On top of the European Commission’s agenda: levelling the playing field as regards foreign subsidies

Tackling distortive effects caused by foreign subsidies in the EU single market is a top priority of the European Commission.

In her first State of the Union address last week, EC President Ursula von der Leyen listed the legislative proposal on levelling the playing field as regards foreign subsidies as one of her key initiatives for the coming 12 months.

Earlier this month, Deputy Director General for state aid (DG Competition), Carles Esteva Mosso, went one step further and announced that EU rules on foreign subsidies are a 'maximum priority' and are likely to enter into force as soon as 2021.

Scope of the initiative 

On 17 June 2020, the Commission published its White Paper on levelling the playing field as regards foreign subsidies ('the White Paper') and kicked off an online public consultation (read more in this blog post). Freshfields Bruckhaus Deringer has submitted comprehensive observations on the proposal today (see the attached document below).

Our submission includes two main recommendations for the EC to consider as it transforms the ideas in the White Paper into a legislative proposal:

1. Legal certainty: if a new legal instrument on foreign subsidies is introduced, it needs to provide legal certainty and transparency, and include sufficiently high thresholds, both for triggering filing obligations and for carving out non-distortive situations from substantive assessment. There should be clear deadlines and short review periods to minimise the administrative burden for undertakings, allowing regulators to focus on the most relevant cases.
2. Non-discriminatory application: such a new instrument must be applied on a fair and non-discriminatory basis and, where possible, be in line with existing EU state aid rules (including various soft law notices, guidelines and best practice documents) in order to allow for a true level playing field and not to deter foreign investment in the EU.

Possible areas to improve

Too broad definition of foreign subsidy 

The envisaged foreign subsidies regime is meant to be a catch-all tool, applicable to all types of market conduct of potentially foreign-funded undertakings, including transactions and participation in public procurement procedures, but also to day-to-day business in the EU internal market.

At the same time, the proposed definition of a foreign subsidy is very broad, unspecific and, in parts, goes beyond what is presumed as state aid under EU state aid rules. This will likely catch a high number of non-distortive constellations, for example concerning the way in which taxation works for particular types of investors.

Targeting more specifically the constellations that cause real concern can avoid a chilling effect on much-needed investment in the EU.

EU interest test focusing on non-competition-related issues 

The envisaged EU interest test is prone to politicisation and could thus result in arbitrary application and discrimination against certain undertakings and/or sectors. It would allow the EC to introduce non-competition-related aspects into its assessment of the compatibility of foreign subsidies with the internal market, including employment conditions, health considerations, sustainability aspects and data protection issues.

In order to ensure that the objective of the proposal is met, i.e. preventing distortions in the internal market by foreign subsidies, the relevant criteria for the EU interest test need to be clearly defined and the test applied in a very cautious manner.

Procedural set-up with risks of double or incoherent enforcement, uncertainty and application to unproblematic cases

Of the three Modules that are currently foreseen in the White Paper, Module 1 is a catch-all instrument, applicable to all types of market conduct within the EU, while Module 2 is specifically targeted at transactions and Module 3 at public procurement.

Module 1

Procedurally, Module 1 is intended to be enforced in parallel by the Commission and EU member states’ authorities (under a system of shared competences).

However, at least as long as there is no established case law, it may make sense to limit enforcement powers to the Commission to ensure this new instrument is applied in a coherent manner.

As Module 1 would operate as an ex-post ex-officio regime, the possibility of obtaining a comfort letter (confirming, for example, that there is no foreign subsidy or that the foreign subsidy does not distort competition) triggered by a voluntary submission should be considered. Such a letter could quickly give legal certainty to the undertakings concerned.

Module 2

This module includes a mandatory notification requirement for transactions potentially involving foreign subsidies.

Given the very broad definition of a foreign subsidy, this would lead to an enormous administrative burden and disadvantage to non-EU undertakings in transaction scenarios.

To address these concerns, a voluntary notification system should be considered. If a mandatory notification requirement is implemented, there should at least be a fast-track procedure for cases that clearly do not raise any issues (eg for corporates with no track record of receiving foreign subsidies).

As a further means to limit the administrative burden, Module 2 should only apply to acquisitions of control and not to all kinds of minority acquisitions.

Interplay between Modules

There is a clear need to define the boundaries between the three different Modules more strictly.

Areas that are caught by the specific Modules 2 and 3, ie transactions and public procurement, should be out of scope for Module 1 review to avoid double enforcement and investigations into presumably unproblematic cases that fall below the respective thresholds of Modules 2 and 3.

Outlook 

There is still much work to be done to resolve open questions and address specific issues before the concept set out in the White Paper becomes a legislative proposal.

However it is eventually implemented, the regime will add to the regulatory compliance requirements when doing business in the EU.

This is particularly true in a transactional context, where a foreign subsidy assessment will have to be factored into deal timetables along with the existing merger control and foreign investment review rules.