers, even if that transaction does not pose a significant impediment to effective competition from a merger control perspective.

The SWD specifically refers to a particular type of foreign subsidy, i.e., unlimited State guarantees, considering them likely to distort the internal market by affecting the financing conditions and the competitive position of the beneficiary. Indeed, the only in-depth investigation that the Commission has initiated to date, in relation to the acquisition by Emirates Telecommunications Group Company PJSC of sole control over PPF Telecom Group, is motivated precisely by the possible granting of unlimited guarantees by the United Arab Emirates.

As regards public procurement, the Commission’s assessment of distortions is limited to the tendering procedure, focusing on two aspects: (i) whether the tender is unduly advantageous; and (ii) whether there is a link between the foreign subsidy and the tender. Thus, a tender is unduly advantageous if it allows the bidder to offer a lower price or a higher quality than its competitors, or if it gives it an advantage in terms of capacity, experience or reputation. A link between the subsidy and the tender exists if the subsidy is used to finance the tender or if it influences the decision to participate in the procedure.

Balancing test

The SWD also refers to the balancing test, i.e., weighing the negative against the positive effects of a foreign subsidy in the internal market, such as contributing to EU political or economic objectives, environmental protection or innovation.

However, the Commission openly acknowledges in the SWD that it has yet to gather substantial experience in applying this test, which will depend on the specific circumstances of each case.

Comments

The SWD represents progress in interpreting certain notions and elements of the substantive assessment required under the FSR. However, other aspects remain undefined a year after its entry into force. Therefore, companies should be alert to developments in the Commission’s implementation of the FSR and seek expert advice to assess their exposure to FSR-related risks.