On 17 June 2020, the European Commission (‘Commission’) published a White Paper “on levelling the playing field as regards foreign subsidies” which outlines a proposal for a series of new investigatory and enforcement tools, intended to identify and counteract the possible distortions of competition in the EU single market due to foreign subsidies. A public consultation ran until 23 September 2020, inviting stakeholders to provide their views on the options set out in the White Paper.
A. EU Rationale
Europe’s economy grows increasingly linked to the rest of the world. “If this is to remain a strength, we must stay vigilant”, the Executive Vice-President Margrethe Vestager said, and foreign subsidies could pose a threat to the EU single market. In the White Paper, the Commission introduces tools to ensure that such foreign subsidies do not distort the EU market.
The assessment of subsidies is already performed by the Commission through the EU State aid rules. While EU State aid controls address the subsidies granted by EU Member States, they do not cover subsidies granted by non-EU countries. Further, distortions caused by foreign subsidies cannot exhaustively be addressed by the existing EU rules on competition (in particular mergers and State aid), trade policy, public procurement, and EU funding. The White Paper develops a possible new legal framework to address this perceived regulatory gap.
B. Proposed White Paper “Modules”
The White Paper proposes three sets of tools (so-called “Modules”) to address the distortive effects of foreign subsidies. The Commission considers the proposed three Modules to be complementary to each other.
Module 1: A General Instrument to Capture the Distortive Effects of Foreign Subsidies
Module 1 would be an ex post market scrutiny tool which seeks to address distortive effects caused by foreign subsidies in all market situations. This module allows a supervisory authority to implement an investigation in two steps. First, the Commission or a national authority may launch a preliminary review where evidence suggests that a possible foreign subsidy is leading to a distortion of competition on the internal market (“phase I”). Second, the investigating authority may launch an in-depth investigation (“phase II”). Based on the proposed framework, both the Commission and national authorities would be competent during the phase I investigation, while the Commission would have exclusive competence once it opens a phase II investigation.
The White Paper indicates that any intervention under the proposed Module 1 should be based on certain prerequisites, namely the establishment of the existence of a foreign subsidy to an undertaking which causes or is liable to cause a distortion in the EU single market. Where the existence of a foreign subsidy is established, the competent authority should have the power to impose measures to remedy any likely distortive impact, such as remedial payments and structural or behavioral remedies.
Once the distortive effects caused by foreign subsidies are established, the White Paper proposes the application of the EU ‘Interest test’ to assess the potential positive impacts of that subsidy. For potential defenses, the White Paper lists public policy objectives that would be taken into account, such as creating jobs, achieving climate neutrality and protecting the environment, digital transformation, security, public order and public safety, and resilience.
Module 2: A Compulsory Notification Mechanism for Potentially Subsidized Acquisitions of EU Companies
Module 2 seeks to address ex ante perceived distortions caused by foreign subsidies facilitating the acquisition of EU undertakings in order to ensure that no unfair benefit is conferred to an acquirer, either directly by linking a subsidy to a given acquisition, or indirectly by de facto increasing the financial strength of the acquirer. In the White Paper, the notion of an acquisition would cover all investments that include (i) the direct or indirect acquisition of control of an undertaking; or (ii) the direct or indirect acquisition of a yet-to-be-defined percentage of the shares or voting rights, or otherwise a material influence, in an undertaking. In Module 2, there is no need for a “foreign subsidy” to have been granted — the White Paper defines “potentially subsidized acquisitions” as those “where a party has received a financial contribution by any third country government”.
While in Module 1 the Commission and Member States are designated as competent authorities, in Module 2 the Commission would be the only competent authority to prohibit or impose conditions on any such acquisition that is found to be facilitated by foreign subsidies and to distort the single market.
The White Paper suggests that the Commission may launch an ex ante investigation of the planned acquisition based on a compulsory notification mechanism for potentially subsidized acquisitions triggered by a threshold. This module is built around the notification obligation and standstill provision. The White Paper proposes that, much as under Module 1, the established distortion would be balanced against the positive impact that the investment might have within the EU or on public policy interests recognized by the EU.
Module 3: A Compulsory Notification Mechanism for Potential Foreign Subsidies to Bidders in Public Procurement Procedures
Module 3 proposes a legal instrument to address perceived foreign subsidies in individual public procurement procedures. Under Module 3, the bidders in public procurement procedures would have to notify the contracting authority of financial contributions received from non-EU countries. This captures not only subsidies of the bidders, but also of their consortium members, subcontractors and suppliers.
The contracting authority will then transmit the notification to the competent authority (either the Commission or the national authority) which would assess whether there is a foreign subsidy and whether that subsidy makes the procurement procedure unfair. EU public procurement buyers would be required to exclude bidders that have received distortive foreign subsidies.
C. Foreign Subsidies in the Context of EU Funding
The White Paper also seeks to address the distortive effects of foreign subsidized undertakings gaining access to EU funding. The White Paper states that all economic operators should compete on an equal footing and that foreign subsidies may distort the process of access to EU funding by putting their beneficiaries in a better position to apply.
The White Paper proposes options to prevent such allegedly unfair advantage. Among others, in case of funding distributed through public tenders or grants, a similar procedure would apply as the one used for EU public procurement procedures. Moreover, the Commission emphasizes the importance of ensuring that international financial institutions that implement projects supported by the EU budget, such as the European Investment Bank or the European Bank for Reconstruction and Development, mirror this approach to foreign subsidies.
D. Open Questions
While the White Paper seeks to introduce a framework aiming at protecting the EU single market from distortive foreign subsidies, it leaves a number of open questions.
For instance, the White Paper does not indicate clearly that all involved authorities must take a decision at the same time. In addition, the White Paper proposes a system of shared enforcement and allows the competent authorities to intervene and examine the foreign subsidies at their initiative.
Moreover, it is not clear from the White Paper whether acquisitions that have been reviewed and approved under Module 2 can later be subject to an investigation under Module 1.
More importantly, at this stage, there is not enough clarity on how the substantive assessment criteria and the proposed remedies will be implemented, nor how the EU ‘Interest test’ would be applied.
Last but not least, the currently proposed Module 2 would impose a suspensory filing obligation on all companies that have received a financial contribution from a foreign government, in whichever form, which is de facto a very broad coverage.