New merger control powers of the European Commission under the Foreign Subsidies Regulation
In recent years, the European Union’s legislative bodies have drafted new laws to combat the potential influence of third countries on proper functioning of the internal market. The regulatory measures have introduced a mechanism for examination and control by the European Commission of subsidies granted by third countries for planned economic activity in the EU of publicly or privately owned undertakings.
Work lasting until mid-2021 resulted in adoption of Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (known as the Foreign Subsidies Regulation or FSR). The FSR entered into force on 12 January 2023, but most of its provisions began to take effect on 12 July 2023. The FSR introduced new obligations for undertakings benefitting from subsidies from third countries (i.e. countries outside the EU) which could give them a competitive advantage on the EU’s common market. In particular, the regulation introduced special rules and procedures for oversight of public procurement procedures and concentrations of undertakings. The rules in this area took effect recently, from 12 October 2023. Detailed rules governing proceedings based on the FSR were adopted in Commission Implementing Regulation (EU) 2023/1441 of 10 July 2023 on detailed arrangements for the conduct of proceedings by the Commission pursuant to Regulation (EU) 2022/2560.
Aim of the FSR: a level playing field for competitors in the internal market
Foreign subsidies can negatively impact and disrupt equal terms for doing business by undertakings on the EU’s internal market, thus harming competition within the EU.
The FSR was designed to close a loophole, because none of the existing laws had solved the problem of subsidies from third countries distorting competition in the EU. By contrast, subsidies from EU member states have been (and continue to be) subject to strict control based on the EU’s state aid rules.
Thus, on one hand the FSR introduces new legal instruments needed to eliminate such distortions of the internal market, in order to ensure equal footing for business operations. On the other hand, the FSR imposes new duties on undertakings subsidised by third countries seeking to operate in the EU, where the subsidies they have received allow them to obtain a competitive advantage on the EU’s common market.
As pointed out in the FSR, foreign subsidies can distort the internal market and undermine the level playing field for various economic activities in the Union. This could in particular occur in the context of concentrations entailing a change of control over Union undertakings, where such concentrations are fully or partially financed through foreign subsidies, or where economic operators benefiting from foreign subsidies are awarded contracts in the Union. Hence the introduction of control mechanisms enabling the Commission to examine the origin of funds giving a competitive advantage to foreign undertakings taking part in concentrations or seeking the award of public contracts, and to respond appropriately to ensure fair and consistent conditions for undertakings doing business on the internal market.
Definition and categories of foreign subsidies
A foreign subsidy shall be deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries.
In turn, the regulation provides for a broad, open-ended understanding of the notion of a “financial contribution,” covering a wide spectrum of support measures, not just cash transfers. Under FSR, examples of financial contributions include:
- Transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt-to-equity swaps, or rescheduling
- Foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration
- Provision of goods or services or purchase of goods or services.
Significantly, financial contributions should be understood to cover contributions by the central government or public authorities at any other level, a foreign public entity whose actions can be attributed to the third country, or a private entity whose actions can be attributed to the third country. These restrictions also apply to international undertakings established in the EU but receiving subsidies from countries outside the EU.
Such subsidies are subject to the regulation if they could (even potentially) distort competition within the EU. This means that the subsidy could improve the competitive position of an undertaking on the internal market, and thus negatively impact the existing competition on the market. The FSR includes an open-ended list of indicators for distortion of the internal market, such as:
- The amount of the foreign subsidy
- The nature of the foreign subsidy
- The situation of the undertaking, including its size and the markets or sectors concerned,
- The level and evolution of economic activity of the undertaking on the internal market
- The purpose and conditions attached to the foreign subsidy as well as its use on the internal market.
The FSR identifies categories of foreign subsidies most likely to distort the internal market, including:
- A foreign subsidy directly facilitating a concentration
- Subsidies involving:
- Support for ailing undertakings (without a long-term restructuring plan in place)
- An unlimited guarantee for the debts or liabilities of the undertaking (i.e. without limitation as to amount or duration)
- Financing measures not in line with the OECD Arrangement on officially supported export credits
- Submission of an unduly advantageous tender.
Conversely, a foreign subsidy is not considered to distort the internal market when:
- It is aimed at making good the damage caused by natural disasters or other exceptional occurrences, or
- The total amount of a foreign subsidy to an undertaking does not exceed EUR 200,000 per third country over any consecutive period of three years.
Additionally, if the total amount of a foreign subsidy to an undertaking does not exceed EUR 4 million over any consecutive period of three years, such a subsidy is unlikely to distort the internal market.
Concentrations subject to notification and control
Provisions of the FSR applies to the following transactions, defined as “concentrations,” where a change of control on a lasting basis results from any of the following:
- Merger—the merger of two or more previously independent undertakings or parts of undertakings
- Acquisition of control—the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertaking
- Joint venture—the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity.
The requirement of pre-merger notification applies to concentrations meeting both of the following turnover criteria:
- At least one of the merging undertakings, the acquired undertaking, or the joint venture is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million
- The undertakings participating in the concentration were granted combined aggregate financial contributions of more than EUR 50 million from third countries in the three years preceding conclusion of the agreement, announcement of the public bid, or acquisition of a controlling interest (in the case of an acquisition, the acquirer(s) and the acquired undertaking; in the case of a merger, the merging undertakings; in the case of a joint venture, the undertakings creating the joint venture, and the joint venture itself).
Exclusions from the notification obligation
In certain instances, even when the notification criteria above are met, the FSR excludes the notification requirement, deeming no concentration to have occurred. This applies to:
- Temporary holding of securities by financial institutions for resale (when credit institutions or other financial institutions or insurance companies, the normal activities of which include transactions and dealing in securities for their own account or for the account of others, hold on a temporary basis securities which they have acquired in an undertaking with a view to reselling them, provided that they do not exercise voting rights in respect of those securities with a view to determining the competitive conduct of that undertaking or provided that they exercise such voting rights only with a view to preparing the disposal of all or part of that undertaking or of its assets or the disposal of those securities and that any such disposal takes place within one year of the date of acquisition)
- Acquisition of control in bankruptcy or arrangement proceedings (when control is acquired by an officeholder according to the law of a member state relating to liquidation, winding up, insolvency, cessation of payments, compositions or analogous proceedings)
- Operations by holding companies only to maintain the full value of their investments (i.e. acquisition of control carried out by financial holding undertakings, provided that the voting rights in respect of the holding are exercised, in particular in relation to the appointment of members of the management and supervisory bodies of the undertakings in which they have holdings, only to maintain the full value of those investments and not to determine directly or indirectly the competitive conduct of those undertakings).
Investigative powers of the Commission and interim measures
The European Commission has broad investigative authority to review concentrations of undertakings involving foreign subsidies, and is the only body authorised to enforce the Foreign Subsidies Regulation. This approach is designed to ensure consistent impacts of the Commission’s actions across the entire internal market.
On its own initiative (ex officio), the Commission may take the following actions:
- Examine information from any source (e.g. member states, a natural or legal person or a trade association) regarding alleged foreign subsidies distorting the internal market
- Conduct necessary inspections of undertakings and associations of undertakings in EU member states—officials authorised by the Commission to conduct an inspection, assisted by officials and other persons authorised or appointed by the member state in whose territory the inspection is to be conducted, shall be empowered to:
- Enter any premises, land and means of transport of the undertaking or association
- Examine books and other business records, irrespective of the medium, obtain copies of documentation, and seal any business premises and books or records for the period and to the extent necessary for the inspection
- Ask any representative or member of staff of the undertaking or association for explanations of facts or documents relating to the inspection, and record their answers
- Conduct a market investigation into the particular sector or the particular type of economic activity, and require the undertakings or associations concerned to supply the necessary information
- Demand information for pending proceedings not only from the parties, but also from other undertakings or associations of undertakings, or from member states or third countries
- Interrogate natural or legal persons (with their consent) to gather information concerning the proceeding.
The Commission is also authorised to conduct inspections in the territory of a third country, provided that the government of the third country is officially notified and raises no objection to the inspection.
As a rule, review of concentrations under the FSR is ex ante—notifiable concentrations shall be notified to the Commission prior to implementation. However, the Commission itself may also request prior notification of any concentration that does not meet the notification criteria at any time prior to implementation, where the Commission suspects that foreign subsidies may have been granted to the undertakings concerned in the three years prior to the concentration.
In addition, the Commission may conduct ex post review of a concentration meeting the notification criteria but not notified by the parties prior to implementation, or notified at the request of the Commission. If in such case the Commission finds that the concentration distorts the internal market, the Commission may require the participants to restore the situation prevailing prior to implementation of the concentration as far as possible (e.g. by unwinding the concentration, or if that is not possible, by ordering other appropriate measures).
Moreover, in necessary cases, the Commission may order interim measures to preserve competition in the internal market and prevent irreparable damage, when (i) there are sufficient indications that a financial contribution constitutes a foreign subsidy and distorts the internal market and (ii) there is a risk of serious and irreparable damage to competition on the internal market. The catalogue of interim measures is open-ended, and may include e.g. refraining from certain investments, or offering access to infrastructure (including research facilities, production capabilities or essential facilities) acquired or supported by the foreign subsidies distorting the internal market. Interim measures are adopted by the Commission in the form of a decision. The interim measures may apply for a specific period, which may be renewed as necessary, or until the final decision is taken.
Notification procedure, information to be provided, and possible determinations by the Commission
Notifiable concentrations should be notified to the Commission prior to their implementation and following conclusion of the agreement, announcement of the public bid, or acquisition of a controlling interest. A merger, acquisition of joint control, or creation of a joint venture shall be notified jointly by the parties to the merger or those acquiring joint control or creating the joint venture. In other cases, the notification shall be made by the person or undertaking acquiring control of the whole or parts of one or more undertakings.
As a rule, the parties to a planned concentration must refrain from implementing a concentration before notification, and until the Commission issues a decision or the time limit for issuing a decision lapses (suspension requirement).
The detailed procedures for making notifications and conduct of notification proceedings by the Commission are set forth in the implementing regulation. One of the annexes to the implementing regulation is the notification form that must be used in notifying a concentration (Form FS-CO).
The notification procedure is conducted in two stages. Following notification of the intended concentration by the obligated entities, the first stage, a preliminary review, is held. This should be completed within 25 working days. During this time the Commission will either close the proceeding, or issue a decision launching an in-depth investigation (second stage). This decision is based on the Commission’s determination of whether the undertaking has received a foreign subsidy, and if so, whether it could distort the internal market.
The in-depth investigation should be completed within 90 working days, but the Commission may extend it up to an additional 20 working days. If the parties to the concentration propose commitments to remedy the distortion of the internal market, the in-depth investigation will be extended by 15 working days. The time limits for both the first and second phase exclude periods where the Commission is waiting for the parties to make up shortcomings in the notification, or to submit additional information requested by the Commission.
During the in-depth investigation, the Commission will make a further assessment of the foreign subsidy, including a balancing test, weighing the negative effects of distortion against any positive effects on growth of the internal market, in line with relevant policy objectives of the EU.
After conducting the proceeding, the Commission may issue one of the following determinations:
- A no-objection decision (if the distortion is outweighed by positive effects)
- A decision with redressive measures or with commitments (if the measures will fully and effectively remedy the distortion)
- A decision prohibiting the concentration, where the Commission finds that the foreign subsidy distorts the internal market.
The redressive measures or commitments may include the following (an open-ended list):
- Offering access to infrastructure (research facilities, production capabilities, or essential facilities)
- Reducing capacity or market presence
- Refraining from certain investments
- Licensing of assets acquired or developed with the help of foreign subsidies
- Publication of R&D results
- Divestment of certain assets
- Requiring the undertakings to dissolve the concentration
- Repayment of the foreign subsidy
- Requiring the undertakings to adapt their governance structure.
The parties have a right to seek judicial review of Commission decisions issued under the Foreign Subsidies Regulation, pursuant to general rules.
If the parties to a concentration fail to notify a notifiable concentration prior to implementation, or implement a notified concentration before obtaining a decision from the Commission or in violation of a decision prohibiting the concentration, the Commission may impose a fine on the undertakings of up to 10% of their aggregate turnover in the preceding financial year. The Commission may also impose fines of up to 1% of aggregate turnover for submitting incorrect or misleading information to the Commission.
Wardyński & Partners
 In relation to the existing regulations in this area, i.e. the EC Merger Regulation (Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings) and Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.
 The existing instruments for protection of trade enabled the Commission to act in the case of importation of subsidised goods into the EU, but not in a situation where foreign subsidies take the form of subsidised investments or involve financial services or financial flows (cf. WTO–GATT Agreement on Subsidies and Countervailing Measures, O.J. L 336 of 23 December 1994, under point 5 of which the EU can launch mechanisms to resolve inter-state disputes over certain foreign subsidies granted by WTO member states, but limited to goods). See also note 1 above.
 Under EU law, general rules on state aid are set forth in Art. 107 and 108 of the Treaty on the Functioning of the European Union, Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108, and Commission Regulation (EC) 794/2004 of 21 April 2004 implementing Council Regulation (EU) 2015/1589.
 Under Art. 2(15) of Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, “financial holding undertakings” are defined as “undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders.”