The European Union has introduced regulations[i] designed to prevent foreign subsidies from having a negative impact on the internal EU market, and to ensure a level playing field for businesses.
Just two months after the Regulation came into force, the Commission launched a high-profile investigation into a contract awarded by the Bulgarian Ministry of Transport and Communications for the purchase of electric trains from a major Chinese manufacturer. This was intended to emphasise the EU’s stance on unfair competition and its determination to combat this phenomenon.
The new regulations and intensive inspections are intended to encourage companies to approach legal issues related to foreign subsidies with due care and attention, bearing in mind the requirements and consequences of non-compliance resulting from the Regulation.
In Poland, it is clear that the issue of subsidies and related regulations is becoming increasingly heated due to the numerous foreign investments.
What are subsidies and when do they distort the market?
A foreign subsidy is a financial contribution made directly or indirectly by a third country, which confers a benefit on a company operating in the EU market.
‘Financial contribution’ is a broad concept, covering, among other things:
- The transfer of funds, capital injections, loans, loan guarantees
- The foregoing of revenue (e.g. tax exemptions)
- The provision of goods or services or their purchase on terms other than market terms
The definition of ‘financial contribution’ is therefore broad, covering various forms of support that are not necessarily limited to cash transfers. It may include debt forgiveness, rescheduling repayments, or providing goods at below-market prices.
Distortion of the EU market occurs when such financial contributions can improve the position of a particular company and, in doing so, they actually or potentially negatively affect competition in the EU market.
When should one take an interest in subsidies?
Concentration – M&A transactions
Concentration arises in situations involving a lasting change of control caused by a (specifically defined) merger or acquisition of companies, or the creation of a joint venture performing all the functions of an autonomous entity.
In accordance with the Regulation, a concentration transaction must be notified if:
- At least one of the merging or acquired undertakings or the joint venture is established in the Union and generates a total turnover of at least EUR 500 million
- The undertakings were granted total financial contributions of more than EUR 50 million from third countries during the three years preceding the notification
Therefore, if an EU undertaking is carrying out (or participating in) a concentration that exceeds these thresholds, it must notify the Commission of its intention to do so.
Public procurement
The Regulation also covers control in the area of public procurement, identifying situations in which foreign subsidies enable a contractor to submit an unduly advantageous tender for works, supply or services as market distortions.
Procurement procedures must be notified if:
- The estimated value of the public procurement or framework agreement, net of VAT, is at least EUR 250 million
- The total value of foreign financial contributions received from a given third country over the last three years is at least EUR 4 million
If these thresholds are exceeded, the economic operator and the contracting entity (as well as other entities participating in the procedure) must notify the contracting authority of any subsidies received. This notification will then be forwarded to the European Commission.
Commission investigation
Following an investigation, if the Commission concludes that a foreign subsidy is distorting the internal market, it may impose obligations to counteract the distortion, or prohibit the concentration/the award of the contract to the economic operator in question.
Penalty payments
Failure to comply with the information obligation or to notify foreign financial contributions may result in serious sanctions, including fines of up to 10% of a company’s annual turnover. This also applies to situations where the notification contains false, misleading or incomplete information, or where the required data has not been notified or the notification obligation has been circumvented.
Summary
Foreign subsidy regulations impose significant obligations on businesses that receive such support.
Due to the complex and broad definition of ‘financial contribution’ and the severe penalties for failing to notify, companies should prepare accordingly. Analysing the content of the new regulations and preparing the relevant notifications will minimise legal and financial risks. We would be happy to assist you with this.
Any questions? Contact us
[i] Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market
