Closing the Gap – European Union to Challenge Foreign Subsidies

FCPA

Foreign Subsidies Could Soon Become The Subject of Specified EU Regulations

The EU Commission wants to create regulations to tackle impacts of foreign government funding in the EU. In its “White Paper on levelling the playing field as regards foreign subsidies,” published on June 17, 2020, the EU Commission identifies problematic foreign subsidies that distort the EU internal market but that cannot be controlled under the current regulatory framework. According to the EU Commission, the regulatory gap is particularly apparent, where foreign subsidies take the form of financial flows facilitating acquisitions of EU companies or where they support the operation of a company active in the EU. To address this regulatory gap, the EU Commission calls for new tools supplementing the existing EU state aid, public procurement, foreign direct investment screening, anti-dumping and antitrust rules. The White Paper is now open for public consultation until September 23, 2020; the EU Commission aims at introducing a new legal instrument in 2021.

New Tools to Prevent Foreign Subsidies From Distorting the EU Internal Market

According to the EU Commission, a regulatory gap exists due to the following limitations of existing rules: antitrust and merger control rules are not designed to sufficiently weigh foreign subsidies nor tackle the new foreign direct investment screening mechanism of this issue in a satisfactory manner. Also, EU state aid rules only apply to funding by EU governments and does not address foreign government grants. Anti-dumping rules apply to products imported to the EU only, not to business activities carried out in the EU that are backed by foreign subsidies. Under current EU law, access to EU funding is not generally restricted if a company also receives foreign subsidies. Last but not least, EU public procurement law offers public sector business opportunities for (practically) all EU-based businesses and many companies established in third countries; contracting authorities are not obliged to assess whether bidders receive funding from foreign governments.

The EU Commission defines “foreign subsidy” broader than the notion of state aid under EU state aid law to cover any financial contribution by a government or any public body of a non-EU State, which confers a benefit to a recipient and which is limited to an individual company or industry or a group thereof. These can take a broad variety of forms, e.g., unlimited guarantees, capital injections or preferential tax treatments.

To achieve its goal to prevent foreign subsidies from distorting the EU internal market, the White Paper presents three regulatory approaches (Modules), as briefly summarized below, that could be used individually or in a combination. Enforcement of the suggested schemes would be carried out by the EU Commission or by Member State authorities (or jointly), depending on the Module(s) and circumstances.

Module 1: Instrument to control foreign subsidies granted to a recipient active or established in the EU

Module 1 aims at addressing distortive foreign subsidies in all market situations, including acquisitions facilitated by foreign subsidies. The competent authority could assess the foreign subsidy ex officio in a two‑step procedure consisting of a preliminary review and, if necessary, an in-depth investigation. Following an in‑depth investigation, the authority could impose measures to redress those distortions, such as redressive payments and structural or behavioral remedies.

An intervention would depend on certain criteria and thresholds, such as that the foreign subsidy reaches the threshold of EUR 200 000 over a period of three consecutive years (aligned with the de minimis threshold under EU state aid law) and that any positive impact of the subsidy does not outweigh its distortions. The EU Commission proposes to distinguish between two categories of foreign subsidies: one shall be considered distortive per se and the other shall be subject to a rebuttable presumption.

Module 2: Instrument to control foreign subsidies facilitating the acquisition of EU targets

Module 2 aims to ensure that foreign subsidies do not confer a benefit on their recipients when acquiring stakes in EU targets, either directly by linking a subsidy to a given acquisition or indirectly by de facto increasing the financial strength of the acquirer. Companies benefitting from a foreign subsidy would need to notify their acquisitions of EU companies, above a given threshold, to the competent authority.

The Commission considers different criteria to trigger the proposed notification obligation. One proposal is a turnover threshold of EUR 100 million. An acquisition shall be deemed to arise where the acquirer receives control of a company or acquires a not yet specified percentage of shares or voting rights or otherwise acquires “material influence.” Module 2 shall include the acquisition of significant but possibly non-controlling minority rights or shareholdings.

An intervention would require that, inter alia, the foreign subsidy directly or indirectly facilitates the acquisition of an EU target and that the positive impact of the subsidy does not outweigh its distortions. A review procedure would need to be carried out, and the authority could impose remedies or prohibit the proposed transaction.

Module 3: Instrument to control foreign subsidies in the context of public procurement procedures

Module 3 aims to ensure that foreign subsidies do not distort public procurement procedures. For example, where the subsidy enables the recipient to submit an offer that would otherwise be economically less sustainable, especially in case of bidding significantly below market price or below cost, a distortion shall be presumed. The White Paper proposes a mechanism where bidders would have to notify the contracting authority of foreign subsidies they received. Depending on the outcome of its assessment, the contracting authority could exclude the bidder from the ongoing tender.

Finally, the White Paper includes a proposal on how to address subsidies that give foreign companies an unfair advantage in winning contests for EU grants and suggests following a procedure similar to public procurement.

Outlook

The EU uses a moment of increased economic insecurity during the COVID-19 pandemic to introduce a proposal of far-reaching control tools. If adopted, such rules could significantly change foreign government‑funded acquisitions of EU-based target companies or foreign government-backed business activities in the EU. For now, it bears close watching which positions stakeholders will take during the consultation process either calling for moderations or the implementation of a protectionist regime and contributing to this process.