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Business Law Today

November 2023

The EU Foreign Subsidies Regulation

Sarah Blazek and Sebastian Waldmann


  • In October 2023, the obligation to notify the European Commission of certain M&A transactions and public procurement procedures under the EU Foreign Subsidies Regulation became applicable. Substantial fines for noncompliance can be imposed.
  • Notification requirements are tied to “financial contributions” granted (directly or indirectly) by non-EU countries, which are defined very broadly and therefore comprise more than just “foreign subsidies.”
  • Implementing the duties resulting from the EU Foreign Subsidies Regulation also matters to US companies: additional administrative burdens must be taken into account to stay M&A-ready, and a standstill obligation will impact deal timelines.
The EU Foreign Subsidies Regulation Sharrocks

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The European Union (EU) Foreign Subsidies Regulation (FSR) has now entered into full effect. On October 12, 2023, its last element—the obligation to notify the European Commission (EC) of certain M&A transactions and public procurement procedures—became applicable. Companies must now adopt internal implementation measures to comply with all the obligations imposed by the FSR. This article will briefly outline the main aspects of the FSR and demonstrate why FSR issues may be important even for US companies.

A. Background

Investments in the EU by companies receiving subsidies from non-EU countries (including the US) have increased rapidly in recent years. This has raised concerns that fair competition in the EU market could be distorted, as subsidies granted from EU member states are subject to the EU’s strict rules on state aid. Adopted at the end of 2022, the FSR is intended to tackle this issue, with the goal of creating a level playing field in the EU for EU and non-EU companies alike.

The FSR empowers the EC to impose remedies on companies that receive subsidies from non-EU countries (such as reducing market presence or repaying the subsidies). The EC may even prohibit contemplated M&A transactions or require a completed transaction to be reversed. Fines for noncompliance can be imposed of up to 10% of aggregate worldwide turnover and periodic penalty payments. To avoid this, companies must make sure they are prepared, as the EC intends to enforce the FSR rigorously.

B. Three main tools

Under the FSR, the EC has three tools for assessing the legality of foreign subsidies:

First, the “M&A tool,” which enables the EC to review certain mergers and acquisitions of control. It creates an obligation to notify the EC of any M&A transactions that exceed two thresholds and a standstill obligation. Companies must notify financial contributions from non-EU countries when:

  • at least one merging company, the target, or the joint venture is established in the EU and generates aggregate turnover of at least EUR 500 million in the EU, and
  • taken together, all companies involved have received more than EUR 50 million in financial contributions from non-EU countries in the three preceding years.

Notifiable M&A transactions must not be implemented before their clearance by the EC. This has a direct impact on deal timelines (“standstill obligation”).

Second, the “public procurement instrument,” which expands the notification obligation to include procurement procedures. The EC is to be notified of financial contributions from non-EU countries when:

  • the estimated total value of the awarded public procurement agreement is at least EUR 250 million, and
  • the bidder has received at least EUR 4 million in financial contributions from non-EU countries in the three preceding years.

And third, a general instrument for market investigation, the “ex officio review tool.” Regardless of the above-mentioned formal notification obligations, the EC will also be able to investigate ex officio any potentially distorting foreign subsidies. A wide margin of discretion enables the EC to initiate such ex officio investigations with almost no restrictions. However, it is not yet clear to what extent the EC will actually make use of this tool.

C. Financial contributions and foreign subsidies

Notification requirements are tied to “financial contributions” granted (directly or indirectly) by non-EU countries. The term refers to more than just “foreign subsidies” and is defined very broadly.

A “financial contribution” can include but is not limited to:

(i) transferring funds or liabilities (such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps, or rescheduling),

(ii) the foregoing of revenue that is otherwise due (such as tax exemptions, or granting special or exclusive rights without adequate remuneration), or

(iii) providing goods or services or purchasing goods or services where a foreign subsidy necessitates finding a foreign financial contribution with:

(a) a benefit for a company engaging in an economic activity in the internal market, and

(b) a limitation of the benefit, in law or in fact, to one or more companies or industries.

Once notified, the EC will assess whether the foreign financial contribution constitutes a foreign subsidy and evaluate whether it has any distorting effect on the EU market. Finally, the EC may carry out a balancing act, taking into account all positive and negative effects of the foreign subsidy. The actual test criteria to be applied remain unclear and will only be further clarified by the EC in the coming years. The EC is expected to choose an approach inspired by well-established principles and jurisprudence regarding EU state aid law.

D. What do companies need in order to be prepared?

Because the FSR creates new notification requirements, companies are facing additional administrative burdens to ensure M&A compliance and be M&A-ready (i.e., collecting the necessary data and preparing a compliance system). The FSR will impact deal timelines and transaction security by creating one more regulatory filing that will have to be considered in addition to merger control and foreign direct investment filings.

The FSR also provides companies with new options to use the FSR itself against competitors. Companies can complain to the EC, which can result in an ex officio investigation. For example, such informal complaints over distortive subsidies from Qatar and the United Arab Emirates were raised by EU soccer clubs and associations earlier this year. So far, the EC has reacted with restraint.

E. Outlook

Because of the FSR’s wide scope, implementing the duties resulting from the FSR is a topic that also matters to US companies. Just to mention one example: according to the parties, the merger between the two US fashion companies Tapestry and Capri is subject to the FSR M&A notification obligation. Capri has a well-established business in Europe (brands such as Michael Kors, Jimmy Choo, or Versace). Hence, according to the EC Implementing Regulation it is deemed to be “established in the EU.” Therefore, the transaction is covered by the FSR regardless of the fact that Tapestry and Capri are both US—and not EU—companies.

Although concrete effects of the FSR may not have been strongly felt so far, this may change soon. According to the EC’s department for competition and its Director-General Olivier Guersent, the new EU reviewing power and the EC’s FSR activities will be “ramped up” over the next few months.

Specifically, FSR investigations may be initiated in the wind power industry in the near future. The EC recently encouraged the industry to submit information on potential unfair practices distorting competition in the wind power market. In its European Wind Power Action Plan of October 24, 2023, the EC explicitly announced that it intends to make use of the tools provided to it by the FSR. Another sector that could attract the EC’s interest is the electric vehicle industry: President of the European Commission Ursula von der Leyen announced in her State of the Union speech on September 12, 2023, the launch of anti-subsidy investigations into electric vehicles from China. FSR investigations could follow, although this is uncertain.

However, the situation remains very dynamic. So far, seventeen M&A deals have been pre-notified to the EC in order to discuss and determine jointly whether they will be covered by the FSR. More FSR (pre-)notifications to the EC will certainly follow soon. The EC can also be expected to extend its ex officio FSR activities sooner or later—in general and in regard to other specific sectors.