Regulation on foreign subsidies: new obligations to affect mergers and public procurement
Until now, the EU has not had the instruments to prevent distortions of the EU market due to foreign subsidies or to prevent an unfair advantage for subsidised companies from third countries. This should change with new Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, which complements EU rules prohibiting state aid by member states. The regulation introduces an extensive notification obligation and makes it possible to prevent mergers or participation in procurement procedures.
Definition of foreign subsidies and internal market distortion
Foreign subsidies are deemed to exist when an undertaking operating on the EU market directly or indirectly receives a financial contribution from a third country that confers certain benefit on such an undertaking. This contribution can take various forms (e.g., capital injections, grants, loans, tax incentives, debt forgiveness, tax exemptions, or supplies or purchases of goods and services) and may be provided not only by public authorities of a third country but in certain circumstances also by private entities. Where such a foreign subsidy is likely to improve an undertaking's competitive position in the internal market and negatively affect competition, the Commission will now be able to take extensive measures to prevent distortions of the internal market.
New notification obligation for concentrations
The regulation introduces a new notification obligation for concentrations (e.g., mergers or acquisitions of shares), thus complementing the existing provisions in the Merger Regulation. Thus, the Commission will always have to be notified, in advance, of a concentration if:
- one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates a turnover in the EU of at least EUR 500 million; and
- financial contributions of at least EUR 50 million were granted from third countries in the three years prior to the merger or acquisition.
The concentration cannot be implemented before such a notification, or, more precisely, before the expiry of the period during which the Commission is making its assessment.
New notification obligation for participation in public procurement procedures
Participants in the public procurement procedure will also be obliged to notify if:
- the estimated value of the public contract is at least EUR 250 million excluding VAT
- the contributions received by the public procurement procedure participant (including its subsidiaries and parent companies, main contractors and subcontractors) from a third country in the last three years amount to at least EUR 4 million.
When submitting a proposal or request to participate in a public procurement procedure, participants shall notify the contracting authority of any foreign subsidies exceeding EUR 4 million. If they do not reach this threshold, they have to send to the contracting authority an affidavit listing the foreign subsidies and confirming that these are not subject to notification obligation. Failure to comply with this obligation may result in them being excluded from the procurement procedure on the Commission's initiative.
If the Commission suspects foreign subsidies, it may require the entity concerned to submit a notification of a concentration or a notification of the existence of foreign subsidies regardless of the above thresholds (i.e., require to be notified in the event of any concentrations or procurement procedures).
For breaches of the notification obligation, the Commission may impose a fine of up to 10% of the undertaking’s total turnover. In addition, to remedy the distortion, the Commission may impose commitments or redressive measures on the undertaking, such as a reduction of market presence, divestment of assets, dissolution of a concentration, or repayment of a foreign subsidy incl. interest.
With some exceptions, the regulation will apply from 12 July 2023, but will also apply to foreign subsidies granted in the five years prior to that date.