Introducing the Foreign Subsidies Regulation: New regulatory regime and enforcement powers for the EU

In this piece, the five-part RENFORCE blog series on the new Foreign Subsidies Regulation (FSR) is introduced by Urszula Jaremba.

The FSR – adopted in December 2022, and due to enter into force next week – is an extraordinary piece of EU legislation. Whereas its primary goal is to address distortions on the internal market brought on by subsidies granted by non-EU governments to undertakings active in the EU, the new rules interact and intersect with various EU regulatory regimes in the areas of antitrust, public procurement, and Common Commercial Policy. At the same time, under this novel regulatory regime, the European Commission is designated new, extensive and exclusive enforcement powers which, in turn, give rise to various questions of institutional and constitutional nature pertaining to the democratic foundations of the European Union.

Whereas this blog post offers a general introduction to this new and fascinating regulatory regime and its main features, other authors (details below) will shed light on the FSR from the perspective of their own academic disciplines.

Foreign subsidies and regulatory gap in the EU

Since a few years ago, the issue regarding foreign (external) subsidies given to businesses operating in the EU and a possible regulatory gap in the EU’s legal system has been a focus of heated political debate. In March 2019 and February 2020, the European Council and the European Parliament respectively asked the Commission to identify new tools to address the distortive effects of subsidies granted by foreign states. Also in 2020, the European Court of Auditors came to the conclusion in its Review on China’s state-driven investment strategy that Chinese investments could distort competition in the EU’s internal market and make it challenging to achieve a level playing field. This happens when, for instance, China’s State Owned Enterprises (SOE) that benefit from public subsidies given by the Chinese state finance various projects and transactions across the EU.

As the reader may be aware, subsidies granted to undertakings by EU Member States are captured by EU state aid regime. However, foreign subsidies, such as those granted by Chinese state to SOEs active on the EU market, escape the EU’s state aid rules. In May 2021, the European Commission concluded in its explanatory memorandum to a proposal for a regulation that:

“there is a growing number of instances in which foreign subsidies seem to have facilitated the acquisition of EU undertakings, influenced investment decisions, distorted trade in services or otherwise influenced the behaviour of their beneficiaries in the EU market, to the detriment of fair competition.”

The final text of the act was agreed by the European Parliament and the Council already in June 2022 and finally adopted by December 2022 which, undoubtedly, can be classified as a fast legislative track for EU standards. The act entered into force on 12 January 2023 and it will start to apply as of 12 July 2023. In February 2023, the European Commission also presented the Draft Implementing Regulation which is aimed at addressing procedural aspects of the FSR. As argued by Hornkhol, this record time in which the new regulatory regime was adopted affirms the importance of levelling the playing field on the internal market.

Importantly, the Regulation has a dual legal basis: article 207 TFEU (the scope of Common Commercial Policy) and article 114 TFEU (approximation measures for the internal market). This reflects the various and intersecting objectives of the Regulation, i.e. while it generally aims at creating and enhancing undistorted competition on the market of the EU, it targets foreign subsidies and so actions of third state governments distorting the said competition.

Against this background, it can be concluded that the very objective of the Regulation is to contribute to the functioning of the internal market by establishing rules to address distortions caused, directly or indirectly, by subsidies granted by non-EU governments to undertakings active in the EU, in order to ensure a level playing field (article 1 FSR). According to article 1 FSR, those distortions can occur with respect to any economic activity but they can be particularly common in the area of concentrations and public procurement.

The general idea behind the working of the Regulation is to provide the European Commission with competences and procedures for investigating foreign subsidies that distort the internal market and for redressing such distortions. In this regard, the FSR is intended to close the gap in the EU’s legal framework and supplement other regulatory frameworks that are unable to (effectively) capture foreign subsidies, such as:

• EU competition rules, including antitrust, merger control, and state aid regimes
• EU public procurement rules, including EU’s International Procurement Instrument
• EU external trade regime under the Common Commercial Policy, including acts such as EU anti-subsidies Regulation, various Free Trade Agreements concluded by the EU, and Foreign Direct Investment Screening Regulation.

Unsurprisingly, the Regulation carries many of the institutional features of those different above-mentioned regulatory framework. For instance, the Regulation’s ex ante notification requirement (see below), which is imposed on undertakings, is quite similar to how the EU Merger Regulation operates.

Core aspects of the new regime and the Commission’s boosted role

To better grasp the Regulation’s scope and operation, a few of its core aspects must be briefly touched upon.

First, in art 3 the Regulation provides for a broad definition of ‘a foreign subsidy’ which exists where a third state provides, directly or indirectly, a financial contribution to an undertaking active in the EU. This financial contribution has to be selective, i.e. it is limited, in law or in fact, to one or more undertakings or industries. Financial contributions are understood broadly and can include, inter alia capital injections, grants, loans, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, tax exemptions or the granting of special or exclusive rights without adequate remuneration, to name just a few. For the purpose of the Regulation, a subsidy can be granted by the central government and all other levels of public authorities and private entities whose actions can be attributed to the third state, to be decided by the Commission on a case-by-case basis taking into consideration the characteristics of the relevant entity. Finally, in article 5 the FSR provides for five categories of foreign subsidies most likely to distort the internal market. An example of such subsidy is one provided to an unprofitable undertaking or a business which, in the absence of any assistance, is likely to cease operations in the short or medium term.

Second, ‘distortion of competition in the internal market’ (art. 4 FSR) shall be deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market. It is assumed that a foreign subsidy that does not exceed €4 million over any consecutive period of three years, is considered unlikely to distort the internal market. In a similar vein, where the total amount of a subsidy to an undertaking does not exceed de minimis aid of € 200 000 over any period of three fiscal years, that foreign subsidy is not considered to distort the internal market.

Third, the Regulation foresees three general mechanisms:

• Mandatory ex ante authorisation of concentrations, meaning that undertakings engaging in concentrations in the EU must notify the Commission if aggregate EU-wide turnover was at least €500 million in the previous financial year and the parties to the transaction have received combined foreign financial contributions exceeding €50 million in the three years prior to the conclusion of the agreement (articles 19-21 FSR);
• Mandatory ex ante authorisation obligation for companies engaging in public procurement tenders, meaning that undertakings must notify the European Commission if the contract value of the respective tender is equal or above €250 million and the bidding party has received aggregated foreign financial contributions equal to or greater than €4 million in the three years prior to notification (articles 28-29 FSR), and
• An ex post catch-all market investigations mechanism at the disposal of the Commission, which entails that the Commission has the power to ex officio investigate all potentially distortive foreign subsidies (article 9 FSR).

The most striking feature of the FSR, in my opinion, are the very extensive, exclusive and discretionary competences of the Commission in implementing and applying the new regime. In this regard, the Commission is granted far-reaching investigative powers, can impose fines and redressive measures or accept commitments which are offered by undertakings to remedy the distortion caused by the foreign subsidy.

On the basis of information received by the Commission, the institution has the authority to balance the negative effects of a foreign subsidy on the EU internal market against its positive effects on the development of the relevant subsidized economic activity, or other relevant policy objectives, in particular on the EU internal market (article 6 FSR). When deciding on the appropriate remedies or commitments offered by the undertaking under investigation, the Commission takes that balancing into account. The far-reaching investigative powers of the Commission under the FSR, resemble those known from the field of antitrust under Regulation 1/2003 and include competences to require an undertaking under investigation to provide all necessary information, interview natural and legal persons for the purpose of collecting information relating to the subject matter of an investigation, and conduct inspections on undertakings’ premises, also in the territory of a third state, provided that the state has been officially notified and raised no objections to the inspection.

Walking the labyrinth

Unsurprisingly, the FSR raises a number of interesting and essential legal, political, as well as scholarly and practical problems. First, how should the new regime be evaluated in light of the evolving geopolitical landscape and the globally evident rise in protectionist trends? This issue is also linked to the phenomenon of the shift in the EU’s external trade policy EU’s onto the open strategic autonomy agenda and the increasing unilateralisation of EU trade policy.

Our five-part RENFORCE blog series tackles these problems from several different perspectives.

From the EU institutional perspective, concerns can be raised regarding the wide-ranging enforcement powers of the European Commission, the wide discretion given to the supranational enforcer and the way it will carry out various procedural tasks affixed to the Regulation. These, in turn, pertain to the topic of the European Union’s democratic accountability, which will be further covered by Thomas Verellen. In a similar vein, there may be some important considerations about the relation of the new regime with the rules of World Trade Organization which will be examined by Anna Marhold. Furthermore, the issue of increasingly mounting and possibly overlapping regulatory regimes may be raised. In this regard, a number of inquiries pertaining to the FSR’s relationship to the antitrust, state aid, and merger regimes are in order. Jasper Sluijs will go into greater detail about this connection. In a similar vein, the new regulatory regime intertwines with the European public procurement regime, an issue which will be explored by Willem Janssen. Lastly, Dionysios Pelekis will consider the limitations the FSR creates on fiscal sovereignty and the potential problems that can be created in the field of taxation for non-EU governments and for undertakings based outside the EU.

On a final and more practical note, the FSR raises complex multifaceted issues regarding legal certainty for businesses operating in the European Union and the additional burden it places on them, while also increasing demand for the services of legal professionals and undoubtedly adding to the workload of the European Commission. For now, it remains to be seen what impact the new regime will create on (competition in) the internal market.