Wide-ranging new EU tool targets foreign state subsidies

The European Commission’s controversial white paper on levelling the playing field as regards foreign subsidies (PDF) published on 17 June identifies a regulatory gap concerning distortions of competition occurring in the EU as a result of subsidies granted by non-EU states. 

It proposes an extremely far-reaching new legal instrument which would target foreign-subsidised acquisitions, but also any kind of subsidised commercial activity affecting EU markets, including participation in public procurement and access to EU funding.

Why is a new instrument needed?

The Commission observes that state subsidies granted by EU member states are controlled under state aid rules, but that in many situations similar subsidies granted by non-EU governments escape control. 

Existing EU and international regulatory tools (multilateral and bilateral trade defence instruments, member state foreign direct investment rules, and EU antitrust, merger control, state aid and public procurement rules) only deal with the issue to a partial and unsatisfactory extent.

In what sectors and situations will it be used? 

The new instrument will apply to all sectors and a wide variety of situations. The Commission proposes a three-part framework, to address foreign subsidies (ie subsidies granted by a non-EU government):

• to businesses established, or maybe just active, in the EU market (Module 1);
• facilitating acquisitions of EU targets (Module 2); and
• providing an unfair advantage in public procurement (Module 3).

In addition to Modules 1, 2 and 3 described below, measures are also proposed in relation to foreign access to EU funding.

How would Module 1 work? 

Module 1 would empower the Commission or member state authorities to act on their own initiative to investigate possible distortions of the proper functioning of the EU internal market caused by a foreign subsidy to a business established, or maybe just active, in the EU. 

Any distortive effects found would be weighed against a possible positive impact within the EU (for example on job creation or environmental goals), with the Commission having exclusive competence to apply this ‘EU interest test’. All enforcing authorities would have information gathering powers backed by strict sanctions. 

Distortions could be remedied by imposing ‘redressive measures’ (repayment of the subsidy, behavioural or structural changes, or payment by the undertaking concerned to the EU or member states), or alternatively taking binding commitments, with financial penalties for non-compliance.

And Module 2?

Module 2 would require prior notification to the Commission of a ‘potentially subsidised’ acquisition of control of, or a specified percentage of shares or voting rights, or otherwise ‘material influence’ in, an EU undertaking. 

Notification thresholds could be set, which might be quantitative or qualitative, or a combination, and there would be information gathering powers backed by financial sanctions. 

If a distortion were found, it would again be balanced against possible positive effects, and distortions could be remedied with commitments or prohibition of the transaction. 

Completed deals could also be investigated and unwound.

And Module 3?

Module 3 would require public procurement bidders to declare certain foreign subsidies and would set up a two-stage investigation procedure. If it was found that a foreign subsidy made the procurement procedure unfair this could result in the bidder being excluded from either that specific tender or from tenders generally for a period of up to three years.

The paper raises a vast number of questions as to the exact scope and content of the new instrument that will ultimately be adopted, and how it will work in practice. 

In our longer briefing (PDF), we consider in more detail various aspects of the proposal and its potential implications for different types of businesses. We also explore some of the points that companies looking at this proposal from different perspectives may consider drawing to the Commission’s attention when responding to its consultation, which is open until 23 September.

For additional reading on the antitrust landscape, visit our Global antitrust in 2020: 10 key themes report. 

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