The EU Foreign Subsidies Regulation: What are the key takeaways for businesses from the Commission's experience to date?

Why should I read this?

The EU Foreign Subsidies Regulation (FSR) came into force last year, introducing new tools enabling the European Commission (Commission) to review foreign subsidies granted by non-EU countries to determine if they might distort the EU internal market. The Commission has published a Policy Brief and a press release on the first 100 days of the FSR regime from 12 October 2023, when notifications for M&A transactions and EU public procurement processes meeting certain thresholds became mandatory, to 20 January 2024. As the Commission is not required to publish details of FSR notifications or its case closure decisions in the preliminary review phase, the Policy Brief and press release provide a welcome insight into the general trends on the operation of the regime to date.

Read our previous briefings to (here and here) for further detail on the key principles, breadth and impacts of the FSR.

100 days of M&A notifications: Key findings

In the first 100 days, the Commission received case team allocation requests and engaged in pre-notification discussions in 53 M&A cases. In contrast to public procurement notifications (see below for further details), no M&A cases have yet developed into a Phase 2 investigation. Around one third of the 53 cases involved an investment fund, nearly 80% were simultaneously reviewed under the EU’s merger control regime and almost 50% were subject to FDI screening procedures in one or several Member States.

In terms of geographical scope, 33 out of the 53 cases involved cross-border EU to non-EU transactions, 7 involved a cross-border transaction within the EU and 7 involved a cross-border transaction outside the EU, and 6 involved a transaction within the same EU Member State.

The most common types of foreign financial contributions (FFCs) assessed in the first notifications related to the sources of financing of the notified transactions, such as capital injections, equity contributions and loans from financial institutions which could be considered attributable to a third country. Other frequent forms of FFCs assessed included state guarantees, direct grants for specific projects and tax benefits (notably for R&D expenses and investment projects).

In terms of practical takeaways, the policy brief:

• prompted businesses that special attention should be paid to the quality and completeness of reported information. In some instances, getting this wrong will not prejudice the assessment of notifications – but the Commission noted it is important to ensuring timely and smooth assessment of transactions. Businesses should also be aware that additional information beyond what is requested on the form could be asked for;
• reiterated that there are differences between the notification threshold and reporting threshold, and that proper qualification of a concentration (i.e., as acquisition, merger, or JV) is crucial;
• clarified that if businesses are relying on exceptions, these should generally be interpreted narrowly (for example, the list of tax measures is exhaustive). In addition, case teams might ask parties to substantiate why certain measures fall under the exception and to disclose FFCs, should it be necessary for the assessment of a transaction;
• reminded investment funds of the exception enabling them to limit the information they provide, to the FFCs granted to the acquiring fund and the portfolio companies of this fund. FFCs granted to other funds and their portfolio companies do not have to be reported – provided that they meet the Commission’s conditions that cross-subsidisation is unlikely; and
• set out a clear message that in case of doubts and to prevent delays in the process, parties are encouraged to contact the case team as soon as practically possible. As of 1 March 2024, the review of concentrations under the FSR sits with the newly created Directorate K in DG Competition, “created to ensure the proper enforcement of the FSR”.

Businesses should be aware that the new regime is in full force and that FSR screening should be considered as early as possible, along with merger control and FDI procedures. We can support with preparing internal information in readiness for notifications, and throughout interactions with the Commission.

100 days of public procurement notifications: Key findings

In the first 100 days’ operation of the application of the mandatory notification requirement, the Commission received over 100 submissions regarding public procurements. However, the Commission appears to be concerned about a lack of awareness of the FSR more generally. In the press release, the Commission sent a clear message that there is still a need to “spread awareness” of the FSR.

In the context of a perceived lack of awareness, on the procurement side the Commission’s update also emphasised the role of economic operators in informing the Commission if they have suspicions of unnotified foreign subsidies received by their competitors. This is essentially inviting market participants to make complaints under the FSR. It is ever more crucial for businesses to continue ensuring that they are understanding and complying with the obligations of the FSR.

On 16 February 2024, the Commission announced its first in-depth ‘Phase 2’ procurement review under the FSR. This relates to a tender by the Bulgarian Ministry of Transport and Communication for an estimated €610 million contract for electric “push-pull” trains. The Commission will assess the extent to which FFCs enabled CRRC Qingdao Sifang Locomotive Co. Ltd (CRRC) to submit an unduly advantageous offer. The Commission has until 2 July 2024 to reach a decision. Ultimately, the Commission can issue a ‘no objection decision’, prohibit the award of the contract to CRRC, or accept commitments (although, it is not entirely clear how commitments might work in practice). As the Commission’s first in-depth investigation, the outcome of this case will be an important indication of the shape of the FSR regime going forwards. Close attention will be paid to how this case progresses and the Commission’s decision in July.

For more information about the FSR

Businesses operating globally should consider the new regime as early as possible and be taking proactive steps to ensure FSR compliance. For queries or support in relation to the FSR, please get in touch with your usual Eversheds Sutherland contact or a member of our team listed below.