foreign subsidies

Foreign subsidies: The European Commission goes extraterritorial

The EU State Aid regime has long protected the EU internal market from anti-competitive subsidies granted by EU Member States. On 17 June 2020, the European Commission published a White Paper that proposes a new set of tools designed to address distortive effects in the internal market caused by subsidies granted by states outside the EU.

The White Paper outlines three complementary tools, or “modules”, intended to tackle the distortive competitive effects arising from foreign subsidies. These modules would be implemented by “supervisory authorities”, possibly at EU-level (most likely by the Commission itself) and/or at national level by an authority chosen by the Member State. For each of the three modules, the existence of a foreign subsidy with an actual or potential disruptive effect in the EU would be assessed in a “preliminary review”, potentially followed by an “in-depth investigation”. Undertakings under investigation could face “redressive measures” including the prohibition or even unwinding of certain transactions, or else make commitments to avoid prohibition. Failure to comply with procedural obligations would be subject to fines and periodic penalty payments.

Module 1 – General instrument to capture distortive effects of foreign subsidies

This largely mirrors the existing EU State Aid regime that applies to states in the European Economic Area (EEA). It proposes a general instrument that could capture all distortive effects of foreign subsidies exceeding a certain threshold, currently proposed at EUR 200,000 over three consecutive years. The Commission lists several categories of distortive subsidies, i.e. foreign subsidies that would distort the EU’s internal market: export financing, debt relief to the benefit of ailing undertakings, unlimited government guarantees, individual tax reliefs and foreign subsidies directly facilitating an acquisition.

For all other forms of subsidies, a more detailed assessment would be necessary, based on indicators such as the size of the subsidy, the size of the beneficiary and the utilisation of production capacity, the market situation, specific behaviour such as outbidding in acquisitions or distortive bidding in procurement procedures, and the level of activity of the beneficiary in the EU. If a distortive effect is established, it would be weighed up against any positive impact (the “EU interest test”), taking into account EU objectives such as job creation, climate neutrality goals, digital transformation, security, public order, public safety and resilience. Redressive measures could range from structural remedies and behavioural measures, to redressive payments to the EU, or the Member States, and could be subject to a limitation period of ten years.

Module 2 – Control of acquisitions facilitated by foreign subsidies

This proposes to tackle subsidised acquisitions of EU businesses by introducing an ex ante notification system, separate from and complementary to EU merger control and foreign direct investment screening. This module would investigate direct facilitation of acquisitions by foreign subsidies, as well as indirect de facto facilitation when foreign subsidies increase the acquirer’s financial strength. The regime would be subject to certain quantitative and qualitative thresholds and cover not only the acquisition of control over EU targets, but also the acquisition of significant – but possibly non-controlling – minority rights or shareholdings. The time period for the benefit of foreign subsidies would be limited, e.g. from three years prior to the notification until one year after closing. To avoid a prohibition of the planned transaction the acquirer could offer commitments, which would likely have to include structural remedies.

The proposals also envisage an ex officio review process to scrutinise acquisitions that should have been notified by the acquirer but were not, including after they have completed. The module includes the right to order the unwinding of completed transactions.

Module 3 – Control of unfair advantages in public procurement due to foreign subsidies

This complements the public procurement regime by introducing an additional notification obligation when submitting a bid, where the bidding party has received a “financial contribution” in the last three years. This module would address direct distortion of a procurement procedure by operation-specific foreign subsidies, as well as indirect de facto distortion by increasing the financial strength of the operator. The Commission aims to avoid situations where artificially low public procurement bids are facilitated by foreign subsidies. If a bidder is found to benefit from foreign subsidies, it could be excluded from public procurement in the EU.

The White Paper also identifies a risk that foreign subsidies create unfairness in the context of EU funding. The proposals are less developed, but the solution could be similar to Module 3 where EU funding is distributed through public tenders.

Hurdles and next steps

A first obstacle might be resistance by national governments that will scrutinise the proposal – the outcome of this process will influence the distribution of powers between the Commission and the Member States. For the general instrument (Module 1) as well as the public procurement instrument (Module 3), it is proposed that the Commission and the relevant national authorities would have concurrent authority for the initial stages. However, the Commission proposes to be exclusively competent to apply the EU interest test. Similar to its “one-stop shop” role in EU merger control, the Commission envisages exclusive responsibility for the enforcement of the ex ante control of acquisitions facilitated by foreign subsidies (Module 2).

In any event, enforcement outside the EEA will largely depend on third countries’ willingness to co-operate, which is not a given. State aid is highly political – foreign countries are unlikely to give the EU access to detailed information, unless the benefit of achieving EU approval outweighs the intrusion in the foreign state’s autonomy and political process. While the White Paper proposes an obligation to provide information, as well as powers to impose a fine or to order parties to unwind a transaction, the lack of effective enforcement outside the EEA could jeopardize the new regime(s). Even providing the supervisory authorities with the possibility to make decisions based on the facts available would not fully address this fundamental and intrinsic weakness.

Conversely, foreign companies benefiting from subsidies may lack information that would enable them to argue either the absence of a distortive effect, or the benefits outweighing such distortive effects. These dynamics could cause a stalemate between the EU and foreign countries, with increased trade barriers as a result.

The Commission acknowledges that there might be overlaps with existing legal tools, including international law such as the WTO Agreement on Subsidies and Countervailing Measures (for goods), as well as bilateral free trade agreements with third states, which may contain relevant dispute settlement or consultation provisions. In case of overlapping actions, the White Paper merely suggests the ability to suspend the proceedings under the proposed new instruments and to conditionally resume those if the distortion persists.

A public consultation is open for stakeholders to comment on the White Paper until 23 September 2020, with proposed legislation scheduled for 2021. Legislation is unlikely to come into force before 2022.