December 6, 2022
EU Member States give final approval to Foreign Subsidies Regulation
On 28 November 2022, the Council of the EU (i.e., the Member States) formally adopted a Regulation on foreign subsidies distorting the internal market (the Regulation). The adoption follows from a European Commission (Commission) proposal published on 7 May 2021 and a provisional agreement between the Council and the European Parliament (the Parliament) which was published on 30 June 2022. The Parliament adopted the Regulation on 11 November 2022. As a next step, the Regulation will be published and is expected to enter into effect as from Q2 2023 (exact date to be confirmed)
The adoption of the Regulation and the new powers of the Commission towards third countries should be considered in the context of the growing attention for the EU's trade relationship with non-EU countries.1 In this context the Commission has raised concerns on distortions of the EU's internal market which are caused by market participants from outside the EU. Specifically, the Commission has concerns that subsidies and other forms of support from governments outside the EU may distort the EU's internal market. For example, procurement bids may be awarded to non-EU competitors because of subsidies and there are concerns that non-EU companies may leverage foreign subsidies to acquire EU companies. This is especially sensitive if the acquired companies are active in the high tech or pharmaceutical sectors. The EU already has a comprehensive set of rules against distortive State aid provided by EU Member States. The Commission is responsible for the monitoring and enforcement of these rules. For example, in recent years the Commission has launched various high-profile State aid investigations in the area of direct taxation.2 The Regulation essentially expands the scope of the existing State aid rules to also cover State aid provided by non-EU countries.
On 7 May 2021, the Commission published a proposal for the Regulation following an earlier white paper dated 17 June 2020. The Council and the European Parliament subsequently reached a provisional agreement on the Regulation which was published on 30 June 2022. The European Parliament voted in favor of the Regulation on 11 November 2022. On 16 November 2022, the Council (together with the European Parliament) published an updated version of the proposal for the Regulation. On 28 November 2022, the Council of the EU formally adopted the Regulation. The Regulation was adopted in accordance with the ordinary legislative procedure.
The Regulation provides the Commission the power to investigate financial contributions granted by public authorities of a non-EU country that benefit companies engaging in an economic activity in the EU, and to redress their distortive effects.
The Regulation provides the Commission, in short, with three tools:
A foreign subsidy is a financial contribution from a non-EU government. The definition is very broad. Subsidies can include any transfer of funds or liabilities such as capital injections, grants, loans, loan guarantees, fiscal incentives, etc., but also the foregoing of revenue that is otherwise due or the provision of goods and services. Subsidies can be provided by all levels of government and other foreign public entities, even private entities if their actions can be attributed to third-country governments.
The Commission has a wide range of options for redress, including mandatory repayment of the foreign subsidy. In a worst-case scenario, the Commission can prohibit an envisioned merger or prohibit a participant from being awarded a contract in a procurement procedure. The Regulation provides the Commission with various other competencies. For example, the Commission is empowered to impose fines, including for failure to make the required notifications. Actions taken by the Commission under the Regulation are subject to review from the Court of Justice of the EU. The Commission is also granted the power to initiate a dialogue with a third country on the distortive effects of its subsidies.
The Regulation will enter into force on the day following its publication to the Official Journal of the EU and will generally apply from six months after its publication (nine months for some articles). Publication is expected soon, and the Regulation is therefore expected to apply as from Q2 2023 (exact date to be confirmed). The Regulation will be directly applicable, also without transposition into the domestic laws of EU Member States. The Commission can/must also adopt guidelines, implementing acts, and delegated acts covering aspects of the Regulation. Officials have hinted that the Commission's guidelines will be published for consultation in December 2022, but this has not yet been officially confirmed.
The Regulation has retroactive effect as it applies to foreign subsidies that were granted up to five years prior to the date of the application of the Regulation if these continue to distort the internal market. For notifiable concentrations and public procurement procedures this term is limited to three years. There are grandfathering rules which exempt M&A activity which was announced, concluded, and/or effectuated prior to the application of the Regulation. Similarly, public procurement procedures that have been initiated and/or awarded before the application are also grandfathered.
The impact of the Regulation is not fully clear at this time, as the Commission's guidelines are yet to be developed. However, it is clear that the Regulation effectively results in an extraterritorial effect of EU State aid rules in certain situations. For businesses that receive foreign subsidies and that seek to invest in the EU or participate in public procurement processes, the Regulation will have a significant impact warranting a timely analysis of the rules. This includes non-EU businesses as well as EU businesses that receive subsidies from foreign countries.
For additional information with respect to this Alert, please contact the following:
EY Société d'Avocats, Paris
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United States), Global Tax Desk Network, New York
2 See for example EY Global Tax Alert, EU General Court annuls Commission's decision on Luxembourg transfer pricing State aid case, dated 24 May 2021.
3 See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: First impressions, dated 20 December 2021.