The EU’s Foreign Subsidies Regulation (FSR) introduces a new layer of scrutiny for companies that receive financial support from non-EU governments, aiming to correct competitive imbalances caused by foreign subsidies. This regulation mandates that certain large acquisitions and public tenders involving foreign financial contributions (FFCs) must be notified to, and approved by, the European Commission (EC). In addition, the EC has new investigative powers that allow it to examine potential market distortions caused by foreign subsidies.
Who Needs to Comply?
The FSR impacts companies operating or intending to invest in the EU, especially those with financial backing from non-EU governments. Compliance entails tracking foreign financial contributions and preparing to adjust corporate structures, transfer pricing, and governance practices to meet FSR standards.
Understanding Foreign Financial Contributions (FFCs)
Under the FSR, FFCs encompass both direct financial support, such as grants or low-interest loans, and indirect benefits, including tax breaks, government contracts, and exclusive rights provided by non-EU countries. Notably, while FFCs broadly cover foreign financial aid, a “foreign subsidy” under the FSR is an FFC that grants a competitive advantage unavailable on the open market.
The European Commission’s Oversight
The EC enforces the FSR through required notifications for certain transactions and by conducting market investigations.
- Mandatory Notifications: For mergers, acquisitions, and certain large public tenders, companies must notify the EC if the EU business involved has annual revenue exceeding €500 million and has received more than €50 million in FFCs over three years. Tenders exceeding €250 million (€125 million in some cases) also require notification if bidders received FFCs of €4 million or more per non-EU country over three years. These transactions cannot proceed without EC approval, leading to a “standstill obligation.”
- General Market Investigations: The EC can independently investigate any potentially distortive subsidies, requiring companies to provide notification for aid received within the past decade if a market advantage is suspected.
Assessing Market Distortion and Outcomes
The EC evaluates whether an FFC improves a company’s competitive position within the EU, potentially impacting competition. If an FFC is found likely to distort the market, the FSR’s “balancing test” comes into play, where the EC weighs the public benefits of foreign subsidies—such as environmental contributions or R&D—against competitive harms. If distortions outweigh these benefits, the EC can impose corrective actions like divestitures, subsidy repayments, or outright prohibition of transactions.
Key Practical Considerations for Compliance
- Data Management: Businesses should establish robust systems to monitor FFCs on a rolling three-year basis to stay ahead of the FSR’s notification requirements and avoid EC-triggered investigations.
- Planning for Transactions: FSR compliance can influence M&A timelines and terms. For instance, contracts may require clauses that account for potential FSR reviews and remedies, adding a layer of complexity to cross-border deals.
How Aliant Can Support Your Compliance Efforts
Navigating the FSR’s intricate requirements demands a sophisticated understanding of both EU regulatory nuances and global market dynamics. At Aliant, our team specializes in helping businesses stay compliant with EU regulations and minimize the impact of foreign subsidies on strategic initiatives. Our services include:
- Customized Compliance Strategies: Aliant’s attorneys provide tailored compliance plans to streamline FFC tracking and management. We establish data systems and develop internal controls to ensure your business consistently meets the FSR’s demands.
- Proactive Transaction Planning: We work closely with clients on cross-border deals, ensuring FSR compliance from the outset. Our legal experts provide support in drafting agreements that incorporate FSR considerations, protect transaction timelines, and manage any remedies imposed by the EC.
- Expert Guidance in Regulatory Investigations: If the EC initiates an FSR investigation, Aliant’s attorneys offer full support, from preparing documentation to representing you during the proceedings. Our team anticipates potential challenges and provides the strategic counsel needed to safeguard your interests in the EU market.
A Growing Focus on Foreign Subsidy Compliance
Since its implementation, the FSR has seen robust enforcement, with the EC actively reviewing M&A transactions and launching investigations into market practices across various industries. This commitment signals the EU’s intent to level the playing field and protect its internal market from potential distortions caused by foreign subsidies.
The FSR poses a fresh regulatory landscape, but with Aliant’s experience in EU law and cross-border business, your company can confidently navigate these changes, ensuring compliance and leveraging the European market’s full potential. Reach out to Aliant to understand how our team can partner with your business for a seamless transition under the FSR.
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