On 12 July 2023 the Implementing Regulations setting out the procedural details of the FSR came into effect.^[1] The mandatory requirement to notify foreign subsidies will apply from 12 October 2023.

Purpose of the FSR

The FSR is intended to address a perceived gap in the regulatory toolbox of the European Commission (“Commission”) and prevent potential distortions in the EU internal market caused by financial contributions by non-EU countries to undertakings active in the EU (and, if necessary, redress the distortive effects of such subsidies).

The FSR and Implementing Regulation specify the circumstances where companies engaging in an economic activity in the EU and in receipt of certain foreign subsidies will be required to make a mandatory notification.

Such a requirement arises where either (i) the undertaking proposes to engage in a merger, acquisition or joint venture; or (ii) in the context of public procurement procedures, while also granting the Commission a broader power to investigate other foreign subsidies on its own initiative.

The FSR and Implementing Regulation also provide details of the circumstances where the Commission may open its own investigation or require notification even where the mandatory thresholds are not met.

Mandatory Notification Regimes

Criteria for mandatory notification of a concentration

The FSR requires that a concentration^[2] be notified to the Commission where:

• one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover of at least €500 million in the EU; and
• the undertakings concerned were granted combined aggregate ‘financial contributions’^[3] of more than €50 million from third countries^[4] in the three-year period preceding the conclusion of the relevant transaction agreement/announcement of the public bid.

The Commission has clarified that transactions for which an agreement was concluded on or after 12 July 2023, but which will not be implemented on or before 12 October 2023 will need to be notified. However, the notification requirements will not apply where the agreement was concluded on or after 12 July 2023 but implemented before 12 October 2023.

Criteria for mandatory notification in public procurement procedures

A foreign subsidy granted in the context of a public procurement procedure may also be notifiable to the Commission where it enables an economic operator “to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned”. The FSR provides that an economic operator participating in a public procurement procedure shall be obliged to notify the relevant contracting authority of a foreign financial contribution that it has received where:

• the estimated value of the public procurement contract is at least €250 million (and, where the procurement is divided into lots, the total value of the lot(s) for which the recipient is applying is at least €125 million); and
• the total value of the financial contribution(s) granted to the recipient over the three-year period preceding the notification was at least €4 million per third country involved.

Where the thresholds above are not met, the participant will be required to provide a declaration to the contracting authority listing all foreign financial contributions received and confirming that they are not notifiable under the FSR, which will then be transferred to the Commission without delay.

Calculating the total value of the “financial contribution”

All financial contributions from outside the EU must be aggregated.

What constitutes a “financial contribution” has been defined broadly and encompasses a wide range of measures, including any transfer of financial resources from non-EU public authorities.^[5] For the purposes of determining whether a filing is required, there is no requirement for there to be a nexus between a financial contribution and the EU.

Review process

The Commission’s review process varies slightly depending on the type of notification:

• For the notification of a concentration,^[6] the Commission will carry out a preliminary ‘Phase 1’ review lasting 25 working days and, where it identifies “sufficient indications” that an undertaking has been granted a foreign subsidy that distorts the EU internal market following its preliminary review, it shall proceed to an in-depth ‘Phase 2’ investigation lasting 90 working days;^[7] and
• For notifications in public procurement procedures, the Commission will carry out a preliminary review lasting 20 working days and, where there are sufficient indications of a distortive effect, proceed to an in-depth investigation which must be concluded within 110 working days from the date of the initial notification.^[8]

Prior to the Commission’s final decision or the expiry of the relevant time period, (a) the parties to a concentration under review shall be prohibited from implementing the transaction and (b) the contracting authority responsible for a public procurement procedure shall be prohibited from awarding the contract to the party under review.

Requirement to notify below-threshold concentrations/public procurement tenders

Where either a transaction or participation in a public procurement procedure does not meet the above criteria triggering a mandatory notification, the Commission may still request that the parties submit a notification on the basis set out above where the Commission suspects that foreign subsidies may have been granted to the parties in the three-year period preceding the conclusion of the relevant transaction agreement/announcement of the public bid or the submission of the tender/request to participate in the public procurement procedure.^[9]

When this power is exercised, the transaction will be deemed to be a notifiable transaction for the purposes of the FSR.

Ex Officio Investigations

The Commission can also examine information from any source^[10] regarding an allegedly distortive foreign subsidy granted in the context of any other market situation and, where it considers necessary, commence an ‘ex officio’ investigation on its own initiative to determine whether the foreign subsidy gives rise to a genuine distortive effect in the EU.^[11] 

Although the Commission can generally investigate foreign subsidies up to 10 years after they are granted, it cannot call in for review foreign subsidies that were granted more than five years prior to the FSR entering into force on 12 July 2023.

The Commission’s ‘ex officio’ investigation shall commence with a preliminary investigation and, where it identifies sufficient indications that an undertaking has been granted a distortive foreign subsidy, it shall proceed to an in-depth investigation. Although there is no legal deadline for the Commission to complete its preliminary or in-depth ‘ex officio’ investigation, it must “as far as possible, endeavour to adopt a decision” within 18 months of opening an in-depth investigation.

The Commission has suggested that the ex-officio tool would cover market situations such as greenfield investments.  The investigative tool reflects the current EU State aid powers of the Commission and is essentially an extension of State aid rules to third countries that distort activities within the internal market by granting financial contributions.  It therefore remains to be seen how proactive the Commission will be in launching such investigations considering the recent fiscal State aid judgments of the ECJ.

Assessment of Distortive Effect

In determining whether a foreign subsidy creates a distortion in the internal market, Commission will consider whether the foreign subsidy is liable to improve the competitive position of an undertaking active in the EU and, if so, whether it negatively impacts (either actually or potentially) competition in the EU.  In particular, the Commission shall consider the: (i) nature and amount of the foreign subsidy;^[12] (ii) situation and economic activity of the recipient; and (iii) purpose and conditions attached to the foreign subsidy as well as its use on the internal market.^[13]

The Commission will therefore apply a balancing test by taking into account both the negative distortive effects of the foreign subsidy as well as its positive effects on the development of the relevant subsidised economic activity, and will decide on the appropriate nature and level of any redressive measures or commitments that may be required from the parties on this basis.^[14]

Key Elements of the Commission’s Review and Final Decision

The Commission has a range of additional powers to assist with its review, including by imposing interim measures on the parties,^[15] issuing requests for information (“RFIs”) to an undertaking under investigation (or any other parties who may have information required by the Commission), and carrying out necessary inspections of the relevant undertaking(s), both inside and outside the EU.^[16]

Where there are sufficient indications that a foreign subsidy distorts the internal market following the preliminary review and the Commission proceeds to an in-depth investigation, the Commission can conclude its review by:

• adopting a ‘no objection’ decision, allowing the transaction to proceed where it has not found any distortive effect (or that any distortion is outweighed by the positive effects of the subsidy);
• requiring binding commitments or other redressive measures^[17] from the parties to fully and effectively remedy any distortive effect of the subsidy, and allowing the transaction to proceed on this basis; or
• prohibiting the transaction where no appropriate commitments or other remedies to address the distortive effect can be found or agreed with the parties.

The Commission can also impose fines or periodic penalty payments on parties who infringe certain provisions of the FSR, including for failure to (i) comply with the notification obligations set out above, (ii) comply with a Commission decision imposing commitments, redressive measures or interim measures, (iii) properly respond to an RFI, and (iv) comply or cooperate with an inspection carried out by the Commission.

The Commission shall have regard to the nature, gravity and duration of the infringement when determining the amount of the relevant penalty, though the most serious infringements can result in (i) fines not exceeding 10% of the aggregate turnover of the undertaking concerned in the preceding financial year or (ii) periodic penalty payments not exceeding 5% of the average daily aggregate turnover of the undertaking concerned in the preceding financial year for each day of non-compliance.

Key Takeaways

While the final Implementing Regulation did limit the more detailed notification requirements, companies operating in the EU internal market will still bear a significant compliance burden under this new regime; particularly, in light of the broad scope of what tax measures constitute a financial contribution and the low thresholds involved (€4 million for public procurement and €50 million for concentrations).

Businesses contemplating a transaction or bidding in a substantial public procurement exercise will therefore need to consider:

• whether the receipt of foreign subsidies will render that concentration or public procurement procedure notifiable under the FSR and, if so, the resulting impact on completion timelines;
• the Commission’s power to retroactively ‘call in’ for review foreign subsidies granted up to five years prior to 12 July 2023 in certain scenarios;  
• the need to maintain records of any financial contributions they receive from non-EU countries or any entities (either public or private) whose actions can be attributed to non-EU countries, including the positive effects of such foreign subsidies. 

Given the significant amount of information required for notifications, businesses in receipt of significant third country support should maintain records of any financial contributions they receive from non-EU countries or any entities (either public or private) whose actions can be attributed to non-EU countries. The timelines for completion of deals should also now reflect these additional notification requirements, where relevant.

If you would like further information, please contact a member of the Arthur Cox team.

This briefing contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.