EEuropean Commission to pull the strings of foreign subsidies

NL Law
EU Law

The European Commission is adding powers to its toolbox to ensure a level playing field between European and foreign(-backed) companies active on the EU market. On top of merger control and Foreign Direct Investment screening obligations, companies may also need to account for future rules allowing scrutiny of subsidies granted by non-EU governments if those subsidies might distort the EU Single Market.

While the EU remains open to trade and (foreign) investment, that openness "must go hand in hand with fairness and predictable rules", states the Commission in a White Paper. On 17 June 2020, the European Commission adopted a White Paper on proposed rules countering subsidies, granted by non-EU governments to companies operating in the EU, that distort the EU Single Market. Existing EU State Aid rules dealing with public support granted by EU Member States do not apply to public support given by non-EU governments; the proposed rules aim to fill this perceived regulatory gap. The Commission is now seeking views on its proposal.

In its White Paper, the Commission proposes three ‘modules’ to address distortive effects caused by foreign subsidies:

  1. a general "catch all" instrument;
  2. an instrument dealing with foreign subsidies which facilitate the acquisition of EU targets; and
  3. an instrument tackling foreign subsidies in public procurement procedures.

The White Paper also addresses foreign subsidies in applications for EU funding (by which organisations can receive for instance financial support from the EU to carry out their projects).

The first module covers any form of subsidy that might distort the EU Single Market. If a preliminary review leads to a suspected market distortion, the competent authority (a national authority or the Commission) may decide to conduct an in-depth investigation and – depending on the outcome of such investigation – impose redress measures to remedy the distortive effect.

Modules 2 and 3 would involve a mandatory pre-closing notification mechanism. Under module 2, companies being subsidised by non-EU governments would be obliged to notify their acquisitions of EU companies (above a given threshold) to the Commission in order to obtain prior approval. If the Commission were to find that the acquisition was facilitated by foreign subsidy and would distort the EU Single Market, it could accept commitments to remedy the distortion, or prohibit the acquisition. Under module 3, bids in public procurement are scrutinised. Bidders would have to notify the contracting authority of financial support received from non-EU governments. If that support is held to be unfair, the bidder would be excluded from the procurement procedure and possibly from future procedures.

Finally, as regards EU funding, the Commission proposes that where a foreign subsidy forms part of winning contests for EU grants, it would apply a similar procedure to public procurement procedures.

These proposals would add another layer to controlling (foreign) companies doing business in the EU. For now, it will be interesting to see if and how these proposals are implemented, and how companies should account for this when doing business in the EU.

The public consultation is open until 23 September 2020 and the Commission aims to introduce a new legal instrument in 2021.

This article was published in the Competition Newsletter of July 2020. Other articles in this newsletter: