Commission proposes new Regulation to address distortions caused by foreign subsidies in the Single Market

This article is brought to you in association with the European Commission.

The European Commission proposes today a new instrument to address potential distortive effects of foreign subsidies in the Single Market. Today’s legislative proposal follows the adoption of the White Paper in June 2020 and an extensive consultation process with stakeholders. It aims at closing the regulatory gap in the Single Market, whereby subsidies granted by non-EU governments currently go largely unchecked, while subsidies granted by Member States are subject to close scrutiny. The new tool is designed to effectively tackle foreign subsidies that cause distortions and harm the level playing field in the Single Market in any market situation. It is also a key element to deliver on the updated EU Industrial Strategy also adopted today, by promoting a fair and competitive Single Market thereby setting the right conditions for the European industry to thrive.

Executive Vice-President Margrethe Vestager, in charge of competition policy and responsible for the cluster Europe Fit for the Digital Age, said: “Europe is a trade and investment superpower. In 2019 the stock of foreign direct investments  was worth more than 7 trillion euros. Openness of the Single Market is our biggest asset. But openness requires fairness. For more than 60 years, we’ve had a system of State aid control to prevent subsidy races between our Member States. And today we are adopting a proposal to also tackle distortive subsidies granted by non-EU countries. It is all the more important to ensure a level playing field in these challenging times, to support the recovery of the EU economy”.

Executive Vice-President Valdis Dombrovskis, responsible for An Economy that Works for People and for Trade, said: “Unfair advantages accorded through subsidies have long been a scourge of international competition. This is why we have made it a priority to clamp down on such unfair practices. They distort markets and provide competitive advantages on the basis of the support received, rather than on the quality and innovativeness of the products concerned. Today’s proposal complements our international efforts in this regard. It will level the playing field within the EU and encourage positive change, while maintaining the openness that is so vital to our economic strength.”

Commissioner for the Internal Market, Thierry Breton, said: “Our Single Market is fiercely competitive and attractive to foreign investors and companies. But being open to the world only works if everyone who is active in the Single Market, invests in Europe or bids for publicly funded projects, plays by our rules. Today we are closing a gap in our rule book to make sure that all companies compete on an equal footing and that no one can undermine the level playing field and Europe’s competitiveness with distortive foreign subsidies. This will strengthen Europe’s resilience.”

EU rules on competition, public procurement and trade defence instruments play an important role in ensuring fair conditions for companies operating in the Single Market.  But none of these tools applies to foreign subsidies which provide their recipients with an unfair advantage when acquiring EU companies, participating in public procurements in the EU or engaging in other commercial activities in the EU. Such foreign subsidies can take different forms, such as zero-interest loans and other below-cost financing, unlimited State guarantees, zero-tax agreements or direct financial grants.

Today’s proposal is accompanied by an Impact Assessment report, which explains in detail the rationale behind the proposed Regulation and describes several situations in which foreign subsidies may cause distortions in the Single Market.

The proposed Regulation

Scope

Under the proposed Regulation, the Commission will have the power to investigate financial contributions granted by public authorities of a non-EU country which benefit companies engaging in an economic activity in the EU and redress their distortive effects, as relevant.

In this context, the Regulation proposes the introduction of three tools, two notification-based and a general market investigation tool. More specifically:

• A notification-based tool to investigate concentrations involving a financial contribution by a non-EU government, where the EU turnover of the company to be acquired (or of at least one of the merging parties) is €500 million or more and the foreign financial contribution is at least €50 million;
• A notification-based tool to investigate bids in public procurements involving a financial contribution by a non-EU government, where the estimated value of the procurement is €250 million or more; and
• A tool to investigate all other market situations and smaller concentrations and public procurement procedures, which the Commission can start on its own initiative (ex-officio) and may request ad-hoc notifications.

With respect to the two notification-based tools, the acquirer or bidder will have to notify ex-ante any financial contribution received from a non-EU government in relation to concentrations or public procurements meeting the thresholds. Pending the Commission’s review, the concentration in question cannot be completed and the investigated bidder cannot be awarded the contract. Binding deadlines are established for the Commission’s decision.

Under the proposed Regulation, where a company does not comply with the obligation to notify a subsidised concentration or a financial contribution in procurements meeting the thresholds, the Commission may impose fines and review the transaction as if it had been notified.

The general market investigation tool, on the other hand, will enable the Commission to investigate other types of market situations, such as greenfield investments or concentrations and procurements below the thresholds, when it suspects that a foreign subsidy may be involved. In these instances, the Commission will be able to start investigations on its own initiative (ex-officio) and may request ad-hoc notifications.

Based on the feedback received on the White Paper, the enforcement of the Regulation will lie exclusively with the Commission to ensure its uniform application across the EU.

If the Commission establishes that a foreign subsidy exists and that it is distortive, it will, where warranted, consider the possible positive effects of the foreign subsidy and balance these effects with the negative effects brought about by the distortion.

When the negative effects outweigh the positive effects, the Commission will have the power to impose redressive measures or accept commitments from the companies concerned that remedy the distortion.

Redressive measures and commitments

With respect to the redressive measures and commitments, the proposed Regulation includes a range of structural or behavioural remedies, such as the divestment of certain assets or the prohibition of a certain market behaviour.

In case of notified transactions, the Commission will also have the power to prohibit the subsidised acquisition or the award of the public procurement contract to the subsidised bidder.

Next Steps

The European Parliament and the Member States will now discuss the Commission’s proposal in the context of the ordinary legislative procedure with a view of adopt a final text of the Regulation.

The proposal will also be open for an eight-week public consultation.

Once adopted, the Regulation will be directly applicable across the EU.

Background

The European Council in its Conclusions of the meeting on 21 and 22 March 2019 tasked the Commission to identify new tools to address the distortive effects of foreign subsidies on the Single Market. The Council also referred to the Commission’s White Paper in its Conclusions of 11 September 2020 and called for ‘further instruments to address the distortive effects of foreign subsidies in the Single Market’ in its Conclusions of 1-2 October 2020.

In its February 2020 report on competition policy, the European Parliament called on the Commission to ‘investigate the option to add a pillar to EU competition law that gives the Commission appropriate investigative tools in cases where a company is deemed to have engaged in distortionary behaviour due to government subsidies…’

In its Communication “A New Industrial Strategy for Europe” of 10 March 2020, the Commission confirmed that by mid-2020 it would adopt a White Paper on an Instrument on Foreign Subsidies, to address distortive effects caused by foreign subsidies within the Single Market. The Updated Industrial Strategy, adopted today, also identifies the proposed Regulation on foreign subsidies as one of the key actions delivering on the objective of EU’s open strategic autonomy.

In the 2021 Commission Work Programme and its Communication “Trade Policy Review” of 18 February 2021, the Commission announced that it would propose a legal instrument on foreign subsidies by mid-2021.

On 17 June 2020, the Commission adopted a White Paper proposing ways to deal with the distortive effects caused by foreign subsidies in the Single Market.

The public consultation on the White Paper ended on 23 September 2020. The Commission also consulted the public on the Inception Impact Assessment and run a targeted consultation with a sample of most impacted stakeholders.

The Commission has thoroughly analysed the input received and has taken it into due account when formulating today’s proposal.