Ensuring Compliance With New Foreign Subsidy Rules For EU And Non-EU Companies - Government Contracts, Procurement & PPP

Introduction

Over the past few months, a new regime tackling foreign subsidies has begun to take effect in the European Union. The EU Foreign Subsidies Regulation ("FSR") started to apply in part in June 2023, and more fully in October 2023.¹

The FSR empowers the European Commission ("Commission") to address the effects of distortive subsidies granted by non-EU countries to companies operating in the EU. It is a broad and new tool for the Commission adding to the already existing merger control, foreign direct investment and State Aid rules, covering (i) concentrations and (ii) public procurement procedures. This memo focuses on the latter.²

The FSR establishes new mechanisms to ensure competitive, transparent and non-discriminatory public procurement procedures throughout the EU. To that effect, the FSR places on economic operators that participate in public procurement procedures significant obligations to report the foreign (non-EU) subsidies they receive and grants the Commission the power to launch ex officio investigations in relation to these.

While the FSR first and foremost aims to tackle subsidies from outside the EU that cause distortions and undermine the level playing field in the EU markets, it nonetheless equally applies to all EU companies that receive such contributions.

KEY TAKE-AWAYS

The FSR introduces new mandatory reporting requirements, for both EU and non-EU companies participating in public procurement procedures covered by the EU procurement directives:
- Above certain thresholds, an FSR notification must be submitted to the contracting authority with the response to the tender; or
- Below the relevant thresholds, foreign subsidies may still have to be reported in a declaration.
Companies that frequently participate in such public procurement procedures should therefore:
- implement internal monitoring systems to track foreign financial contributions on an ongoing and consistent basis, using templates that already include most of the information that needs to be reported
- make sure the results are made accessible to all persons/entities that may submit tenders
- engage with the Commission as early as possible to seek advice in case of uncertainty and build time for this into the timetable for any bid
- monitor their competitors' activities and reach out to the Commission if they believe a contract was awarded to a company that received distortive subsidies.

I. When is there a reporting requirement?

1. WHAT ARE FOREIGN SUBSIDIES?

Under the FSR, foreign subsidies are:

financial contributions (as defined below);
provided directly or indirectly by a non-EU country (e.g. a public authority, a foreign public entity or a state-owned private entity);
which confers a benefit (i.e. it could not have been obtained under normal market conditions); and
which is limited to one or more undertakings or industries (i.e. are selective in nature).

2. WHO IS SUBJECT TO THESE REPORTING REQUIREMENTS?

Reporting obligations apply to the economic operator and groups of economic operators participating (e.g. bidding consortia) to tenders in the EU, irrespective of whether these operators are based in the EU or not. They also extend to the main subcontractors and main suppliers known at the time of the submission of the notification or declaration. "Main" in this context means that their participation ensures key elements of the contract performance or where the economic share of their contribution exceeds 20% of the value of the submitted tender.

3. WHAT TENDER PROCEDURES ARE COVERED?

The FSR applies only to public procurement procedures covered by the relevant EU procurement directives.³ Private tender procedures are not in the scope of the FSR.

The FSR applies to tender procedures:⁴

for the conclusion of a public contract under Directive 2014/24/EU on public procurement;
for the conclusion of a supply, works and service contract under Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors;
for the award of a works or a service concession under Directive 2014/23/EU on the award of concession contracts;
for awarding contracts falling under Directive 2009/81/EC on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security.⁵

In each case, the FSR only applies to public procurements meeting the requirements and thresholds of the relevant Directive. For example, for works contracts6 and concessions,7 the net value must be estimated to be at least EUR 5,382,000.

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Footnotes

1. Foreign Subsidies Regulation (europa.eu)

2. For more information on how the FSR applies in a M&A context see: Key Takeaways: The European Union Foreign Subsidies Regulation | Perspectives & Events | Mayer Brown

3. Directive 2014/23/EU; Directive 2014/24/EU; Directive 2014/25/EU; Directive 2009/81/EC.

4. In addition, the FSR applies to tender proceedings for public contracts and concessions which the contracting authority is obliged to award or organize in accordance with procedures different from those laid down in Directive 2014/23/EU, Directive 2014/24, and Directive 2014/25/EU, established by a legal instrument creating international law obligations, such as an international agreement concluded in conformity with the TFEU between a Member State and one or more third countries or subdivisions thereof and covering works, supplies or services intended for the joint implementation or exploitation of a project by their signatories, Article 2 (3) point (d) FSR in connection with Article 10(4), point (a) of Directive 2014/23/EU; Article 9(1), point (a) of Directive 2014/24/EU; Article 20(1), point (a) of Directive 2014/25/EU.

5. Such procedures are only caught by the FSR within the limits of Article 346 TFEU, which provides in particular that EU Member States any Member State may take such measures they consider necessary for the protection of the essential interests of their security which are connected with the production of or trade in arms, munitions and war material and that Member States shall not be obliged to supply information the disclosure of which they consider contrary to the essential interests of their securit

Originally Published by 7 December 2023

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