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Noerr | European Commission’s draft regulation tackles foreign subsidies – more scrutiny of non-EU investors in sight

Times are getting harder for foreign investors in the EU! Member States are tightening their foreign direct investment control regimes (see our alert here), and national competition authorities are calling for more rigorous merger control enforcement (see our alert here). The European Commission (“Commission”) encourages Member States to refer to it non-notifiable transactions, and the proposed Digital Markets Act (DMA) shows the direction of the Commission’s intention to regulate (primarily US-based) gatekeepers in the digital markets (see our alert here).

As investments in the EU by foreign companies, including state-owned entities, have grown rapidly in recent years, policymakers in the EU have become increasingly sceptical that existing state aid, antitrust/merger control, procurement and trade defence tools are sufficient to tackle the (perceived) distortions caused by subsidies granted by non-EU countries. Hence, in June last year, the Commission adopted a White Paper on levelling the playing field as regards foreign subsidies: novel and far-reaching intervention powers for the Commission were discussed in order to close the regulatory gap (see our alert here). During the consultation, the Commission received 150 contributions: while almost all EU contributors welcomed the initiative, non-EU stakeholders, unsurprisingly, were generally critical of any form of regulation on top of the existing antitrust rules and trade defence instruments.

The Commission has now published its proposed Regulation that equips the Commission with three new regulatory tools: (i) a notification-based investigative tool for certain transactions aimed at facilitating concentrations; (ii) a notification-based investigative tool for bids in large public procurements; and (iii) a general investigative tool for the Commission to investigate on its own initiative any markets that may have been negatively affected by foreign subsidies.

During the public consultation, which started on 7 May 2021, interested parties have until 4 July 2021 to submit their views on the proposed Regulation.

Foreign Subsidies and their Distortive Effects

The substantive test against which the Commission plans to examine foreign subsidies is whether the foreign subsidy is liable to improve the competitive position of the undertaking concerned in the internal market and whether, in doing so, it actually or potentially negatively affects overall competition on the internal market. In assessing the subsidy, the Commission will balance the distortive effects against the possible positive effects of a subsidy.

Foreign subsidy: In light of the main goal of the proposed Regulation – namely to catch subsidies that are not subject to EU State aid rules simply because they were not granted by an EU Member State – the Commission foresees a definition which is both very similar to that of EU State aid and that largely reflects the definition of a subsidy in the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) of the World Trade Organization (“WTO”). Thus, the definition is conceptually very broad and likely to capture a vast set of financial contributions from non-EU countries.

A foreign subsidy is deemed to exist where a third country provides a financial contribution which confers a benefit to an undertaking active in the internal market and which is limited, in law or in fact, to an individual undertaking or industry or to several undertakings or industries (i.e. is selective).

Just as the notion of “advantage” under State aid rules, a financial contribution can include the 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, or the foregoing of revenue. The key requirement is the at least indirect origin from a government (“imputability”, in EU State aid terms).

Distortions on the internal market: in its case-by-case assessment, again similar to EU State Aid rules, the Commission will consider certain indicators, such as the amount and nature of the foreign subsidy. Subsidies to undertakings in difficulty are seen as particularly critical, unless they were granted under stringent conditions equivalent to those applying to rescue and restructuring aid in the EU.

Where foreign subsidies remain below a quantitative threshold of EUR 5 million over three fiscal years (de minimis aid), they are considered exempt.

Balancing: according to the proposed Regulation, the Commission shall, where warranted, balance the negative effects of a foreign subsidy in terms of distortion on the internal market with positive effects on the development of the relevant economic activity. The Commission thus will enjoy a significant margin of discretion when deciding whether to impose redressive measures or to accept commitments, and when deciding on the nature and level of those redressive measures or commitments.

Commitments or redressive measures, both of which shall fully and effectively remedy the distortion may consist of the following: (i) offering access under fair and non-discriminatory conditions to an infrastructure that was acquired or supported by the distortive foreign subsidies; (ii) reducing capacity or market presence; (iii) refraining from certain investments; (iv) licensing on fair, reasonable and non-discriminatory (“FRAND”) terms of assets acquired or developed with the help of foreign subsidies; (v) publication of results of research and development; (vi) divestment of certain assets; (vii) requiring the undertakings concerned to dissolve the concentration; (viii) repayment of the foreign subsidy, including an appropriate interest rate.


The proposed Regulation introduces a new merger notification requirement for notifiable transactions – on top of the existing EU merger control regime. Such notifiable transactions are mergers and acquisitions of control where companies established in the EU (e.g. target, joint venture) had Union-wide revenue of at least EUR 500 million; and the foreign subsidy received in the three calendar years prior to notification amounts to EUR 50 million.

In this regard, the proposed Regulation is very much modelled on EU merger control laws: it provides a pre-notification requirement, and parties must wait for clearance until closing is permitted. Failure to notify authorizes the Commission to investigate any time after closing. The normal proceeding involves a first phase of 25 working days, and a second in-depth phase of regularly 90 working days. The Commission could prohibit a transaction or make it subject to commitments offered by the parties. The draft allows the Commission to unwind a given transactions, and to issue fines between 1% and 10% of the aggregate turnover.

Ex officio investigations

The Commission will be allowed to, on its own initiativeexamine information from any source regarding alleged distortive foreign subsidies. This would enable in particular competitors to submit complaints and initiate an investigation.

The Commission can first conduct a preliminary review. If there are sufficient indications, the Commission can initiate an in-depth investigation;  in both phases, the Commission can issue information requests to companies Member States or third countries. In each phase, the Commission is entitled to conduct inspections in and outside the European Union (similar to dawn raids – outside the EU only if the company and foreign state permit the inspection).

The consequences of non-cooperation can be far reaching: If necessary information is not provided, the Commission assume that a financial contribution does confer a benefit. It may also impose fines and periodic penalty payments.

Where the Commission, after an in-depth review, finds that a foreign subsidy distorts the internal market, it may impose redressive measures, or accept commitments from the company under investigation. Interim measures are also possible. In case of non-compliance, in particular the fine level can be increased up to 10 % of the aggregate turnover in the preceding business year.

Public Procurement

As its third tool, the proposed Regulation introduces a notification requirement in relation to all public procurement procedures with a value exceeding EUR 250 million. Public procurement procedures below this threshold, whilst not subject to a notification requirement, can be reviewed by the Commission on an ex officio basis.

The notification regime sets up on the existing EU procurement rules and applies to any type of award procedure; public contract; supply, works and service contract; or works and service concessions. Undertakings participating in any of these public procurement proceedings are required to notify the contracting authorities of any foreign subsidies not only they, but also their main suppliers or subcontractors have received over the past three years. The contracting authority then transfers the notifications to the Commission which within 60 days conducts a preliminary review and within 200 days from receipt has to conclude any in-depth investigation. No contract may be awarded, unless the applicable review period has expired or the Commission has determined that the foreign subsidy does not distort the market. The Commission may impose fines of up to 10% of aggregate turnover for failure to notify a subsidy, and up to 1% for supplying incorrect or misleading information.


Unlike foreseen in the White Paper, the enforcement of the new rules shall occur solely at the Commission level and no longer at Member State level. What is more, a foreign subsidy notified in the context of a particular concentration or public procurement can be assessed once more in the context of a different economic activity.

Furthermore, the Commission can initiate a market investigation into a whole sector if it has a reasonable suspicion that that sector in particular is affected by foreign subsidies.

Finally, while the proposed Regulation introduces long lasting limitation periods that effectively allow the Commission to review foreign subsidies over a decade after being granted. Any investigation of the subsidies during that period effectively resets the clock. Slightly shorter limitation periods apply for the imposition of fines and their enforcement (three and five years respectively).

In practical terms, the main procedural challenges are to be expected when it comes to the enforceability of the proposed Regulation. Thus, the extent to which the Commission will get access to all relevant information required to assess the existence of a distortive foreign subsidy seems at best uncertain.


To become law, the European Parliament and the Council will need to discuss the Commission’s proposal with a view to adopting a final text of the proposed Regulation.

The European Commission has called on the Council and the European Parliament for a prompt adoption but with some Member States being more open to foreign investment and others favoring a more protectionist line, the proposed Regulation is up for a tough ride in the Council. In the European Parliament, by contrast, the proposed Regulation may be more easily and broadly welcomed as a valuable tool to address the vulnerability of the European economy and of businesses within the Union, rendered particularly vulnerable by the Covid-19 pandemic. Based on experience, it may take from 18 months to two years for the final version of the Regulation to be adopted.

Politically, the proposed Regulation is likely to attract significant attention across the world. When asked whether the White Paper was aimed at foreign subsidies from specific countries, EU Internal Market Commissioner Thierry Breton reportedly singled out China, countries from the Middle East and, last but not least, the United Kingdom. The proposed Regulation still seems to target mainly imports from those countries. While not openly discriminating against EU-bound investments from any specific country, the effective application of the proposed Regulation, once adopted, will no doubt be subject to very critical scrutiny to assess whether the EU’s new way of dealing with allegedly distorting effects of foreign subsidies runs afoul of the EU’s WTO commitments under the SCM Agreement as well as the rules on procedural fairness and the national-treatment and most-favoured nation principles as enshrined in the General Agreement on Tariffs and Trade 1994 (“GATT 1994”), the General Agreement on Trade in Services (“GATS”), the Agreement on Trade-Related Investment Measures (“TRIMS”) and the WTO’s plurilateral Government Procurement Agreement (“GPA”).

European companies relying on, and expecting future, major investments from non-EU countries that may amount to a foreign subsidy are well advised to make good use of the time until adoption of the Regulation.  Specifically, now is the time to set up the necessary internal procedures seeking to identify whether EU-bound investments have benefited from any third-country investment or other direct or indirect financial contribution that might be investigated by the Commission as a distortive foreign subsidy.


  • Dr Jens Peter Schmidt, Co-Head of Brussels Office, Rechtsanwalt (Lawyer) | T +32 2 2745570
  • Sarah Blazek, Rechtsanwältin | T +49 89 28628513
  • Dr Dr Claus Zimmermann, LL.M., Rechtsanwalt, Avocat à la Cour | T +32 4 91905460
  • Philipp Studt-Tartarotti, LL.M., Rechtsanwalt (Lawyer), Attorney at law | T +32 2 274 55 79
  • Giovanna Ventura | T +32 2 2745573

Compliments of Noerr – a member of the EACCNY.