EC announces consultation on White Paper as regards foreign subsidies

As announced last week, the European Commission published today its White Paper regarding proposed new legislation to tackle the 'unfair' effects of third country subsidies on the EU internal market.

The White Paper’s starting point is that EU companies are subject to numerous rules designed to create a level playing field within the EU. However, the White Paper notes that there are gaps in the European Commission’s enforcement toolbox, more in particular when it comes to companies which have received subsidies from non-EU States and which may, as a result of these subsidies, distort competition in the EU market.

In its White Paper, the European Commission proposes to work on this through 3 so-called “modules”. In all cases, the relevant authorities are able to impose wide-ranging “redressive measures” to remedy any distortion in competition identified as a consequence of receiving the foreign subsidy. Modules 2 (acquisition of an EU entity) and 3 (participation in an EU public procurement process) would introduce an upfront notification requirement on the party which has received foreign subsidies - if the party fails to declare that it has received foreign subsidies, the relevant authorities (either the European Commission of the relevant Member State authority) can start their own investigation. The relevant authorities would have ten years, beginning on the day when the subsidy is granted, to impose redressive measures.

If brought into law, these proposals could have a significant impact on the activities of entities which may receive some benefit from their non-EU home State and which operate in the EU or are proposing to acquire EU companies.

• Module 1 concerns a general instrument to capture foreign subsidies provided to beneficiaries established in the EU and possibly also to beneficiaries that are ‘merely’ active in the EU and their effects on the EU internal market. It concerns an ex-post enforcement tool. This tool would not cover foreign subsidies for goods and agricultural products imported into the EU which fall under the rules (WTO and EU) regarding subsidies and countervailing measures.

  The Commission proposes in this respect a system whereby both the European Commission and national authorities would have enforcement powers under a shared system of review to avoid duplications.

  Module 1 has a broad scope and would allow intervention in all market situations including in relation to mergers already implemented or in relation to market behaviour of a bidder in a public procurement context.

  The White Paper provides some examples of types of foreign subsidies that are likely to create issues under Module 1 (export financing, subsidies to ailing undertakings without a restructuring plan or without it being necessary to remedy a serious national or global disturbance of the economy, unlimited government guarantees of debts or liabilities, operating subsidies in the form of tax reliefs and foreign subsidies directly facilitating an acquisition). Other types of subsidies may however also cause issues depending on other factors, such as the size of the subsidy, the situation of the beneficiary, the situation on the market concerned, the resulting market conduct and the level of activity on the EU internal market of the beneficiary. In the assessment, Module 1 would include a balancing test with possible positive effects of the foreign subsidy whereby the EU's public policy objectives will be taken into account.

  Finally in respect of Module 1, the White Paper foresees "redressive measures", in principle, in the form the reimbursement of the subsidy to the third country concerned. However, as this may be difficult to establish in practice, the White Paper foresees a variety of possible, alternative measures. These would concern structural or behavioural remedies such as divestments, prohibition of certain investments, prohibition of the subsidised acquisition, mandatory third party access to infrastructure, FRAND licensing, prohibition of certain market conduct, publication of R&D results, etc.. Reporting and transparency obligations would apply in any case. The beneficiary may take the initiative and offer the authority commitments which could be made binding. Sanctions for non-compliance would include fines and periodic penalty payments.

• Module 2 concerns a merger control instrument to capture foreign subsidies that facilitate the acquisition of EU targets. It concerns an ex-ante enforcement tool.

  The White Paper leaves the question open whether only the European Commission should have competence in respect of Module 2 or whether this competence should be shared with the national competition authorities similar to what is currently the case for the usual merger control rules - although the White Paper's preference is clearly that the European Commission should have exclusive jurisdiction.

  Module 2 would cover not only acquisitions of control (in a similar sense of the EU's merger control regime) but would also cover acquisition of a certain percentage of share or 'material influence'. The obligation to notify would also be subject to some form of threshold. The White Paper does not already indicate what the concrete thresholds would be but suggests a cumulative threshold consisting of:

  • either a qualitative threshold and/or a threshold regarding the transaction value (ii) or a quantitative threshold based on turnover; and
  • a threshold regarding a certain volume of financial contribution from third-country authorities.

  The White Paper indicates that the competent authority would need to show (i) that a foreign subsidy has facilitated the acquisition (directly or de facto) and (ii) that the acquisition results in the "distortion of the internal market" taking into account several criteria of which the following are mentioned in a non-exhaustive manner: the relative size of the subsidy, the size of the target or the acquirer, the situation on the market concerned, the level of activity in the EU internal market of the parties concerned, etc.. The possibly privileged status of the beneficiary on its domestic market will also be taken into account. Also Module 2 would include a balancing test with possible positive effects of the foreign subsidy.

  Module 2 would establish a two-step notification system consisting of a first, short information notice possibly followed by an in-depth investigation. The transaction would be subject to a standstill-obligation as from the notification of the short information notice. The in-depth investigation could result in a clearance decision, a conditional clearance decision (likely to require structural remedies) or a prohibition decision (similar to what is already the case under EU merger control).

  The competent authority would be able to open an ex officio investigation in absence of a prior notification and could impose fines for procedural violations (such as the provision of misleading or incomplete information).

• Module 3 concerns a public procurement instrument which would obligate bidders to notify having received financial contributions from EU third countries within the last three years. The contracting authority would then have to transmit this notification to the competent national authority, the supervising authority, that will have to decide under strict time limits. This may ultimately - after a preliminary review and an in-depth investigation in close cooperation with the European Commission - result in (i) the supervising authority deciding that it concerns a foreign subsidy and, subsequently, (ii) the contracting authority deciding that this foreign subsidy made the procurement procedure unfair. This in turn would result in the exclusion of the bidder concerned. Moreover, it may be possible that the beneficiary would be excluded from future procurement procedures for a certain time.

During the procedure, the contracting authority would be barred from granting the contract to the company under investigation. It may however continue the procurement procedure and even grant the contract to a company that is not under investigation for reasons other than a possible distorting foreign subsidy (e.g. because that company has offered the lowest price). This would end the on-going investigation.

The White Paper foresees in this respect the possibility to introduce certain time limits and thresholds to avoid increasing the administrative burden on contracting authorities too much.

Finally, the White Paper provides for the possibility for contracting authorities to sanction companies for failure to notify with fines or even with the exclusion from the procedure.

In addition, the White Paper discusses possibilities to prevent beneficiaries of third country subsidies having an unfair advantage in receiving EU funding (in the context of EU procurement, EU grants).

Interested parties are invited to present their views on this White Paper via the public consultation that is open until 23 September 2020.