Entered into force on Jan. 12, 2023, Regulation (EU) 2022/2560 of Dec. 14, 2022 - the foreign subsidies regulation, or FSR - allows the European Commission to address distortions in the EU market caused by foreign subsidies, in order to ensure a level playing field.

As of July 12, 2023, the European Commission will be authorized to investigate financial contributions granted by non-EU countries to companies operating in the EU and, if those contributions are found to distort competition, to impose remedies to companies benefitting of such contributions.

The aim of the FSR is to help establish a single, properly functioning European market by implementing a harmonized framework to address distortions of competition caused by foreign subsidies.

Scope of application of the FSR

The FSR is applicable to any company, including public companies that are directly or indirectly controlled by a state, that is engaging in economic activity in the EU and that has benefited from foreign subsidies that could distort competition in the internal market, including M&A transactions, public procurements and any other relevant market situations.

The FSR applies without prejudice to all other EU competition rules, including Articles 101, 102, 106, 107 and 108 of the Treaty on Functioning of the European Union; the merger regulation (EC Regulation No 139/2004 of Jan. 20, 2004); and the regulation on the implementation of the rules on competition (EC Regulation No 1/2003 of Dec. 16, 2002).

For external growth operations, the European Commission's control of foreign subsidies is a new regulatory requirement at the European level that must be complied with in the same way as merger control.

The European Commission's new investigative powers

The European Commission will be able, at its own initiative, to examine information from any source, including from member states, companies or associations, concerning foreign subsidies that potentially distort the internal market.

In order to gather the relevant information, the European Commission will have the power to request information from market players or to carry out on-site inspections at a company's premises if the stakeholder benefited from foreign subsidies. These options enable the Commission to scrutinize transactions that do not meet the relevant notification thresholds under the FSR if they raise an issue from the foreign subsidies perspective.

In addition, when a company notifies the Commission of a merger under the FSR, the Commission will be able to examine foreign subsidies that have been granted to the parties since July 12, 2020.

Sanctions

If a company does not comply with the requirements of the FSR, it may be subject to significant sanctions.

In the case of a merger, if the transaction is carried out without prior notification, the European Commission may require the relevant companies to dissolve the merger due to fear that the foreign subsidy could distort the internal market (since the Commission did not have a chance to evaluate the merger's effects before it took place)..

Also, the party or parties responsible for the filing may be fined up to 10% of their aggregate turnover in the previous financial year. The same fine is applicable in cases where a company circumvented or attempted to circumvent the filing requirement.

If the notification filing is incomplete or contains incorrect information, a company may also be subject to:

  • A financial penalty of up to 1% of the aggregate turnover in the preceding financial year
  • Daily penalties of up to 5% of the average daily aggregate turnover in the preceding financial year for each working day of delay, as of the date established in the decision, until it submits complete and correct information as required by the Commission, or until it submits to an inspection

If a company fails to comply with remedies imposed by the EU Commission, it may be sanctioned with a fine of up to 10% of turnover in the preceding financial year, or with daily penalties of up to 5% of the average total daily turnover achieved in the previous financial year, until the company complies with the Commission's request.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.