Chinese Enterprises Going Global – EU Foreign Subsidies Regulation

Introduction
 
The EU’s Foreign Subsidies Regulation (FSR) came into full effect on October 12, 2023. It has increased the compliance burden and risks for Chinese enterprises going overseas. Its broad definition of “financial support” means that businesses with global operations must closely monitor transactions with non-EU governments and their controlled entities.
 
1. Institutional Background of FSR
 
Unlike the EU’s State Aid, which addresses subsidies within EU member states, the FSR targets non-EU foreign subsidies that distort the level playing field in the EU’s single large market. Specifically, the FSR addresses concerns that EU businesses are at a significant disadvantage when competing with businesses heavily subsidized by non-EU foreign governments. Such foreign subsidies can enable beneficiaries to outbid competitors in public tenders and offer better terms for acquiring EU businesses.
 
Before the FSR, the EU was virtually unable to intervene in or prevent such foreign subsidies – EU state aid laws only apply to subsidies provided by EU member states, and EU concentration review and antitrust rules also apply differently. While the EU can investigate certain subsidy activities through trade protection measures like anti-dumping and countervailing measures, these measures only apply to the export of goods to the EU, not services, and do not address foreign subsidies for products produced within the EU.
 
2. What is Foreign Financial Support?
 
The most criticized and controversial part of the FSR is the breadth of its definition of financial support. This definition covers almost all forms of financial support, including, but not limited to, the following:
 
•  Any transfer of funds or liabilities, such as grants, capital injections, loans, loan guarantees, below-cost financing, financial incentives, debt forgiveness, set-off of business losses, compensation for imposing financial burdens on public institutions, and debt-to-equity swaps.
 
•  Waiver of income at maturity, such as tax exemptions, grants of special or exclusive rights that are not based on equivalent returns.
 
•  Offering or buying goods or services (even under fair market conditions and prices).
 
It is important to note that the types of financial support described above are not exhaustive. In determining whether support is a “subsidy,” the European Commission will generally consider factors such as the customary investment practices of private investors, the level of market financing rates, and the reasonable return of a particular commodity.
 
Financial support may be considered foreign if it is provided by the central government of a third country, all other public bodies at all levels, or by a foreign public or private entity whose conduct is attributable to the government of a third country. Whether an entity’s actions are attributable to a third country government needs to be assessed on a case-by-case basis. It is recommended that businesses monitor not only the financial support received from the non-EU government but also any financial support received from an entity with significant legal, economic, organizational, or decision-making links to the third government.
 
3. Circumstances and Reporting Thresholds that Trigger FSR Regulation
 
According to the regulations, there are three situations that trigger the FSR regulation: one is an M&A transaction to acquire a target company with a certain amount of EU revenue, the second is participation in a public procurement tender in the EU, and the third is an FSR investigation conducted by the European Commissioner at his discretion.
 
FSR Filing Procedures for Concentration of Undertakings
 
According to the FSR, a concentration of undertakings that meets both the “turnover threshold” and the “foreign financial support (FFS) threshold” is required to file a pre-notification with the European Commission. The FSR’s definition of a concentration of undertakings is the same as that of the EU Merger Control Regulation and covers a lasting change of control resulting from any of the following:
 
•  Amalgamation of two or more independent proprietors or portions of proprietors.
 
•  Takeover, individually or jointly, whether through the purchase of shares or assets, by contract or otherwise, directly controls all or part of another operator.
 
•  Establishment of a long-standing, self-operated, full-featured joint venture.
 
A concentration of undertakings will trigger an FSR reporting obligation when both the following turnover thresholds and foreign subsidy thresholds are met:
 
•  At least one of the undertakings, takeover targets, or joint ventures involved in the concentration is established in the EU and generates a turnover of at least €500 million in the EU; moreover,
 
•  The relevant operators received foreign financial support in the aggregate amount of more than €50 million in the three years prior to the concentration, of which the related enterprises were: i. In the event of a merger, all the merging parties; ii. in the case of an acquisition, the acquirer and the target operator; iii. In the case of a joint venture, the shareholders who created the joint venture and the joint venture itself.
 
In addition, once the transaction triggers the FSR reporting obligation, the company must not complete the transaction before the European Commission approves the declaration or before the relevant statutory deadline.
 
FSR Filing Procedures for Public Procurement Bids
 
For public procurement bidding, the FSR filing obligation is triggered when both the following “Procurement Threshold” and “Subsidy Threshold” are met:
 
•  Operator participation in tenders for public procurement projects with a procurement amount of up to 250 million euros.
 
•  The total amount of foreign financial support received by the participating operators (and their affiliates) in the three years preceding the declaration is not less than 4 million euros per third country.
 
In addition, if the above thresholds are met, but the public procurement process is divided into multiple lots, and the value of one lot or the total value of all bids tendered by the operator is equal to or greater than 125 million euros, a declaration is required.
 
However, unlike the FSR filing process triggered by a concentration of undertakings, for the public procurement process, even if an operator does not meet the “foreign financial support” (FFS) threshold, it will be required to sign a declaration stating that the operator has not received “foreign financial support” that meets the filing criteria and is still obliged to disclose in the list all “foreign financial support” it received in the three years preceding the declaration.
 
FSR Investigations Conducted at the Discretion of the European Commission
 
The European Commission’s statutory powers allow it to investigate any instances of distortion of competition caused by foreign subsidies to companies active in the EU, including investigations of concentrations of undertakings and public procurement tenders that do not meet the FSR reporting threshold. The European Commission can use its investigative powers to require operators to provide detailed information about foreign subsidies and to conduct inspections inside and outside the EU. Interested third parties, such as competitors, may also use the European Commission’s new FSR investigation system to lodge complaints or objections to transactions or public procurement tenders that do not serve their interests.
 
4. The European Commission’s FSR Investigation Powers
 
In all three cases, the Commission will assess the potential negative impact on the internal market of the particular subsidy being investigated and weigh it against any positive impacts that may arise from public policy interests within or recognized by the EU, such as environmental benefits or job creation within the EU. If the negative effects outweigh the positive effects, the European Commission may take remedial measures. Similar to the antitrust review of a concentration of undertakings, the remedies for the FSR investigation include structural measures (e.g., divestiture, de-concentration) and behavioral measures (e.g., third-party access obligations, FRAND clause licensing, repayment of foreign subsidies, etc.).
 
Respondents can make commitments to address the Commission’s concerns about distorting foreign subsidies, which would be legally binding if accepted by the Commission. Failure to comply with commitments may result in fines. Failure to file an FSR filing for a concentration of undertakings or public procurement tenders could result in a hefty fine of up to 10% of a company’s total global turnover. In addition, the European Commission also has the power to prohibit the concentration of undertakings or prohibit the signing of bidding contracts based on the FSR.
 
Summary
 
Through the introduction of the institutional background, regulatory scope, reporting threshold, and investigation powers of law enforcement agencies under the EU Foreign Subsidies Regulation, it is believed that Chinese enterprises will be able to make a preliminary assessment of which overseas activities may be subject to the regulation of the EU Foreign Subsidies Regulation, and what pre-compliance measures need to be taken. The next lecture will focus on the calculation of subsidy and turnover, FSR reporting obligations, FSR review process and timeline, information required for FSR filing, and compliance practice guides.

Anjie Broad, China, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact china@transatlanticlaw.com

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