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The EU Foreign Subsidies Regulation (FSR) Has Now Taken Effect

The new EU Foreign Subsidies Regulation (FSR) has now finally taken effect. Under the FSR the European Commission (EC) will have new powers to intervene against distortions to competition in the EU internal market caused by companies active in the EU that benefit from foreign financial contributions (FFC) and conduct investigations into potentially distorting FFCs. The FSR also introduces a new notification regime for certain M&A transactions and public tenders to mitigate against the risk of distortive subsidies granted by third countries.

On July 10, 2023, the EC released the highly anticipated revised FSR implementing regulations. These regulations offer practical guidance on the operational aspects of the FSR and, importantly, the final draft has simplified the reporting requirements. In light of these changes, we have revised our previous blog post to reflect the latest position.

The implementing regulations provides detailed rules on the form, content and procedures for notifications required under the FSR. These notifications are required where a company is (i) active in the EU and (ii) has received direct or indirect financial contributions that may have a distortive effect from a non-EU country.

Mandatory Notification Regime
From October 12, 2023, companies engaging in (a) M&A activity or (b) a public procurement procedure in the EU will be required to submit formal notifications with the Commission if the following thresholds are met:

  • M&A:
    • EU Turnover. At least one of the merging companies (in case of merger), the target (in case of acquisition), or the JV is established in the EU and generated an aggregate EU-wide turnover of at least €500 million in the previous financial year; AND
    • Foreign Financial Contribution (FFC). The parties to the transaction have received combined foreign financial contributions exceeding €50 million in aggregate in the previous three years to the conclusion of the agreement, the announcement of the bid, or the acquisition.
  • Public Tender:
    • Contract Value. The contract value net of VAT is equal or above €250 million; and in cases where the tender is divided into lots, the aggregate value net of VAT of the lots applied for is equal to or above €125 million; AND
    • FFC. The bidding party (including its subsidiaries and/or holding) and its main subcontractors (or suppliers) have received aggregated foreign financial contributions equal to or above €4 million in the past three years prior to the notification. Bidding parties who received a foreign financial contribution falling under €4 million are still under an obligation to submit a declaration confirming that they are under the filing threshold.

What Information Needs to Be Provided?
For both M&A transactions and public tenders in the EU meeting the thresholds above, the notifying parties will need to provide an executive summary of the M&A deal/public tender, information about the parties, information on FFCs received in the past three years, and relevant supporting documentation for the likely distortive FFC.

In the event that the M&A deal occurs in the context of a structured bidding process, the notifying parties need to provide a detailed description of the bidding process, including a description of the profile of the other bidders that the notifying parties are aware of.

The notifying party in an M&A transaction is the party acquiring control (including group entities). Whereas in public procurement the notifying party is the “economic operators” and the main sub-contractors and suppliers that are expected to contribute more than 20% of the contract value.

The reporting obligations vary depending on whether the FFC is likely to have a market distortive effect.

  1. Likely distortive” FFCs above €1 million require detailed information to be provided, such as the amount, purpose, economic rationale, main characteristics, conditions attached to its grant and use, and whether the FFc constitutes a foreign subsidy.
  2. Other non-distortive FFCs, which exceed €45 million (for M&A deals) or €4 million (for public tenders in the EU) in total per non-EU country over a three-year period, require only a high-level overview of the FFC and a description of the link with the notifiable transaction.

Excluded FFCS
A number of FFCs do not need to be reported and do not count toward the aggregate €45/€4 million total:

  1. contracts for supply/purchase of goods concluded on market terms (except financial services, i.e., bank loans);
  2. deferral on payments of taxes or social security contributions;
  3. application of tax relief for the avoidance of double taxation;
  4. non-distortive FFCS where aggregate amount in question is less than €45 million for concentrations, or less than €4 million for public procurement procedures over a three-year period; and
  5. any FFC below €1 million.

Although, even when an FFC is excluded from disclosure, it will still count toward the €50 million threshold (separate to the €45/€4 million threshold) to determine if a formal FSR filing is necessary.

Investigatory Powers
From July 12, 2023, the Commission will have powers to conduct investigations into any potentially distorting FFC received in a period of up to 10 years before the investigation commences (but no more than five years prior to the application of the FSR). The Commission will also have the power to request ad hoc notifications for transactions and public tenders that do not meet the prescribed thresholds, but for which it suspects that the involved companies received foreign subsidies within the three years preceding the transaction or tender submission.

To assist its investigations, the Commission can gather information by issuing requests for information to operators, interviewing parties, and conducting dawn raids both in and outside the EU. Failure to provide information and/or cooperate can lead to potential penalties being imposed by the Commission. Whilst there is no formal reporting or complaints process, third parties (including competitors) can make submissions on foreign financial contributions received by their competitors.

Practical Takeaways
The FSR has a far-reaching scope and imposes a significant regulatory burden on notifiable transactions, further complicating the transactional landscape in the EU. Organizations currently involved or planning to be involved in EU M&A and/or public procurement activity are advised to:

  • Adopt a FFC data collection process. Companies should begin implementing data collection systems to gather comprehensive group-wide information regarding any foreign subsidies received. To ensure compliance, we advise companies to maintain detailed records of any foreign subsidies received during the five years leading up to July 12, 2023. Moving forward, data should be collected on an on-going basis and retained for a period of 10 years. Establishing a data system ahead of the FSR’s implementation will prevent any delays caused by extensive information-gathering processes.
  • Review current deal activity. The FSR will apply to active deals commenced prior to July 12, provided completion is scheduled to take place on or after October 12, 2023. Companies should factor in an FSR assessment in relation to all M&A and public procurement awards this applies to, including a review of foreign subsidies received as part of the due diligence process. Where a transaction or tender is subject to a notification, the review period under the FSR regime will need to be factored into the timetable for completion of the transaction/public tender process and reflected in transaction documents.
  • Monitor the regulatory landscape. The EC has expressly stated that the FSR rules will develop over time, so it is crucial to stay up-to-date to ensure regulatory compliance. The EC is expected to publish a Q&A shortly answering key stakeholder questions.


The New EU Foreign Subsidies Regulation: Overview and Practical Impact for Companies