On 12 October 2023, the notification obligation for concentrations under the Foreign Subsidies Regulation (FSR) and its implementing Regulation comes into force. The Commission recently announced that 17 prenotification cases were in progress. How should undertakings prepare?
The foreign subsidies regulation (fsr) in a nutshell
Under the FSR, the European Commission has the power to investigate financial contributions granted by third countries to European and foreign companies active in the EU. If the Commission finds that such financial contributions constitute distortive subsidies in the internal market, it can impose redressive measures or even prohibit the concentration.
The FSR provides for three tools:
- An ex-ante notification obligation to investigate bids in public procurement and concession procedures involving financial contributions by third countries, where the estimated contract value is at least EUR 250 million and the bid involves a foreign financial contribution of at least EUR 4 million per third country;
- An ex-ante notification obligation to investigate concentrations involving financial contributions granted by third countries, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least EUR 500 million and the transaction involves foreign financial contributions of more than EUR 50 million;
- The European Commission's own-initiative investigations to examine all other market situations (ex-officio).
What is a foreign financial contribution?
The notion of foreign financial contribution (FFC) is broad and includes subsidies, fiscal incentives, the remuneration of public contracts (i.e. supply of goods or services), public debts write-offs, public loans and guarantees, capital injections etc. granted directly by a third country or via public entities or private companies (which actions can be attributed to third countries, for instance under a mandate). A FFC may provide (or not) a selective benefit to an undertaking.
All FFCs must be monitored by companies at their group level when they are active outside the EU to verify the notification thresholds, even if those contributions do not constitute a foreign subsidy as defined hereunder.
What is a foreign subsidy?
A foreign subsidy is deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on a European or non-European undertaking engaged in an economic activity in the EU and which is limited, in law or in fact, to one or more undertakings or industries (selective financial contribution).
The FFCs will be considered to confer a benefit on an undertaking if it could not have been obtained under normal market conditions. The existence of a benefit will be determined on the basis of comparative benchmarks, such as the investment practice of private investors, financing rates obtainable on the market, a comparable tax treatment etc. Public contracts awarded following an open and non-discriminatory selection procedure will be presumed in line with market conditions.
The European Commission may impose corrective measures or prohibit the transaction only in the case of foreign subsidies that distort the internal market and that are not countervailed by positive effects.
What are the thresholds for notification in the context of concentrations?
A mandatory FSR notification for concentration in the EU arises where (i) the EU turnover of the target company (in case of acquisitions), one of the merging parties (for mergers) or the JV (for creation of a JV) is at least EUR 500 million and (ii) the foreign financial contribution received by all the parties involved in the concentration (i.e. the acquirer and the acquired undertaking, the undertakings involved in the merger or the undertakings setting up a joint venture) reaches at least EUR 50 million over the last three years.
The obligation to notify relies on the parties acquiring joint control or by the person or undertaking acquiring control of the whole or part of one or more undertakings. Pending the Commission’s review and approval, the concentration in question cannot be implemented.
These thresholds must be checked at the level of the group to which the applicant belongs, irrespective of the location of the companies forming part of this group.
The FSR notification obligation for concentrations takes effect on 12 October 2023 for transactions signed after 12 July 2023 that will not be closed by 12 October 2023. Specific forms must be completed.
Which FFCs must be notified?
Detailed description only of the “most likely distortive” FFCs above EUR 1million
A detailed description (e.g. amount, third country, justification, relevant documentation, etc.) must be provided for the FFCs received three years prior to the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest, totalling at least EUR 1 million (granted individually) and are among the most likely to distort the internal market: (i) support an ailing undertaking (having lost more than half of its capital due the accumulated losses, or in a collective reorganisation procedure or meeting certain financial ratios), (ii) unlimited guarantees, (iii) non-OECD compliant export financing, and (iv) FFCs directly facilitating a concentration.
An overview of all the other FFCs
Undertakings must provide an overview of all the FFCs (i.e. which do not fall within the ‘likely distortive’ category) if these are individually above EUR 1 million and in relation only to those countries that have granted to the parties to the transaction at least EUR 45 million over a period of three years before the signing (with exceptions).
Do not need to be reported (and therefore do not need to be described):
- Provision/purchase of goods/services (except financial services) on market terms in the ordinary course of business;
- Deferrals of payment of taxes and/or of social security contributions, tax amnesties and tax holidays as well as normal depreciation and loss-carry forward rules that are of general application unless they are limited to certain sectors, regions or (types of) undertakings;
- Application of tax reliefs for avoidance of double taxation;
- FFCs below the individual amount of EUR 1 million.
Note that all FFCs (even those exempted from reporting in the notification) must be taken into consideration for the assessment of the EUR 50 million notification threshold over the last three years.
In the case of mergers involving investment funds, FFCs granted to other investment funds managed by the same investment company but with different investors (or granted to portfolio companies controlled by these other funds) will not need to be included in the summary table, under certain conditions.
Sanctions for non-compliance with FSR provision
The Commission may impose fines or penalties for non-compliance with the provisions of the FSR:
- fines of up to 1% of the aggregate turnover in the preceding financial year if undertakings, intentionally or negligently, supply incorrect or misleading information in a notifiable notification; and
- fines of up to 10% of the aggregate turnover in the preceding financial year where the undertakings, intentionally or negligently, fail to notify a notifiable concentration, implement a notified concentration in breach of the standstill obligation, implement a notified concentration prohibited under the FSR, etc.
Consequences of FSR to your company
To prepare yourself for the implementation of the FSR, it is necessary to:
- collect internally all FFCs granted at the group level by third countries directly or via foreign companies (e.g. amount of the contribution, identity of the grantor, type of contribution, justification, etc.);
- prepare the justification for each FFCs and gather relevant documentation (e.g. formal grant decision, internal memos, external audits, etc.);
- create a tool to monitor and facilitate communication within your company (at the level of the group);
- analyse the positive/negative effects on the market (e.g. job creation, decarbonisation, RDI, etc.);
- anticipate/consider potential structural or behavioural commitments;
- respect the notification obligation and the deadlines set in the FSR before closing.
Do not hesitate to contact us for further information on this subject and for advice on the practical implementation of these new regulations.