On 30 June 2022, the Council of the EU (the “Council”) and the European Parliament (the “Parliament”) reached a much awaited agreement on the proposal of the European Commission (the “Commission”) for the Regulation on foreign subsidies distorting the internal market (the “FSR”) (see our alert on the proposal). This political agreement swiftly concludes the trilogue discussions initiated in the beginning of May this year, after the Council (see our blog post) and the Parliament (see our blog post) each adopted their own positions. The agreement has been approved by the Permanent Representatives Committee (“COREPER”) of the Council on 13 July and the Committee on International Trade of the European Parliament on 14 July.
The FSR grants substantial new powers to the Commission and “will help close the regulatory gap whereby subsidies granted by non-EU governments currently go largely unchecked”, according to remarks from Executive Vice-President of the Commission, Margrethe Vestager. It will be deeply transformative for M&A and public procurement in the EU.
The agreement on the FSR did not lead to any major changes in the proposal made by the Commission. The most notable points of discussion between the Parliament and Council and the outcome of this agreement are:
- The thresholds above which companies are obliged to inform the Commission about their foreign subsidies remain unchanged compared to the Commission’s proposal;
- The time period in which the Commission has to investigate foreign subsidies in large public procurement has been reduced. In the same way, the retroactive application of the FSR has been limited to foreign subsidies granted in the five years prior to the application of the regulation;
- The Commission will issue guidelines on the existence of a distortion, the balancing test and its power to request notification of non-notifiable transactions, at the latest three years after the entry into force of the FSR; and
- A commitment to a multilateral approach to foreign subsidies above the FSR and the possibility for the Commission to engage in a dialogue with third countries has been included.
No threshold change
Despite long discussions on the notification thresholds, the Council and the Parliament chose to endorse the thresholds set forth in the Commission’s proposal, while adding further thresholds. Consequently, a notification will be required for concentrations where (i) the acquired company, one of the merging parties, or the joint venture generates an EU turnover of at least EUR 500 million and (ii) the parties involved were granted foreign financial contributions in the three past years of more than EUR 50 million. For public procurement procedures, notification is required where (i) the procurement has a total value of at least EUR 250 million and (ii) the economic operator (including its subcontractors, if any) was granted foreign financial contribution in the three preceding years of at least EUR 4 million per third country. In addition, where a procurement is divided into lots, foreign subsidies will only be notifiable if the aggregate value of the lots to which the tenderer applies amounts to at least EUR 125 million.
Reduced time limits
The Council and the Parliament chose to reduce the time limits in which the Commission has to investigate a foreign subsidy in a notified public procurement, compared to the Commission’s proposal. Consequently, the time limit to complete a preliminary review of a foreign subsidy in a notified public procurement is reduced from 60 to 20 working days from the notification or, in multi-stage procurements, from the (final) tender. The time limit to close an in-depth investigation has been lowered from 200 to 110 working days from the notification.
In addition, the initial 10-year time limit to review foreign subsidies granted before the application of the FSR has also been reduced to five years in accordance with the Council’s position.
The time limits for notifiable concentrations remain the same as the Commission’s proposal. Consequently, a notifiable concentration may not be implemented until 25 working days have elapsed from a complete notification or, when the Commission initiates an in-depth investigation within that period, 90 working days after opening the in-depth investigation.
Additional clarifications and guidelines
The Commission will issue supplementary guidelines three years after the entry into force of the FSR. Executive Vice-President Vestager explained the reason behind the three-year time period: “Guidelines are binding on the commission. We do know, to a very large degree, how this tool will work, but it will allow us to get some experience so that we’ll know what will be the exact scope”. These guidelines will cover (i) the existence of a distortion, (ii) the balancing test performed to assess the market-distorting effects of foreign subsidies against their potential wider benefits and (iii) the Commission’s power to request notification of non-notifiable transactions. The Commission committed to provide initial clarification on these concepts within 12 months after the date of application of the FSR.
The FSR now specifies that the following may be taken into consideration for the balancing test: the positive effects on the internal market as well as the positive effects in relation to relevant policy objectives, in particular those of the Union. Positive effects may relate, for instance, to a high level of environmental protection and social standards, and the promotion of research and development.
Multilateral rules and third-country dialogue
The institutions reaffirmed being committed “to an open and rules-based multilateral trading system with a modernised WTO at its core and to further enhancing the effectiveness of the multilateral framework on subsidies”. This may lead to the repeal of the FSR if made thereby redundant.
The agreement further allows the Commission to engage in a dialogue with non-EU countries that are found to regularly grant distortive subsidies. The objective is to explore options for stopping or modifying such subsidies. According to the Parliament’s rapporteur on the FSR, this provision will help the “Commission to fight the consequences of distortive subsidies in the EU, but also seek to address its root causes in third countries.”
The FSR has had a very smooth legislative process so far and received approval at a remarkably high speed. The FSR must now be formally adopted by the Council and the Parliament in plenary. It will then enter into force on the 20th day following its publication in the Official Journal of the European Union. The FSR will apply six months after entering into force and the notification obligations, three months later. This transitory period will allow the Commission to adopt its implementing rules on procedural details and to be staffed for its new role.