The number and form of foreign subsidies that have a distortive effect on the internal market seem to be growing and thereby disadvantaging companies that are subject to more rigorous competition and state aid rules in the EU. Moreover, WTO rules on industrial subsidies seem ineffective. For instance, the steel sector observes that the prohibitive evidence and injury requirements needed to initiate an action under the WTO Agreement on Subsidies and Countervailing Measures has made it nearly impossible to act against unfair third country subsidies or state-owned enterprises in recent years (1).
To identify the extent of a potential regulatory gap, the European Commission adopted a White Paper on foreign subsidies in June 2020 (2). Subsequently, in May 2021, the Commission has decided to tackle the problem of distortive foreign subsidies through a legislative proposal (3). In this context, it is to welcome that new investigative tools shall allow the European executive to consider whether a foreign subsidy distorts competition on the internal market and, where appropriate, to impose redressive measures and/or accept commitments.
The Commission’s proposal defines a foreign subsidy as financial contribution provided by a third country and conferring “a benefit to an undertaking engaging in an economic activity in the internal market, and which is limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries” (article 2 §1). While this definition reminds us of the “state aid” definition under EU rules (4), a more formal alignment would be welcomed to avoid any confusion regarding the definition of longstanding concepts of EU competition policy. In addition, more guidance could be provided for companies to understand the extent of what “engaging” in an economic activity in the EU really means.
Further, the Commission proposes to determine a distortion based on the circumstances where a foreign subsidy improves the competitive position of an undertaking in the internal market, thereby actually or potentially negatively affecting competition within this market. Similarly, the text of the proposal seems very broad and doesn’t specify whether existing guidance and ECJ case-law on state aid would apply to define both what is a distortion and what is a subsidy, especially to better include the selectivity criterion of EU state aid rules.
As regards the new investigative tools, the proposal first suggests introducing an ex officio review of subsidies. More specifically, the Commission should be granted the power to open a preliminary and, when needed, an in-depth investigation of any market situation, including smaller concentrations and public procurements, to “examine information from any source regarding alleged distortive foreign subsidies” (article 7). According to article 35, the Commission would be able to request ad-hoc notifications of foreign subsidies that could have been awarded over a period of ten years. The application of this ex officio review should be more specified to avoid an open-ended power of investigation and guarantee legal certainty. This is necessary especially as regards timelines and criteria considered to request ad hoc notification as well as scope and factors triggering the review.
Notably, the proposal addresses foreign subsidies granted when acquiring or merging with an undertaking and creates new tools to investigate financial contributions granted by non-EU administrations or authorities.
Concentrations involving a financial contribution by a non-EU government that exceeds €50 million and where the turnover of the EU company involved exceeds €500 million, will have to be notified ex ante to the Commission. After a preliminary review and, potentially, a more in-depth investigation, the Commission shall decide whether the foreign subsidy causes a distortion and accordingly allow, suspend, prohibit the concentration, or accept commitments. In any case, companies would be required to identify and quantify any foreign subsidy granted in the last three years beforehand to determine whether the transaction is even notifiable. This could impose compliance burdens on businesses, thus considerably discourage foreign investment.
Comparably, ex ante notification would be required in the context of bids in public tenders with a contract value that exceeds €250 million. Companies participating in these types of bids would have to declare whether they have or have not received any foreign subsidies in the last three years. In case they have, an identification and notification of all the foreign subsidies, including those obtained by their subcontractors and suppliers would be required. This way, the Commission should be able to investigate whether there could be an unfair distortive effect and suspend the award of a public contract to a potentially subsidised bidder. Later, it would decide whether to prohibit the award of the contract to the company concerned or accept commitments. The administrative burden that comes with this procedure shall not be underestimated. Indeed, even European SMEs would fall within the scope of mandatory notification because they often participate in larger tenders through the subdivision of the tender into several lots.
Finally, the new tools will certainly help the Commission investigate foreign subsidies and allow the EU to act where there is distort competition on the internal market. However, the proposal as it stands could unintentionally lead to an overly broad notification constraint and create disproportionate compliance burdens on companies, who are already potentially subject to EU merger and state aid rules or foreign direct investment screening. Therefore, the impact of the provisions taken together should be further studied, reassessed, and refined accordingly to avoid creating of a bureaucratic monster rather than responding to existing problems.