Foreign subsidies: mandatory notification regime now live

The mandatory notification regime under the EU’s Foreign Subsidies Regulation (the FSR) went live on 12 October 2023. Companies engaging in large M&A deals and public tenders must comply with a new notification and approval framework if they come within the scope of the FSR.

Remind me: what is the FSR?

The FSR establishes a framework for the European Commission to review foreign subsidies granted by non-EU countries which may distort competition in the internal market (by providing recipients with an unfair advantage to acquire companies or win public tenders in the EU). Like the merger control framework, the effect of the FSR notification regime is suspensory: notified transactions cannot be completed (nor public tender contracts awarded) until approved by the Commission.

What transactions are within scope?

The Commission has three means of reviewing foreign subsidies under the FSR: two notification-based tools and one market investigation tool.

Notification-based tools

1. Mergers, acquisitions, and full-function joint ventures (“concentrations”) must be notified where:

  • at least one of the merging parties, the target, or the joint venture is established in the EU and has an EU turnover of at least €500m; and
  • the companies involved in the transaction received aggregate foreign financial contributions of more than €50m from non-EU countries in the three years prior to notification.

A foreign subsidy arises where a non-EU country provides a “financial contribution” which confers a benefit on a company engaging in an economic activity in the EU and which is limited to one or more companies or industries.

The concept of a financial contribution is broad: it’s not confined to monetary transfers and captures any form of value transfer, whether direct (such as the transfer of funds through direct grants), or indirect (such as tax exemptions).

Transactions which signed on or after 12 July 2023, but which were not implemented before 12 October 2023, must also be notified to the Commission, and await clearance before being implemented.

2. Public tender processes must be notified where:

  • the estimated value of the public procurement or framework contract is at least €250m (net of VAT), or, where the tender is divided into lots, the aggregate value of the lots applied is at least €125m; and
  • the bidder (including its main contractors and suppliers) has received foreign financial contributions of at least €4m per non-EU country in the previous three financial years.

“Economic operators” (including companies) participating in public procurement procedures must notify the contracting authority or contracting entity of all foreign financial contributions where the above criteria are met.

Market investigation tool

Since 12 July 2023, the FSR empowers the Commission to review, on its own initiative (“ex officio”) completed concentrations and awarded public procurement contracts where it suspects that a distortive foreign subsidy may have been involved.

Under the ex officio regime, the Commission may review a foreign subsidy for up to 10 years from the date on which the subsidy was granted, but cannot look back further than five years prior to 12 July 2023 (i.e. it can’t examine subsidies granted before 12 July 2018).

What should I do?

The FSR has joined what is already a complex web of regulation and each of these regimes (FSR, merger control, foreign direct investment screening, etc.) presents separate and distinct challenges. Implementation of sophisticated and detailed procedures will be key to complying with these regulatory obligations.

Given the ‘look-back’ feature of the FSR, companies should be prepared for historical foreign financial contributions to come under scrutiny, particularly where some market distorting element is identifiable.

Those contemplating transactions with non-EU financing arrangements and those who regularly bid for large EU public procurement opportunities should take steps to gather information about foreign subsidies already received and ensure mechanisms are in place to record contributions going forward.

Further information on the FSR, including on the Commission’s review timetable and enforcement powers, is available in this detailed briefing from our EU, Competition & Procurement team. Please contact Michelle McLoughlin, Knowledge Consultant, Liam Murphy, Senior Knowledge Lawyer, Anne O’Neill, Senior Knowledge Executive, or any other member of ALG’s Corporate and M&A team.

Date published: 17 October 2023