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On 5 May 2021, the European Commission set out a legislative proposal to address the potential distortive effects of foreign subsidies in the Single Market. This is seen by the Commission as a key tool to deliver on its updated EU Industrial Strategy adopted on the same day, which sets out new measures to strengthen the resilience of the Single Market following the Covid-19 crisis.
If adopted, the proposal could have a significant impact on companies seeking to invest or participate in public procurements in the EU, if they are supported by financial contributions from non-EU governments.
Although existing rules on EU competition, public procurement and trade defence play an important role in ensuring a level playing field in the EU, the Commission considers that there is a 'regulatory gap' with regard to the unfair advantage achieved by foreign subsidies.
The draft Regulation proposes the introduction of the following three tools to allow the Commission to investigate financial contributions granted by non-EU governments that benefit companies engaging in an economic activity in the EU:
The enforcement of the Regulation is likely to lie exclusively with the Commission, rather than individual Member States, to ensure uniform application across the EU.
Investors from outside the EU should be aware that the definition of ‘foreign subsidy' is broad and covers not only financial contributions in the form of the transfer of funds but also zero-interest loans and other below-cost financing, unlimited guarantees, compensation, certain export financing, preferential tax treatment, tax credits, or direct grants.
Once the existence of a foreign subsidy is confirmed, the Commission has to establish whether the foreign subsidy distorts the internal market, based on a number of broad indicators. It is noted that for the purposes of its White Paper in 2020, the Commission made a presumption that foreign subsidies below a threshold of €200,000 to an undertaking over a period of three years do not create distortions in the internal market. This threshold has been increased significantly in the current proposal so that financial contributions below €5 million (in the past three years) are presumed not to be distortive. This will, at least, assist in limiting the regulatory burden for some SME’s (as noted in the Commission’s Impact Assessment Report).
In order to determine whether to impose redressive measures or seek remedial commitments, the Commission will need to balance the negative effects of distortion against the positive effects on the development of the relevant economic activity. As yet, there is very little detail within the proposed Regulation about how this balancing exercise should be conducted. The Commission has certainly indicated its commitment to make substantial investment into the enforcement of the Regulation. The proposal envisages an additional 145 full-time employees to monitor compliance with the new Regulation, draft decisions and conduct market investigations.
So how does this fit with existing rules on subsidies? In its Questions and Answers, the Commission states that it will in parallel strive to address the issue of distortive subsidies through new international rules, in particular reform of the WTO and improving the rules on subsidies in bilateral trade agreements. EU state aid rules continue to apply in relation to undertakings which carry out economic activity within the EU, which EU Member States must observe when giving out subsidies. However state aid rules cannot be utilised to address distortions in the market caused by subsidies received from third party governments. It is understood that the EU’s proposal is aimed at restoring a level playing field between actors within member states and those subsidised by third countries.
The European Parliament and the Member States will now discuss the Commission's proposal, which will be open for feedback for eight weeks. Although it could take some time for the Regulation to become law, investors should be aware that the new rules could apply to foreign subsidies granted in the ten years prior to the date of application of the Regulation where such foreign subsidies distort the internal market after the start of its application.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
17 May 2021