What You Need to Know

  • Key takeaway #1 As of October 12, 2023, companies active in the EU have to notify foreign financial contributions (FFCs) received from third countries to the Commission, when they engage in large M&A transactions or participate in high-value public procurements. Pending the Commission’s review of such notifications, a standstill obligation applies.
  • Key takeaway #2 While the focus of the Commission’s substantive review will be on those subsidies deemed most likely to distort the internal market, companies need to consider all of the (broadly defined) FFCs they have received to calculate whether they meet the notification thresholds.
  • Key takeaway #3 Companies active in the EU need to assess their notification risks and update their internal reporting and data management systems to continuously identify, track and categorize any FFCs received from third countries.

As from October 2023, companies receiving financial contributions from third countries will have to report these to the European Commission when engaging in M&A transactions or bidding for public contracts above certain thresholds. This alert guides you through the new notification obligations under the EU Foreign Subsidies Regulation (FSR): first, we situate these obligations within the overall set-up of the FSR; then we go into the detail of the notification obligations themselves; before concluding with practical advice on how to meet these new obligations.

I. Recap of the FSR

As we explained in previous alerts (available here and here), the FSR, which was adopted by the EU legislature in December 2022 and entered into force in January 2023, aims to address the potentially distortive effects of subsidies granted by non-EU countries to companies that are active within the EU. Whereas financial support granted to companies by EU Member States has long been subject to State aid controls, subsidies granted by third countries have so far mostly escaped regulatory scrutiny. To close this gap and create a level playing field for all companies active in the EU, the FSR adds three new tools to the regulatory arsenal of the Commission:

  1. a notification-based tool for large M&A transactions,
  2. a notification-based tool for large public procurements, and
  3. a general investigatory tool, empowering the Commission to conduct ex officio (own-initiative) investigations into any market situation involving potentially distortive third-country subsidies.

Since July 12, 2023, the Commission has had the power to conduct ex officio investigations. The notification obligations apply as of October 12, 2023.

The FSR defines a “foreign subsidy” as a financial contribution provided directly or indirectly by a third country (i.e., a non-EU country) which confers a benefit on a company engaging in an economic activity in the EU internal market and which is limited, in law or in fact, to one or more companies or industries. Notwithstanding terminological differences, this definition is similar to that of “aid” under EU State aid law.

Like the concept of “advantage” in State aid law, the concept of “financial contribution” is not limited to “subsidies” in the strict sense (direct grants), but encompasses various forms of government support, such as:

  1. the transfer of funds or liabilities (e.g., capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling);
  2. the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
  3. the provision of goods or services or the purchase of goods or services.

FFCs include not only financial contributions from central government and public authorities at all levels, but also financial contributions granted by any foreign public or even private entity whose actions can be attributed to the third country.

As discussed below, the notification thresholds are based on the notion of “FFC” rather than that of “foreign subsidy”, meaning that all FFCs count towards the thresholds, even those provided at normal market conditions (i.e., that do not confer a “selective advantage”). In this respect, the FSR’s approach differs from that under State aid rules, where only measures that confer a selective advantage can trigger a notification obligation.

Certain categories of foreign subsidies are deemed to be “most likely” to distort the internal market (Article 5 Subsidies). These include:

  1. a foreign subsidy granted to an ailing company;
  2. a foreign subsidy in the form of an unlimited guarantee for the debts or liabilities of the company;
  3. an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
  4. a foreign subsidy directly facilitating a M&A transaction; and
  5. a foreign subsidy enabling a company to submit an unduly advantageous tender for a public procurement contract.

As further discussed below, the Commission will primarily focus on these Article 5 Subsidies when looking at notified M&A transactions and tenders.

Where the Commission finds that a company has benefited from foreign subsidies, it must carry out a “balancing test”, weighing the negative effects of the foreign subsidies in terms of distortion of the market against its positive effects on the development of the subsidized economic activity.

The Commission can impose both behavioral and structural remedies to mitigate any identified market distortion attributable to foreign subsidies. In addition, the Commission can levy fines on companies of up to 1% of their annual turnover for providing incorrect or misleading information or otherwise obstructing investigations; or up to 10% for infringing the notification and/or standstill obligations (so-called gun jumping).

II. M&A Transactions

The FSR introduces a mandatory notification requirement for large M&A transactions fueled, or potentially fueled, by foreign subsidies. The transactions subject to the notification requirement are the same as under the EU Merger Regulation (EUMR), i.e., mergers, acquisitions and full-function joint ventures (collectively referred to as “concentrations”).

The notification is suspensive, i.e., the parties are not allowed to close the transaction prior to having received clearance from the Commission (standstill obligation).

A. Thresholds

As of October 12, 2023, a concentration is notifiable under the FSR, if the relevant agreement was concluded on or after July 12, 2023, was not already implemented on October 12, 2023, and meets both of the following quantitative thresholds:

  1. A turnover-based threshold: at least one of the merging undertakings, the acquired company or the joint venture generates an EU-wide turnover of at least EUR 500 million (approx. USD 526.5 million); and
  2. An FFC value-based threshold: the merging undertakings, or the acquirer(s) and the acquired undertaking, or the undertakings creating the joint venture and the joint venture, have been granted aggregate FFCs of more than EUR 50 million (approx. USD 52.65 million) from third countries in the three years preceding the transaction.

These thresholds relate to group figures, not just to the entities directly involved in the transaction. Therefore, in parallel with the rules under the EUMR, all group companies that are linked by control relations, have to be included in the assessment (except that, in the case of acquisitions, only the turnover of, and contributions to, the target are taken into account with respect to the seller). Consequently, all relevant FFCs received by all group companies during the three years prior to the transaction need to be considered.

The turnover-based threshold is very high, reflecting the aim to capture only the largest M&A transactions. By contrast, the FFC value-based threshold is comparatively low.

Even where the parties to an M&A transaction do not meet the abovementioned thresholds, the Commission may still require them to file an ad hoc notification, if it suspects that the companies received foreign subsidies during the three preceding years.

B. Which FFCs are reportable?

In its Implementing Regulation, the Commission has made efforts to reduce the administrative burden on notifying undertakings by limiting the information that needs to be provided in the notification form. Companies need to provide the following information concerning any received FFCs:

  • FFCs relating to Article 5 Subsidies: Detailed information has to be provided only as regards FFCs of at least EUR 1 million which may constitute Article 5 Subsidies. As mentioned above, the Article 5 Subsidies are those that are deemed “most likely” to distort the market. It should be noted that identifying those FFCs and providing information on all the related questions in the notification form will likely require companies to conduct some substantive assessment, even if the ultimate determination of whether an FFC constitutes an Article 5 Subsidy remains with the Commission.
  • Other FFCs: For all other FFCs, the notifying parties have to provide a general overview identifying the third country that provided the FFC, the type of contribution and a brief description of the purpose of the FFC and the entity granting it. In this overview, only countries for which the estimated aggregate amount of all FFCs granted in the three years prior to the transaction is at least EUR 45 million (USD 47.4 million) have to be included. Individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: FFCs relating to deferrals of tax payments, tax amnesties and tax holidays, as well as normal depreciation and loss-carry forward rules that are of general application, and also tax relief for the avoidance of double taxation, do not have to be reported. The same applies to the purchase or provision of goods or services at market terms.

To further alleviate the administrative burden, the Implementing Regulation also provides for the possibility to request waivers for information that is normally reportable. However, the Commission has indicated that waivers will only be granted in exceptional cases.

It should be noted that all FFCs, irrespective of whether they are reportable or exempted from the reporting obligation, count towards the notification thresholds. Therefore, companies have to keep track of them in any event to determine whether those thresholds are met.

C. The Review Procedure

Procedurally, the Commission’s review of M&A transactions under the FSR is very similar to that under the EU’s merger control regime:

  • Phase I: The Commission has 25 working days to conduct a preliminary review.
  • Phase II: Where the Commission concludes that an in-depth review is required, the Commission then has an additional 90 working days to complete this review.

In cases where companies offer commitments to the Commission to remedy any concerns, this 90-day period may be extended by a further 15 working days to allow the Commission to assess these commitments. The Commission may “stop the clock” if it has sent the parties a request for information, but has not received complete answers by the deadline set in the request. If the Commission does not adopt a decision within the set time limits, the concentration shall be deemed to have been cleared and the parties are allowed to implement it.

III. Public Procurement

In parallel with the notification regime for M&A transactions, the FSR also introduces a new notification regime in relation to public procurement. The notification obligation concerns all procedures covered by the EU public procurement directives, i.e., procedures for the award of supply, works or service contracts (including in the water, energy, transport and postal services sectors) as well as of concession contracts. However, procedures falling within the scope of the EU Defense Procurement Directive are exempted.

As of October 12, 2023, companies participating in public procurements have to submit a notification to the contracting authority (and not directly to the Commission) if the thresholds are met. The regime allows the Commission to assess whether a distortion in the internal market exists and a tender is unduly advantageous in relation to the works, supplies or services concerned.

A. Thresholds

Tender participants have to notify where the following thresholds are met:

  1. A contract value-based threshold: the estimated value of the contract net of VAT amounts to at least EUR 250 million (approx. USD 263.3 million); and
  2. An FFC value-based threshold: the economic operator, including, where applicable, its main subcontractors and suppliers involved in the tender, was granted aggregate FFCs of at least EUR 4 million (approx. USD 4.2 million) per third country in the preceding three years.

Where the procurement is divided into lots, a notification obligation arises where (i) the overall estimated value of the procurement net of VAT exceeds the EUR 250 million threshold and (ii) the value of the lot or the aggregate value of all the lots to which the tenderer applies is equal to or greater than EUR 125 million (approx. USD 131.6 million) and the FFC value-based threshold is also met.

There is an important difference here in terms of the scope of the notification, as compared with the notification regime for M&A transactions. Whereas in the case of M&A transactions, the notification concerns FFCs to all entities belonging to the same “group” as the parties, in the case of public procurements, the notification concerns FFCs to the “economic operator” involved in the public procurement procedure (including its subsidiary companies without commercial autonomy and its holding companies) as well as its “main subcontractors and suppliers.” In other words, the perimeter does not necessarily include all companies belonging to the same “group” (i.e., linked by control relationships), but may include companies that are not part of the same group as the tenderer (“main” subcontractors/suppliers). A subcontractor or supplier is deemed to be “main” where their participation ensures key elements of the contract performance and in any case where the economic share of their contribution exceeds 20% of the value of the submitted tender.

As in the case of M&A transactions, the Commission can also request ad hoc notifications of public procurements that do not meet these thresholds, where it suspects that potentially distortive foreign subsidies are at play.

B. Which FFCs are reportable?

Where the thresholds are met, a notification has to be submitted to the contracting entity using the standard form annexed to the Implementing Regulation (the so-called Form FS-PP). The contracting entity will then forward the notification to the Commission for its assessment, together with all the documents the contracting entity considers crucial for the investigation.

The notifying parties must provide the following information on the FFCs granted to them:

  • FFCs relating to Article 5 Subsidies: As in the case of concentrations, detailed information has to be provided only on FFCs of at least EUR 1 million that belong to one of the Article 5 Subsidies categories.
  • Other FFCs: For other FFCs, a general overview table must be completed, in which information on the granting third country and entity, the type of FFC and the purpose of the FFC must be included. An FFC only has to be included in the list if the estimated aggregate amount in the previous three years per third country equals or exceeds EUR 4 million. Again, individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: The same exemptions apply as in the case of concentrations (see above). In exceptional cases, it is also possible to request waivers for information that is normally reportable.

C. The Review Procedure

Similar to the procedure for M&A transactions, the review procedure for public procurements consists of a preliminary review (phase I) and an in-depth investigation (phase II).

  • Phase I: The Commission has 20 working days from receipt of a complete notification for its preliminary review, and this time limit may be extended once, by 10 working days, “in duly justified cases”.
  • Phase II: In case of an in-depth review, the Commission has a further 90 working days, which can be extended by 20 working days in “duly justified exceptional cases” and after consultation with the contracting authority.

Pending the Commission’s review, all procedural steps in the public procurement procedure may continue, except for the award of the contract. Contrary to the review procedure in M&A transactions, the Commission cannot “stop the clock” during a review, meaning that, as a rule and disregarding extensions, the Commission has to take a decision no later than 110 days after receiving a complete notification.

D. Declaration of below-threshold FFCs

Importantly, even where the FFC threshold of EUR 4 million is not met, the participating economic operator must submit a declaration listing all FFCs received during the previous three years, provided that the contract-value threshold is met.

The declaration needs to list all of the received FFCs with the exception of FFCs below the de minimis value of EUR 200,000 per third country over the previous three years. FFCs above the de minimis value but below EUR 1 million only have to be reported in aggregate by third country, with a brief description. Individual amounts only have to be provided upon request by the Commission.  

Declarations do not automatically trigger a review, but the Commission may decide on a case-by-case basis whether such declaration warrants an investigation.

IV. Practical Considerations regarding notifications

In light of the foregoing, we make the following practical recommendations:

  • Assessing notification risks: As a first step, companies should assess the likelihood of being involved in M&A transactions or public procurements that meet the turnover- or the contract-value-based thresholds mentioned above (for instance, by reference to past transactions or tenders).
  • Information gathering: Companies that anticipate being involved in such large transactions or tenders should identify all the FFCs granted over the previous three years with a value of at least EUR 1 million. If the aggregate amount of these FFCs already meets the EUR 50 million threshold for M&A transactions, or the EUR 4 million threshold for government contracts, a notification will be necessary, although detailed information need only be gathered about FFCs relating to Article 5 Subsidies. If the aggregate amount of the FFCs does not meet those thresholds, further analysis might be necessary, unless it is obvious that the thresholds will not be reached.
  • Internal reporting setup: Companies that expect to be caught by the notification obligations will have to introduce new dedicated reporting tools in their data management systems to identify, categorize and track all relevant FFCs. Since the notification thresholds refer to all FFCs received during the three years prior to the transaction or tender, these data management systems not only have to capture contributions received prior to the entry into force of the FSR, but must also be continuously updated for any future transactions. If analysis is only undertaken on an ad hoc basis at the time of a contemplated M&A transaction, there is a serious risk that this could use up substantial resources and cause significant delays in the deal timeline. Therefore, it is not only companies that are regularly involved in transactions that need to invest in their data management systems, but also companies that occasionally have M&A activities or occasionally participate in public tenders.
  • Coordination with other reporting obligations: The notification obligation for concentrations under the FSR is without prejudice to other notification requirements that may be applicable to the same transaction under EU or national merger control rules or under national foreign direct investment (FDI) screening regimes. Consequently, an M&A transaction can potentially be subject to several notification requirements, each with its own procedural timeline and standstill obligation. It is therefore important to conduct a comprehensive filing analysis across all regimes that may be applicable and, if the transaction is subject to several notification obligations, closely coordinate the various procedures. This will be all the more important in cases where the parties anticipate a need to offer remedies.