July 11, 2023
European Commission adopts rules for implementing the Foreign Subsidies Regulation
On 10 July 2023, the European Commission (the Commission) adopted rules for implementing the Foreign Subsidies Regulation (the Implementing Regulation). This follows the FSR's adoption by the Member States and the European Parliament in June 20221 and a public consultation on the draft implementing rules launched in February 2023. The Implementing Regulation details procedural aspects of the implementation of the FSR. It also contains notification forms for concentrations involving foreign financial contributions and for foreign financial contributions in public procurement procedures.
The FSR aims to prevent distortions of the European Union's (EU's) internal market that arise as a result of subsidies from foreign (non-EU) countries. It can apply to EU as well as non-EU businesses that receive such foreign subsidies. The term "subsidies" is defined broadly and includes contributions, loans, grants, guarantees and tax benefits. The Regulation focuses on public procurement procedures and merger and acquisition (M&A) transactions (concentrations) that meet certain thresholds in size and amount of foreign subsidies (see our previous Tax Alert). If these thresholds are met, there is a notification requirement (with standstill obligation) that must be met before closing a transaction or rewarding a contract in a public procurement procedure, as well as further scrutiny by the Commission.
Other market distortions are also in-scope; hence, the Regulation could also apply to smaller acquisitions under the threshold, for example. The Commission can impose a range of redressive measures to address distortions, including requiring repayment of the foreign subsidy.
The FSR is directly applicable as of 12 July 2023 and the notification requirements commence on 12 October 2023.
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 in accordance with the ordinary legislative procedure. Later, on 6 February 2023, the Commission launched a public consultation on the draft Implementing Regulation with a deadline on 6 March 2023. More recently, in June 2023, the Commission published a non-binding Q&A on various aspects of the Regulation.
The adoption of the Regulation and the Commission's new powers over other countries should be considered in the context of the growing attention for the EU's trade relationship with non-EU countries. In this context, the Commission has raised concerns about distortions of the EU's internal market caused by market participants from outside the EU. 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, infrastructure or pharmaceutical sectors.
The EU already has a comprehensive set of rules against EY Member States providing distortive State aid. The Commission is responsible for the monitoring and enforcing these rules. For example, in recent years the Commission 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, closing an enforcement gap and leveling the playing field.
Implementing Regulation and notification forms
On 10 July 2023, the Commission adopted the long-awaited FSR Implementing Regulation along with two annexes including the notification forms. The Implementing Regulation details the reporting obligations of notifying parties, specifying the information that needs to be included in the notification forms for concentrations and public procurement procedures.
During a public consultation that took place earlier this year, many businesses and business groups raised concerns on the compliance burden arising from the FSR. According to the Commission's press release, the Implementing Regulation addresses respondents' requests to limit the administrative burden related to notifications by only requesting detailed information on foreign financial contributions most likely to cause distortion.
More specifically, for concentrations, companies must report:
For foreign financial contributions in public procurement procedures, companies must report:
The Implementing Regulation also includes guidance and more details on the following:
The FSR entered into force on 12 January 2023 and applies from 12 July 2023. The Regulation is directly applicable in the EU without transposition into the domestic laws of EU Member States. As of 12 October 2023, companies will be required to notify concentrations and participations in public procurement procedures involving foreign financial contributions and meeting the relevant notification thresholds.
The Implementing Regulation focuses on the procedural aspects of the FSR and provides insights on the filing obligations of parties responsible for submitting the notification (notifying parties). It thus requires close attention in light of the forthcoming notifications and application of the rules.
More broadly, the FSR essentially results in an extraterritorial effect on EU State aid rules in certain situations. The FSR will have a significant impact for businesses that receive foreign subsidies and seek to invest in the EU or participate in public procurement processes, warranting a timely analysis of the rules. This includes non-EU businesses as well as EU businesses that receive subsidies from foreign countries.
Businesses should review whether they have received or anticipate receiving contributions that may be in-scope, including tax incentives provided by third-country governments. This is particularly relevant not just for businesses involved in any (future) bids in EU public procurement and/or M&A processes involving the EU, but also for other business activities in the EU involving foreign subsidies. For M&A specifically, businesses must consider to what extent the FSR is already reflected in the M&A process (tax due diligence) for current and future transactions. As a notification requirement under the FSR for a specific transaction will likely be in addition to a merger filing under the EU Merger Regulation, timely preparing the separate filings will be key. It is also recommended to assess readiness, especially as data may be required during FSR procedures with a quick turnaround.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
EY Société d'Avocats, Paris
Ernst & Young LLP (United States), Global Tax Desk Network, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 See EY Global Tax Alert, EU Member States give final approval to Foreign Subsidies Regulation dated 5 December 2022.
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.