07 March 2023

Federal Trust's Savic: The EU’s Foreign Subsidies Regulation: A new risk for British business?

The European Union (EU) has introduced major new legislation which could have broad implications for extra-territorial jurisdiction over businesses based in any non-EU country including the UK. The Foreign Subsidies Regulation (FSR), which will apply from 12 June 2023, authorises the European Commission (the Commission) to investigate and deal with overseas businesses receiving public funding from third country governments while operating in the EU Single Market.

The purpose of the FSR is to eliminate foreign subsidies, referred to as “financial contributions” in the legislation, which are considered to distort competition in the EU. The new level playing field rules are mainly expected to target China’s state aid programs subsidising Chinese firms operating in the EU, in addition to upcoming US subsidies earmarked for American businesses under the US$430 billion Inflation Reduction Act.

Even so, there are risks that UK businesses may fall foul of its provisions given the substantial level of UK corporate investment in the EU. This currently stands at a cumulative £600 billion.   It has continued to expand rapidly due, in large part, to UK companies setting up subsidiaries in the EU to mitigate the loss of full access to the Single Market since Brexit.

Broad application of the FSR

The FSR covers large-scale mergers and acquisitions of EU companies and large EU public tenders.  It also empowers the Commission with extensive authority to institute ex-officio investigations in any other situations resulting in a distortion of the EU internal market.

In so doing, the FSR adopts a wide-ranging definition of “financial contributions” that could lead to distorting subsidies. These include any benefits provided by government or any public body.  Such benefits can cover a government transfer of funds (or liabilities) such as capital injections, direct grants, tax breaks or incentives, loans, interest concessions on loans, debt guarantees, public funded R&D, and government contracts irrespective of size.  Moreover, these benefits do not need to be associated with a business’s operations in the EU.

Onerous reporting requirements

UK businesses will be required to comply with reporting requirements in relation to their EU operations.

Businesses will need to notify the Commission of any subsidy received from UK public sources as buyers of an EU company or any other undertaking including other business groups, referred to as concentrations in the legislation, arising from mergers or joint ventures.  This reporting requirement would be triggered where a business has an EU revenue of not less than €500 million or received a foreign financial contribution of at least €50 million.

Similarly, a UK business would be required to notify the Commission of its participation in a public tender where the procurement value is at least €250 million or receives a minimum overseas financial contribution of €4 million.  This may make bids for EU public tenders by a UK business less competitive, since a possible Commission investigation may induce the contracting authority to select an EU-based supplier as a more convenient alternative.

Lastly, the Commission may request ad hoc notifications in relation to smaller-value concentrations or public tenders in situations where it launches on its own initiative an investigation of any other market situations.  This includes circumstances where it suspects a business received a financial contribution in the three years prior to purchases in a concentration or bidding in a public tender.

While the Commission is undertaking an investigation, any concentration or public procurement which has been notified by a UK business, cannot be completed or awarded, respectively.  The Commission can impose a fine up to 10% of the annual aggregate EU turnover of a business or 1% of global turnover for failing to provide the required notifications.

A Commission draft Implementing Regulation, issued in early February 2023, provides further details on how notifications should operate in practice.  These include notifying procedures and notification contents applicable to concentrations and public tenders.

The Commission’s extensive investigative powers

The FSR provides the Commission with extensive investigative authority to collect information from a UK business.  This includes making requests for information, interviews of the business and individuals working for it, launching investigations both within the EU and in the UK, as well as initiating investigations into specific industrial sectors or forms of subsidy.  The Commission can also utilise market information supplied by third parties in relation to a UK business falling under an investigation.  Sources of information can include a UK business’s competitors or EU member governments in relation to subsidies provided to the business being investigated...

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