The EU's New Foreign Subsidies Regulation
Effects on Swiss companies
On January 12, 2023, the EU’s new Foreign Subsidies Regulation (FSR) entered into force, and it will take effect on July 12, 2023. The FSR will directly affect Swiss companies with turnover in the EU, in particular if they plan M&A activities or intend to submit public tender offers in the EU. The FSR creates new notification duties and grants the European Commission (EC) ex officio investigative powers regarding subsidies granted by non-EU countries, such as Switzerland.
1. Introduction: The EU’s New Foreign Subsidies Regulation
On January 12, 2023 the new Foreign Subsidies Regulation of the European Parliament and the European Council (the FSR) entered into force, and it will take effect on July 12, 2023. The FSR seeks to identify and redress potential distortions in the EU’s internal market caused by subsidies from foreign (non-EU) countries, including Switzerland, to companies active in the EU. According to the EC, the FSR closes a regulatory gap: Whereas EU Member State subsidies are subject to close scrutiny, prior to the FSR subsidies granted by non-EU governments to companies operating in the EU were not reviewed for potential distortive effects in the EU. The FSR complements existing EU state-aid regulations, which regulate EU Member State subsidies, and extends the EU state-aid regime to non-EU countries.
The FSR will directly affect Swiss companies with business activities in the EU, in particular if they engage in M&A activities or submit public tenders in the EU. We recommend that potentially affected companies use the next six months before the FSR takes effect to prepare.
2. The FSR Grants the EC Three New Powers
The FSR grants the EC three new tools to investigate and redress potential distortions of competition in the internal market by foreign (non-EU) subsidies.
2.1. Notification Obligation for Large Concentrations
Beginning on October 12, 2023, nine months after the FSR enters into force, companies must notify the EC of a concentration if (i) at least one of the undertakings concerned (one of the merging parties, the target or the joint venture) is established in the EU and generates annual turnover in the EU of more than EUR 500 million and (ii) the combined aggregate contributions any of the undertakings concerned received from non-EU countries exceeds EUR 50 million in the three years prior to notification. Undertakings may request pre-notification consultations with the EC as to whether the thresholds for notification are met. The EC may, however, request that concentrations that do not meet the thresholds must still be notified.
2.2. Notification Obligation for Bids in Public Procurement
Regarding public procurement bids in the EU, companies must notify the EC if (i) the contract value exceeds EUR 250 million and (ii) the tenderer received subsidies of more than EUR 4 million from non-EU countries in the three years prior to the tender. The EC may request that bids that do not meet the thresholds must be notified if it considers that the the bid would merit ex ante review given its impact in the EU. This notification obligation takes effect on October 12, 2023.
2.3. Ex Officio Investigation Powers of the EC
The EC will also have the power to investigate all other potential market distortions from non-EU governmental subsidies, including any subsidies received in the preceeding ten years (but not more than five years before the FSR enters into force). Foreign subsidies not exceeding EUR 4 million over three consecutive years are deemed not to distort the internal market.
3. How to Assess Whether a Foreign Subsidy is Distortive?
If the EC determines that a foreign subsidy distorts competition, it will weigh the negative effects of the foreign subsidy on competition in the internal market against the positive effects on the development of the relevant subsidised economic activity on the internal market as well as other positive effects in relation to the relevant policy objectives, in particular those of the EU. If the EC finds that the negative effects outweigh the positive ones, it may impose remedies. These including undoing the acquisition of an EU target, ordering repayment of foreign subsidies, refraining from investments in the EU, expulsion from public tender proceedings in the EU, and licensing obligations under FRAND-conditions (Fair, reasonable and non-discriminatory). The EC will make decisions based on the facts available, whether or not the relevant undertaking(s) or foreign countries cooperate.
4. What Are Foreign Subsidies under the FSR?
The FSR defines foreign subsidies broadly to include any direct or indirect financial contribution from a non-EU country (including e.g. Switzerland) which confers a benefit on or more undertakings. Accordingly, foreign subsidies include:
- The transfer of funds or liabilities (e.g., capital injections, granted loans, and guarantees);
- Forgiving debts or payments due (e.g., tax exemptions, granting special or exclusive rights without adequate remuneration); and
- The provision of goods or services at non-arms’ length conditions.
According to the FSR, financial contributions will not be considered to confer a benefit if a «benchmark assessment shows that the undertaking would have obtained that benefit under normal market conditions.»
As regards transfer pricing, the FSR states that «transfer pricing in the context of goods and services exchanged within an undertaking can confer a benefit if that transfer pricing is not in line with normal market conditions. The benefit conferred by a financial contribution may be passed to an undertaking engaging in an economic activity in the Union.» Companies should therefore review their internal pricing policies to identify potential passing on of foreign subsidies.
5. How Does the FSR Impact Swiss Companies?
The FSR directly affects Swiss companies with turnover in the EU in particular if they plan M&A activities or are engaged in public tenders in the EU. Swiss companies should expect potential notification obligations if the thresholds are met and can also be the target of ex officio investigations by the EC, should they be active in the EU. Any subsidies that Swiss companies receive from Swiss federal, cantonal or local governmental bodies qualify, in principle, as foreign subsidies under the FSR. These can include special, individually negotiated tax arrangements and individually granted support, even pandemic-related support if granted specifically to a particular company. In addition, Swiss companies also need to consider subsidies granted by any other non-EU countries worldwide.
6. Conclusion and Next Steps
Under the FSR, it is likely that many companies will be required to give notice to the EC of M&A transactions and bids for public tenders. Companies should systematically collect information regarding any financial contributions they receive or received from non-EU countries for the past five years and establish whether these contributions were received under market conditions. This information will be necessary (i) to assess whether a M&A deal or a public tender bid is notifiable under the FSR, and (ii) to provide information and prepare a defense should a company become the target of an ex officio investigation.
The EC has announced that it will shortly publish guidelines regarding the application of the FSR. Please mark your calendar for our roundtable on the FSR and its impact on Swiss companies taking place on Tuesday, March 21, 2023 at 1730 CET.
This Bulletin expresses general views of the authors as of the date of this Bulletin, without considering any particular fact pattern or circumstances. It does not constitute legal advice. Any liability for the accuracy, correctness, completeness or fairness of the contents of this Bulletin is explicitly excluded.