European Commission Publishes White Paper on Foreign Subsidies Distorting the EU Internal Market

I. Introduction

On June 17, 2020, the European Commission published a white paper "on levelling the playing field as regards foreign subsidies", which contains proposals for new tools to prevent foreign subsidies from distorting the internal market in the European Union ("EU").¹ The white paper and the proposals contained therein will be the subject of a public consultation that will run until September 23, 2020.

II. Scope and objectives of the white paper

The European Commission considers that new tools are necessary because of the existence of a "regulatory gap" with respect to:

• Foreign subsidies distorting the internal market regarding
• the general market operation of economic operators active in the EU;
• acquisitions of EU undertakings;
• public procurement procedures; and
• Foreign subsidies in the context of access to EU funding.

The European Commission and Member States currently only have limited tools at their disposal to address the distortive effects of foreign subsidies, primarily trade defense measures, such as anti-dumping and anti-subsidy, and foreign investment controls, although these last are largely confined to the protection of Member States' security and other public interests.  

Other existing tools available to the Commission, such as the EU Merger Regulation (“EUMR”), antitrust rules, State aid rules and public procurement rules, do not address the regulatory gap identified by the European Commission, in particular in relation to foreign subsidies that "take the form of financial flows facilitating acquisitions of EU undertakings or where they support the operation of an undertaking in the EU."  For example, the ability of the European Commission to take account of foreign subsidies in its review of a transaction under the EUMR is limited; national FDI screening mechanisms can only take such subsidies into account where they would in some way threaten a Member State’s security or the public interest; and the EU State aid rules only address subsidies granted by an EU Member State.

The European Commission considers that new review tools are necessary in part as a result of a lack of compliance by WTO members with the notification obligations under the WTO's Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). In addition, the white paper reflects concerns with "state sponsored unfair trading practices, which disregard market forces and abuse existing international rules, with a view to building up dominance across various sectors of economic activity."

The white paper defines the term “foreign subsidy” in Annex I as a "financial contribution by a government or any public body of a non-EU State, which confers a benefit to a recipient and which is limited, in law or in fact, to an individual undertaking or industry or to a group of undertakings or industries."² The proposed definition builds on the definition used in the EU's Basic Anti-Subsidy Regulation and the EU Regulation on safeguarding competition in the air transport sector.³ The European Commission proposes that a de minimis threshold of 200,000 EUR per consecutive period of three years could be set, with foreign subsidies above that threshold being subject to review; while foreign subsidies below that threshold would be considered not to distort the correct functioning of the EU's internal market.⁴

The European Commission proposes that foreign subsidies would only be subject to the application of a potential new legal instrument if they cause, directly or indirectly, distortions of the internal market. The following types of subsidies are considered likely to have a distortive effect on the internal market:

(i) foreign subsidies granted directly to undertakings established in the EU;

(ii) foreign subsidies granted to an undertaking established in a third country where such subsidy is used by a related party established in the EU; and

(iii) foreign subsidies granted to an undertaking established in a third country where such a subsidy is used to facilitate an acquisition of an EU undertaking or to participate in EU public procurement procedures.

One of the main concerns identified in the white paper is the lack of a level playing field between EU and non-EU companies competing with respect to public procurement in the EU. The European Commission notes in this regard that foreign "[s]ubsidised companies may be able to make more advantageous offers, thus either discouraging non-subsidised companies from participating in the first place or winning contracts to the detriment of non-subsidised more efficient companies," resulting in the absence of competition on "an equal footing."

III. Proposed mechanisms to address foreign subsidies

Concretely, the white paper proposes three mechanisms ("Modules") that the European Commission could use to address foreign subsidisation.

The first Module ("General instrument to capture foreign subsidies") involves the possibility for competent "supervisory authorities" (i.e., "the Commission and relevant Member State authorities") to open an investigation and impose "redressive measures" – for example, restructuring (divestment of assets), prohibition of investments and acquisitions, and "redressive payments" – in respect of subsidies granted by a third country to companies operating in the EU. Such redressive measures could be imposed if, subsequent to an investigation, a determination were made that the internal market was distorted as a result of the foreign subsidy.⁵

This mechanism would be broadly similar to the manner in which EU State aid awards can be assessed by the European Commission and made subject to repayment and other remedial commitments. Under the first Module, the European Commission foresees that foreign subsidies could be investigated by a single national supervisory authority, several national authorities combined, or by the European Commission itself. The European Commission also foresees the introduction of an EU interest test so that the distortive effects of a foreign subsidy can be weighed against the potential positive impact that the supported economic activity or investment may have.

A second Module ("Foreign subsidies facilitating the acquisition of EU targets") would require foreign investors to notify acquisitions in an EU company, in order to establish that the acquisition takes place on "market terms." An acquisition is provisionally defined as the:

• Acquisition—directly or indirectly—of control of an undertaking; or the
• Acquisition—directly or indirectly—of at least [a specific percentage] % of the shares or voting rights or otherwise of “material influence” in an undertaking.⁶

The European Commission proposes to define the term "EU target" as "any undertaking established in the EU and meeting a certain turnover threshold in the EU," but notes that other qualifying criteria could also be considered (e.g. the value of the transaction or the amount of the third party financial contribution to the acquisition). The white paper contemplates an ex ante notification obligation, i.e., a mandatory and suspensory notification system similar to current EU merger control, pursuant to which transactions could not be completed ahead of the European Commission’s clearance. Importantly, from a business perspective, the European Commission anticipates that the regime would require companies to self-assess whether they had received a "financial contribution" from a third country government, in order to determine if they need to notify; that assessment would "carry the risk of error or circumvention to the extent that undertakings may not be aware of such public support or willing to disclose it." Companies would be liable to penalties for a failure to notify a qualifying acquisition.

Under the second Module, EU regulatory authorities would be given the right to conduct an "in-depth investigation," if there is a suspicion that significant foreign subsidies are involved in an acquisition. Under Module 2, companies would be able to offer remedies (as under Module 1) although the European Commission observes that (as with remedies for merger control), structural remedies (i.e. divestment remedies) are most likely to be appropriate.

The European Commission has proposed a combination of Modules 1 and 2. In this regard it is proposed that for Module 1, the European Commission would share competences with the EU Member States; whereas for Module 2, it would be "exclusively responsible."

The third Module put forward in the white paper envisages legislation to ensure that "foreign subsidies can be addressed in individual public procurement procedures" and that "EU public buyers would be required to exclude from public procurement procedures those economic operators that have received distortive foreign subsidies." The white paper indicates that the scope of the grounds for exclusion would be defined in the light of the EU's obligations under the WTO's Government Procurement Agreement ("GPA") and other (bilateral) agreements that provide access to the EU's procurement markets.

The third Module would require economic operators that participate in a public procurement procedure to "notify to the contracting authority when submitting their bid whether they, including any consortium members, or subcontractors and suppliers have received a financial contribution within the meaning of Annex I within the last three years preceding the participation in the procedure and whether such a financial contribution will be received during the execution of the contract."

The aim of the proposal is to exclude economic operators that have received distortive foreign subsidies from participating in EU public procurement procedures. The proposals impose strict timetables so as to ensure a minimum of disruption to the procurement process (15 business days for an initial review, followed by a maximum period of three months for an in depth assessment).

Lastly, the white paper raises the possibility of developing legislation to address the distortive effects of foreign subsidised undertakings gaining access to EU funding, in particular in the context of the common agricultural policy and the European Structural and Investment Funds ("ESI Funds").

IV. Public consultation

The white paper does not constitute a legislative proposal, its aim being to "launch a broad discussion with stakeholders on the best way to effectively address the challenges" related to foreign subsidisation.  A consultation period on the proposals will run until September 23 2020,⁷ and is likely to be followed by the development of a proposal for a legal instrument.

To that end, Annex II of the white paper provides a questionnaire in respect of the three Modules, with questions directed at stakeholders aimed at determining, inter alia, whether (i) there are needs for new legal instrument; (ii) the proposals would address the distortions caused by foreign subsidies; and (iii) the three Modules would be effective instruments.

The white paper leaves multiple legal and procedural issues unaddressed, for example, how the Modules interrelate with existing European Commission trade defense, merger control and State aid powers, and in relation to EU and national public procurement laws. Mayer Brown professionals are available to assist in relation to any of these matters.

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