EU Commission finetunes the Foreign Subsidies Regulation: insights into the latest Guidance

On 26 July 2024, the European Commission released a staff working document that clarifies the Commission’s substantive test under the Foreign Subsidies Regulation (FSR). This document serves as a valuable supplementary resource to FSR case-law and provides insight into how the Commission will conduct FSR assessments. Although this document is not binding, it may also prove highly beneficial for companies in evaluating and managing FSR risks.

What are FSR procedures?

The preamble to the FSR states that existing EU instruments do not address distortions caused by foreign aid, prompting the Commission to introduce a new instrument to ensure a level playing field in the internal market. The FSR establishes three procedures: prior notification of concentrations; notification of foreign aid in public procurement; and ex officio investigations by the Commission. The enforcement of the FSR, which began regarding the notification obligation in October 2023, is exclusively the responsibility of the Commission, which holds extensive powers to impose remedies, fines, and even prohibit certain actions.

The FSR procedure in action: a review of progress to date

In a speech in April, Competition Commissioner Margrethe Vestager outlined a new direction for the Commission's enforcement efforts, criticising recent trends. She emphasised that a recurring issue in some markets has been Chinese companies offering significantly better prices than EU companies, allegedly financed by non-EU state aid and often with deferred payment terms not available to EU firms. This practice puts EU companies at a substantive competitive disadvantage according to the Commissioner, particularly in sectors like solar or wind energy. This tendency can be seen in FSR procedures as the following indicates:

•  The Commission launched a procedure in Bulgaria concerning a public procurement procedure for trains, which resulted in the withdrawal of a bid by a Chinese state-owned company;
• A dawn raid was conducted on a Chinese security equipment company suspected of receiving market-distorting foreign aid;
•  An investigation was recently opened into bids by Chinese companies that may have been unduly favoured in a public tender for solar panels in Romania. These include cases initiated against Chinese wind turbine suppliers focusing conditions for developing wind farms in Spain, Greece, France, Romania, and Bulgaria.

Unlike the previous investigations into public procurement procedures and the ongoing investigations involving Chinese companies, one of the latest cases focuses on the UAE. The telecommunication companies involved received an unlimited guarantee from the UAE and a loan from UAE-controlled banks that directly facilitated the transaction. The Commission was concerned that these subsidies may have enhanced the company's ability to carry out the acquisition and strengthened the competitive position of the merged entity within the EU, particularly by improving its capacity to finance its EU activities on preferential terms. This concern was also addressed in the Commission’s working document.

These procedures raise the question of whether there is a connection to the strong complaints prompted by previous investigations, such as those constantly voiced by over 40 Chinese companies through the Chinese Chamber of Commerce to the EU. They have claimed that Europe’s protectionist policies are escalating and that the EU’s accusations of unfair competition from China are baseless. It is, however, important to emphasise that Vestager did not characterise the Commission's investigations or new enforcement instruments as attempts to restrict competition or hinder the economic success of non-EU countries and companies.

What does the Commission’s guidance specify regarding the practical aspects of the FSR?

Firstly, the Commission distinguished its substantive assessments between M&A and public procurement investigations. In M&A investigations, the Commission examines both potential distortions in the acquisition process and the impact on the product market where the merged entity operates. Conversely, public procurement investigations are confined to the bidding process, evaluating whether a tender from a subsidised operator is disproportionately advantageous and whether a connection exists between the subsidy and the tender. Market operators should consider these distinctions in their risk assessments under the FSR for both types of procedures.

In the working document, the Commission also made the following clarification: to consider a foreign subsidy as a distortive FSR, it must potentially have a negative impact on competition in the internal market. Although this criterion mirrors the test in the EU regulations of state aid, the Commission confirmed that there are key differences between these (e.g. in state aid cases, the Commission typically does not need to conduct a detailed assessment of the subsidy’s market impact if the recipient has a selective financial advantage in a competitive market). The Commission also explained that assessing whether a foreign subsidy distorts the internal market, as stated in the FSR, necessitates that the Commission establish a causal link between the subsidy and the competitive position of the recipient within the EU market. The Commission bears the responsibility of demonstrating the link between the foreign aid and the beneficiary's activities within the internal market. Nevertheless, the Commission will also consider if subsidies indirectly benefit internal market activities through cross subsidisation. Consequently, the Commission will ultimately investigate and balance the negative and positive effects on the internal market (including cross-subsidisation strategies), and companies should implement safeguards to mitigate potential consequences of these investigations, despite the current lack of clarity regarding the specifics of this balancing test.

Under the FSR, the Commission will presumptively consider certain categories of foreign subsidies as distorting the internal market and these categories are exhaustively listed in the FSR. The working document clarifies that, in practice, foreign subsidies falling under these categories will generally be presumed to distort the market unless specific case facts indicate otherwise and this presumptive approach implies that the Commission will assume these subsidies are distortive unless the involved undertakings can prove otherwise. It will, however, be challenging for companies to contradict this presumption until the Commission provides more detailed guidelines on assessing the distortive effects of foreign subsidies. Undertakings receiving subsidies in these categories can argue that the subsidies are justified under the balancing test of the FSR. Nonetheless, as noted in the FSR, positive effects are less likely to outweigh negative effects for subsidies deemed most likely to distort the internal market.

Furthermore, the Commission devoted a specific section in its working document to the precise examination of “unlimited guarantees” as potentially highly distortive foreign subsidies, indicating that this will be a central focus in the near future. This pertinent question and intention are underscored by the mentioned ongoing in-depth investigation into an alleged unlimited guarantee provided by the UAE to a telecommunications group. Such guarantees, which may encompass exemptions from bankruptcy laws, might be problematic as they can offer the acquirer disproportionately favourable funding conditions by mitigating creditor concerns regarding insolvency.

What does the future hold?

In the case of Hungary, a large-scale investigation into wind power plants in five countries is particularly relevant because recent legal developments have created the potential for a steadily expanding market. The Commission's actions may contribute to this emerging sector. This trend is reinforced by the increasing number of Chinese companies establishing or planning to establish operations in Hungary. Additionally, the recent investigation involving UAE telecommunications companies has also implicated Hungary. This is the first time an FSR procedure has involved a company with interests in Hungary, which should prompt any non-EU company with a market presence in the country to closely monitor the Commission's investigations.

In conclusion, while the working document represents an initial effort to enhance clarity in the FSR, it leaves numerous questions unanswered and underscores the considerable discretionary power of the Commission in determining whether foreign subsidies distort the internal market. This creates a situation of legal uncertainty that can negatively impact businesses operating within the EU. In the coming months, numerous important questions regarding the FSR are expected to arise, given the current uncertainty stemming from the relatively limited number of publicly available cases. The Commission's recent in-depth investigation into companies in the UAE, however, represents the first of its kind under the FSR and may provide significant clarification on the substantive test. Additionally, the Commission’s staff working document represents a crucial resource since it may already be helping market operators interpret FSR rules more precisely, which was the legislator’s original intention.

The article was co-authored by Márton Tenczer.

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