On 12 October 2023, the notification and declaration obligation for public procurement and concessions procedures under the Foreign Subsidies Regulation (FSR) and its implementing Regulation comes into force. How should undertakings prepare?
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 request the contracting authority not to award the public contract to the advantaged company.
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 debt 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 and in any case to be declared in public tenders 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, 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. 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 award of a public contracts 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 public procurement procedure?
A mandatory FSR notification for public tender in the EU, prior to their award, arises where (i) the contract value amounts to at least EUR 250 million (or lots, of a value of at least EUR 125 million), and (ii) the combined FFCs of the tenderer (at group level) and its main subcontractors and suppliers (involved in the tender) is at least EUR 4 million per third country in the three financial years prior to notification.
If the threshold of EUR 250 million is reached but the candidate has not received FFCs above EUR 4 million in any third country, a declaration on FFCs must be provided as explained hereunder.
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.
Public contracts with a value under EUR 250 million are not submitted to any notification or declaration obligations.
The notification or declaration must be provided by the candidates to the contracting authority that will communicate them to the European Commission with its assessment. Pending the Commission’s review, the contracting authority may not award the tender.
The FSR notification and declaration obligations for public tenders in the EU enter into force on 12 October 2023 for procedures that were initiated after 12 July 2023 and have not been awarded before 12 October 2023. Specific forms must be filled in.
Which FFCs must be notified?
Detailed description only of the “most likely distortive” FFCs above EUR 1 million
A detailed description (e.g. amount, third country, justification, relevant documentation, etc.) must be provided for the FFCs received three years prior to the notification of the tender, 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 enabling an undertaking to submit an unduly advantageous tender.
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 (i) individually above EUR 1 million and above EUR 4 million in total per third country over a period of three years.
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 4 million threshold over the last three years.
Which FFCs need to be declared?
If the estimated value of the procurement threshold is reached, but candidates have not benefited from FFCs above EUR 4 million in any third country, they must provide a declaration on FCCs to the contracting authority including :
- The list of all FFCs received in the last three years preceding the declaration;
- For the financial contributions of a value below EUR 1 million but above the de minimis threshold of EUR 200,000 per third country in the last three years preceding the declaration, they can be declared with a brief description and in an aggregate manner without indicating their values.
Do not have to be declared: foreign financial contributions of which the total amount per third country is lower than the de minimis threshold (EUR 200,000) over the last period of three years preceding the declaration.
Sanctions in case of non-compliance with FSR provision?
The Commission may impose fines or penalties in case of non-compliance with the provisions of the FSR:
- fines of up to 1% of the aggregate turnover of the group in the preceding financial year if the economic operators, intentionally or negligently, supply incorrect or misleading information in a notification or declaration; and
- fines of up to 10% of the aggregate turnover of the group in the preceding financial year where the economic operators, intentionally or negligently, fail to notify foreign financial contributions during the public procurement procedure, circumvent or attempt to circumvent the notification requirements as requested under the FSR.
Consequences of FSR to your company
To prepare 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 FFC 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: job creation, decarbonisation, RDI, etc.
- anticipate/consider potential structural or behavioural commitments;
- respect the notification/declaration obligation and the deadlines set in the FSR as the obligation to provide the notification/declaration to the contracting authority lays on undertakings even if the forms have not been included nor requested in the tender documents.
Do not hesitate to contact us for further information on this subject and for advice on the practical implementation of these new regulations.