The Foreign Subsidies Regulation in practice: First cases and first conclusions | In Principle

Pursuant to the EU’s Foreign Subsidies Regulation (2022/2560), the European Commission may, at its own initiative, investigate any foreign subsidy covered by the regulation, in any sector of the economy, relying on information from all available sources. The Commission may also review foreign subsidies based on advance notification by the company, especially in the case of large concentrations and procurement procedures exceeding certain thresholds.

The Foreign Subsidies Regulation targets market-distorting subsidies (foreign financial contributions) granted by non-EU countries to companies operating in the EU single market. The regulation requires companies to notify certain large M&A transactions and procurement procedures, and also authorises the European Commission to open an investigation at its own initiative into cases of potentially market-distorting foreign subsidies. The Commission can impose harsh remedies, including fines, recovery of subsidies, or divestment of companies.

Thanks to the Foreign Subsidies Regulation, the European Union may strengthen its internal production capacity and promote mutually beneficial trade relations. In enforcing the regulation, the Commission is supposed to prioritise strategic areas such as new technologies, semiconductor manufacturing, artificial intelligence, cloud technologies, and clean technologies. As European Commissioner for Competition Margrethe Vestager explained, “In a world powered by technology, those who lead are those who control the most critical technologies, and their supply chains.”

Drawing conclusions from cases already investigated, Commission staff have developed a non-binding interpretation of the regulation, publishing FAQs regarding procedural, jurisdictional, enforcement and practical issues under the FSR. They show that in the nearly eight months since all FSR rules have been fully enforced, and after launching several detailed and ex officio proceedings and analysing several hundred notifications, the Commission’s enforcement practice under the FSR is beginning to come into focus.

This resulted in publication in July 2024 of a document by Commission staff with introductory explanations of how the FSR is functioning, pertaining to findings of distortion of the internal market caused by foreign subsidies (Art. 4(1) FSR), application of the balancing test (Art. 6 FSR), and assessment of distortion in public procurement procedures (Art. 27(1) FSR).

Proceedings to date

So far, the European Commission has opened:

• Two ex officio reviews, concerning:
  • Supply of wind turbines to wind farms in Bulgaria, France, Greece, Romania and Spain
  • Security equipment, including inspections at manufacturers’ offices in the Netherlands and Poland
• Three in-depth proceedings following public tender notifications, regarding:
  • Supply of photovoltaic materials in Romania (two suppliers)
  • Electric push-pull trains in Bulgaria
• One detailed procedure, regarding a telecom acquisition by a state-controlled telecommunications operator based in the United Arab Emirates.

Scale of FSR notifications

During the first 100 days of existence of the notification obligation for companies (12 October 2023 – 20 January 2024), the Commission examined more than 100 notifications of public tenders and 53 notifications of concentrations (when the FSR was proposed, proponents anticipated that there would be 40–70 notifications per year). By June 2024, the numbers rose to more than 500 public tender notifications and more than 100 concentration notifications.

FSR enforcement—risk factors

As an entirely new legal regime, the Foreign Subsidies Regulation generates considerable difficulty and uncertainty for companies in assessing when subsidies from outside the EU may be problematic, i.e. when they give rise to a notification obligation.

1. Chinese subsidies

To date, almost all of the Commission’s detailed and ex officio proceedings (with the exception of the one concerning the acquisition of PPF Telecom Group B.V.) have involved companies from China that may have obtained dubious subsidies from that country. Although the FSR is neutral between third countries, Chinese subsidies are at the centre of the Commission’s attention. The role of subsidies in the Chinese economy is already well recognised, as confirmed by a recently updated Commission report on that subject.

2. State-linked companies

The Commission specifically focuses on bidders and acquirers affiliated with a third country, regardless of the subsidising entity’s level in the administrative system, as the regulation refers to financial contributions made by government institutions at a central level and public bodies at all other levels (e.g. public entities, state-owned enterprises, and sovereign wealth funds), and private entities whose activities can be attributed to a third country. State affiliation also applies to foreign public entities whose activities can be attributed to a third country, taking into account the organisational structure of the government administration and the laws in force in that country.

The scope of examination of financial contributions made (directly or indirectly) by a third country is broad, covering, among other things, grants, capital contributions, fiscal incentives, loans, guarantees, and compensation from the state. The investigation will also cover the relationships with state bodies, including ownership and management interests, participation in management and business decisions, as well as any financial ties or preferential legal treatment. In the case of M&A, when the acquirer is a private investment fund, investments in the fund by any state-related investors are nominally treated as foreign financial contributions made for the purpose of the acquisition, and therefore the fund should be prepared to clarify whether these investments were made under the same conditions as would obtain for private investors.

3. Strategic sectors

Companies operating in strategic sectors should expect more attention from the Commission, as it will be particularly interested in understanding the impact of subsidies on companies owning strategic assets, such as critical infrastructure and innovative technologies. Such foreign subsidies are not currently subject to EU state aid rules.

Even if such subsidies do not have official status under the FSR, competitors may have an influence on initiation of proceedings by the Commission, especially if, to support their suspicions of undeclared foreign subsidies, they present material evidence of such subsidies and their distorting effect on competition in the internal market. Some organisations have already publicly called on the Commission to investigate subsidies alleged to be prevalent in specific sectors, such as shipyards.

4. Value of foreign financial contributions in relation to the value of the bid or deal

To demonstrate that foreign subsidies have enabled the recipient to place an unreasonably favourable bid, the Commission compares the value of the subsidies obtained to the value of the bid or public contract. In the case of electric trains, CRRC Qingdao Sifang Locomotive (the party under investigation) obtained at least EUR 1.745 billion in foreign financial contributions, i.e. five times the value of its bid, and the CRRC bid was barely half that of its Spanish rival Talgo.

In the cases pertaining to solar power projects (C/2024/2830 and C/2024/2832), the Commission noted that the potential foreign subsidies were substantially higher than the value of the procurement, amounting to EUR 375 million. And in the case of wind turbines, WindEurope claimed that Chinese wind turbines could be as much as 50% cheaper than turbines manufactured in Europe, and offered on deferred payment terms inconsistent with OECD guidelines.

5. Incomplete bids

The Commission may be forced to open detailed proceedings if it does not obtain sufficient information to exclude concerns surfacing during the pre-bid phase or initial investigation. This is particularly important in the case of public tenders, as the instigation of detailed proceedings will prolong the 20-day period of the initial assessment by an additional 110 working days (in duly justified, exceptional cases, this period may be further extended by another 20 working days).

In electric train case, the bidder did not report any foreign financial contributions in its initial submission. Therefore, the Commission gave it two days to provide this information. In the photovoltaic cases, the bidders submitted an initial notification that was deemed incomplete. The bidders failed to demonstrate that they did not benefit from alleged subsidies granted to their parent companies (for this purpose, they could for example have provided relevant information on the specifications, conditions, purpose or use of these subsidies).

6. The origin of funds in M&A cases

The purpose of examining subsidies in concentrations (mergers and acquisitions) is to determine whether the purchaser’s bid was backed by foreign subsidies. In such situations, the parties must provide detailed information on the sources of financing for their transaction.

The Commission reported that the most common types of foreign financial subsidies examined to date include transfers of funds or relief from obligations—such as capital injections, grants, loans, loan guarantees, fiscal incentives, offsetting of operating losses, compensation for financial burdens imposed by public authorities, cancellation of debts, conversion of debt into equity, or rescheduling of repayments.

To reduce further scrutiny, the parties should demonstrate that financial contributions made by the third country are provided at arm’s length. Significantly, the Commission’s detailed proceedings on concentrations have focused on alleged subsidies directly facilitating the transaction (unlimited guarantees from the UAE and a loan from banks controlled by the UAE).

7. Sales and purchases from state-related entities

Since commercial transactions with state-related entities are common (e.g. renting public buildings, or contracts for municipal services with state-owned entities), the notification forms exempt the parties from reporting such transactions if they are at arm’s length. However, such transactions are relevant to determining whether the filing thresholds are met, and the Commission expects the parties to explain in the form why they meet the filing thresholds but are not reporting any foreign financial contributions.

8. The Commission’s oversight powers

The Foreign Subsidies Regulation authorises the Commission to conduct inspections within the EU and outside of it for the purpose of carrying out its duties (Art. 14–15 FSR). When conducting such an inspection, the Commission may question representatives or staff of a company or association of companies to clarify facts or documents relevant to the subject and purpose of the inspection, and to document the answers obtained. The Commission can carry out inspections at the EU-based premises of a company or association of companies or, if the third country is officially notified and does not object, at the company’s premises in a third country. In the case of inspections within the EU, the Commission will notify the member state in advance and may ask national authorities for active assistance.

Refusal to submit to an inspection or to cooperate in the inspection may constitute grounds for the Commission to suspend the running of time limits on a concentration.

The recent inspection activities undertaken by the Commission, carried out unannounced on the same day in two different EU member states (Poland and the Netherlands), show that it is ready to fully exercise its inspection powers.

Conclusions and practical advice

The cases to date underline how important it is, especially in complex or sensitive cases, to conduct pre-notification consultations with the Commission, when the party can verify whether the notification thresholds have been met. The purpose of these consultations is primarily to ensure that the preliminary review proceeds quickly and with predictable results.

Consultations allow companies to provide the Commission with all the information necessary to fully evaluate the notification during the initial review, thus avoiding a prolonged detailed procedure. The parties can also receive guidance on problematic issues that could arise at the following stage, extending the initial review. This suggests that to ensure a smooth notification procedure, companies should have their information prepared and be ready to cooperate with the Commission before the formal notification itself.

Significantly, the recently opened ex officio reviews signal that the European Commission intends to target enforcement of the Foreign Subsidies Regulation at priority areas included in the EU Strategic Agenda. This shows that companies may not be in a position to avoid an investigation under the FSR, even if they are not involved in a huge M&A deal or a major public procurement.

Dr Anna Kulińska, Tax practice, Wardyński & Partners