As has been widely reported, the EU wants to expand its defence mechanism against undesirable subsidies and other state aid from non-EU countries. The European Parliament and the Council of the EU have agreed in principle on a Regulation to combat subsidies from third countries that distort the EU’s internal market. The text of the Regulation, of which there is currently a compromise version still to be finalised, is expected to be formally adopted in the near future.
The Regulation gives the European Commission new powers to conduct an investigation if a company involved in an acquisition or other business combination is benefiting from third country subsidies and this could have a negative impact on the EU’s internal market. The Commission may also intervene if competition among bidders in a public tender is distorted by a third country subsidy. It can further intervene in any other case where a third country subsidy significantly distorts the internal market.
The term subsidy is understood broadly. In addition to grants, it covers a wide range of favourable measures including loans, guarantees, tax incentives, debt relief, tax concessions, the granting of advantages on non-market terms and other favourable measures.
The Commission may act either on the basis of a notification or ex officio. In this respect, the Regulation provides for a number of criteria that are intended to distinguish notifiable from non-notifiable projects and which, for this purpose, draw on well-known regulatory patterns from EU merger control, state aid law and foreign trade law.
Obligation to notify in connection with concentrations between companies
A concentration between companies – either in the form of a merger, the acquisition of control of a company or the creation of a full-function joint venture – must be notified if certain thresholds are reached in terms of the turnover involved and the amount of subsidy.
- First, at least one of the companies involved must be established in the EU and realise a turnover of € 500 million or more in the EU. In the case of an acquisition, the target company must be established in the EU and reach the aforementioned turnover threshold. In case of joint ventures it is the joint venture that must be established in the EU and reach the turnover threshold.
- Secondly, the subsidies received by all companies involved from non-EU states in the last three business years must amount to a total in excess of € 50 million.
Transactions that meet these criteria must be notified to the European Commission before they are implemented. The Commission must in principle decide within 25 working days of receipt of the complete notification whether there are grounds for an in-depth investigation. If an in-depth investigation is initiated, it should in principle be concluded within a further 90 working days.
Where the Commission concludes that the concentration has unjustifiable adverse effects on the internal market, it may either prohibit the transaction or make approval subject to compliance with obligations and conditions.
Obligation to notify in connection with public tenders
Subsidies granted by non-EU states to bidders in public tenders in the EU must be notified if
- first, the estimated contract value is € 250 million or more, and
- second, the bidder, including its affiliates and, where applicable, significant subcontractors and suppliers involved in the bid, have received subsidies totalling € 4 million or more from the same non-EU countryin the last three financial years.
(Different rules apply where the procurement is divided into several lots.)
Subsidies that meet these criteria must be notified by the bidder to the body conducting the public tender. If the bidder considers that the above criteria are not met, it must nevertheless list the subsidies granted by non-EU states and declare them to the body issuing the invitation to tender.
The tendering body sends the notification or declaration in question to the European Commission. The Commission must in principle decide within 20 working days of receipt of the complete notification whether arelevant subsidy exists and whether it gives rise to concerns. If so, the Commission may conduct an in-depth investigation, which should in principle be completed no later than 110 working days after receipt of the notification.
If the Commission concludes that the subsidy in question has unjustifiable adverse effects on the internal market, it may either prohibit the award of the contract to the bidder or, where the companies concerned have offered commitments, it may render those commitments binding.
Obligation to notify on a case-by-case basis
Even if there is no notifiable concentration or subsidy in connection with a public tender, the Commission may require notification where it has reason to believe that relevant subsidies have been granted by non-EU states in the last three years and the expected adverse effects of the concentration or the award of the contract on the internal market justify a notification requirement. The Commission may require notification as long as the concentration has not been implemented or the contract has not been awarded.
Ex officio review of non-notifiable projects
Outside the groups of cases subject to notification, the Commission may act on its own initiative (ex officio). This concerns all other cases in which a non-EU state grants a selective subsidy within the meaning of the Regulation to a company operating in the EU, thereby distorting the internal market. For example, the Commission may intervene if a non-EU state grants a company a guarantee unlimited in amount or duration and the company in question is favoured over its competitors when operating in the EU. However, the Commission may also scrutinise concentrations that have already taken place or public contracts that have been awarded if it considers that the EU’s internal market has been materially distorted.
The Regulation provides that the Commission shall first carry out a preliminary investigation if it considers that there may be a critical subsidy within the meaning of the Regulation. If it concludes that there are sufficient indications of the existence of a subsidy that may distort the internal market, it may then open an in-depth investigation. If the in-depth investigation confirms the Commission’s concerns, the Commission may decide to impose remedial measures. Where undertakings offer commitments to meet the concerns expressed by the Commission, such commitments may be made binding. The Commission should as far as possible endeavour to adopt a decision within a period of 18 months from the opening of the in-depth investigation.
De minimis cases
As a rule, a subsidy must amount to more than € 4 million, calculated over a period of three years, in order to be considered harmful within the meaning of the Regulation. In addition, the general de minimis threshold known from EU state aid law applies. A subsidy granted by a non-EU state is therefore “de minimis” if, over a period of three financial years, together with any other subsidies granted during the same period, it does not amount to more than € 200,000 in total.
The Regulation against third country subsidies that distort the EU’s internal market still has to be formally adopted by the European Parliament and the Council, as mentioned above. It will then be published in the Official Journal of the EU and will enter into force after another 20 days. It will become applicable six months after entry into force, and the notification obligations will start to apply nine months after entry into force.
The Regulation will partially have retroactive effect of three to five years on subsidies already granted, whereby a distinction is made between several sophisticated scenarios that cannot be reproduced in detail here.
No species protection for the US, Switzerland or other “best friends”
During the deliberations on the draft Regulation, there has been extensive speculation about who the Regulation will target. Politically, there is no doubt that the Regulation will first and foremost be directed against China and the expansion efforts of state-controlled or influenced companies from China. But this does not mean that all other non-EU states can be given the all-clear. In principle, the Regulation concerns any third country subsidy that is likely to distort the EU’s internal market, regardless of the third country granting it. Even if the Commission wants to focus on China and possibly other countries with a strong state-business nexus, it will only be able to set limited priorities. It will have to focus on processing all the mergers and public contracts that are notified to it. These may concern a great variety of economic sectors and non-EU states. There is also no species protection for certain countries. Especially countries that cooperate closely with the EU politically and economically, such as the USA and Switzerland, could experience unpleasant surprises in this respect.