The European Commission puts foreign subsidies on the radar

On June 30, the Council and the European Parliament reached an agreement on the Foreign Subsidies Regulation to tackle any internal market distortions.

Until now, only subsidies from EU Member States were subject to the Commission’s control through state aid, but there was no monitoring mechanism for third-country subsidies granted to companies operating in the EU market.

The new regulation provides for mandatory notification of concentrations where the EU turnover of the target company, one of the parties or the joint venture exceeds €500 million, and the transaction involves a financial contribution by a foreign government of at least €50 million.

In public procurement procedures the threshold will be an estimated contract value of €250 million and a foreign bid of at least €4 million.

These two cases require prior notification and approval by the Commission, and failure to notify may entail penalties of up to 10% of the aggregate turnover.

In addition to imposing new obligations on companies, this new regulation entitles the Commission to review ex officio foreign subsidies with distorting effects, even if they do not exceed the relevant thresholds. In such cases, the Commission may request an ad hoc notification.

The Commission will enjoy broad powers to gather any market information considered necessary—including information requests, inspections and market investigations in specific sectors. The Commission may also rely on market information submitted by Member States or individuals.

If the Commission finds that the foreign subsidy distorts the single market, it may balance the positive and negative effects. Based on this assessment, the Commission may choose between allowing the subsidy unconditionally, making it subject to compliance with certain commitments or measures (whether structural or not), or prohibiting the transaction or award in the interests of the proper functioning of the internal market.

This new tool seeks to guarantee a level playing field for all companies operating in the internal market by ensuring fairer competition.

It is expected to enter into force in mid-2023, 20 days after its publication in the Official Journal of the European Union. The notification obligations will start to apply nine months after that date. However, there is some room for retroactivity, as the Commission is allowed to investigate foreign subsidies granted up to five years before the entry into force of the Regulation if they still cause distortions in the internal market.