Will the EU "Level the playing field" on foreign subsidies in 2021?

Great openness to foreign investment has come with opportunities for the EU economy, but also with increased challenges such as perceived level playing field issues due to foreign subsidization. (Anti-)subsidy legislation helps preserve a level playing field in the internal market, but subsidies granted by non-EU authorities to undertakings established in the Union, which are difficult to tackle under existing laws, are a growing concern in the EU political debate. Against this background, the European Commission published a white paper in June 2020 in which it considered how the EU can address this challenge.[1]  A first round of public consultations was held and the Commission may submit a legislative proposal in 2021. 

Regulatory Gap

As the name suggests, the objective of the white paper is to level the playing field with regard to foreign subsidies. Foreign subsidies are defined as financial contributions, by government authorities of a non-EU State, conferring a benefit to a recipient and which is limited to an individual undertaking, industry, group of undertakings or industries."[2]  The Commission identified a regulatory gap in the legislation on subsidies and concluded that the current instruments do not suffice to ensure fair competition on the market. 

For instance, the EU's merger and antitrust rules allow the Commission to intervene where concentrations or companies' market practices distort competition in the internal market. However, they do not specifically take into account whether the undertaking benefited from foreign subsidies. EU State aid rules, on the other hand, do apply where financial support granted by EU Member States to undertakings distort competition in the internal market. However, financial support granted by non-EU governments to undertakings established in the EU is not covered by EU State aid rules. 

Likewise, trade rules may also have limitations. Countervailing duties imposed in accordance with the Basic Anti-Subsidy Regulation[3]  typically apply to goods and are levied upon importation of the subsidized goods. Therefore, goods (and services) produced in the Union but subsidized outside of the Union could easily slip through the net.  

As a result, today, subsidies granted by a Member State government to an EU undertaking are regulated, as well as subsidies granted by a non-EU government to an undertaking established in its own territory, outside the EU. By contrast, subsidies granted by non-EU governments to EU undertakings are not regulated, creating an uneven playing field between the different undertakings active in the internal market. 

Proposed remedies to address foreign subsidies 

The Commission posits that foreign subsidies appear to have facilitated the acquisition of EU undertakings, influenced other investment decisions or have distorted the market behaviour of beneficiaries.[4]  Following this, the Commission has identified three problem areas:

1. General distortions in the internal market;
2. Acquisitions of companies; and
3. Public procurement procedures. 

In order to address these distortions, the Commission puts forward three proposed modules or "tools" which can either be applied alternatively, on a stand-alone basis, or in combination.

The first module amounts to a general instrument to remedy distortions caused by foreign subsidies. The Commission (or relevant Member State authorities) may investigate the existence of a foreign subsidy in a preliminary review and if there is a concern, it will start an in-depth investigation assessing whether the subsidy is capable of distorting the internal market. Similar to trade defence investigations, the Commission will also take the Union interest into account before deciding on the appropriate remedy. Remedies may include divestments, licences and redressive payments.[5] 

The second module addresses distortions caused by foreign subsidies facilitating the acquisition of EU targets. This would involve an ex ante review of the planned acquisition under a compulsory notification mechanism. A beneficiary would have to notify a foreign subsidy received in the past three years, or a subsidy it expects to receive in the next year. The notification would have a suspensory effect. The Commission would impose thresholds: 

1. A threshold based on the nature of the transaction: the acquisition of a set number of shares, voting rights, or the value of the transaction; and 
2. A threshold based on the amount of subsidies. 

This means that certain transactions which, today, do not trigger a merger control filing obligation may require a foreign subsidy notification and approval.

The third module would require undertakings participating in public procurement procedures to notify the contracting authority whether they received a foreign subsidy within the last three years or expect to receive a foreign subsidy during the execution of the contract. The competent contracting and supervisory authorities would then investigate the foreign subsidy and may exclude the beneficiary from the procedure. 

Next steps

The Commission's proposal on addressing foreign subsidies is expected in 2021. Three options currently lie on the table: 

1. Non-regulatory approach taking the form of guidance;
2. Regulatory approach by either adapting the existing tools or by developing a new instrument (see above); or 
3. Seeking an international consensus within the World Trade Organization or within bilateral trade agreements. 

If European Commission Vice-President Valdis Dombrovskis, who is responsible for the trade portfolio, pursues the approach outlined in his public statements, it appears that real regulatory change will be on the horizon for 2021. During his confirmation hearing in the European Parliament on 2 October, Mr Dombrovskis declared that “Europe needs to become more assertive” in its trade policy. He also said that the EU's trade defence tools need to be sharpened and expressed his support for the launch of a new legal instrument dealing with distortions from foreign subsidies in the internal market as well as a new "anti-coercion" mechanism. 

While the Vice-President has underlined that the EU will remain open to foreign investment, he has made it clear that "this openness is not unconditional." The Member States and Members of the European Parliament who supported the appointment of Mr Dombrovskis will now expect regulatory action. 

It is evident that any future legislative proposal to address foreign subsidies would have substantial implications for the management of new acquisitions and the strategic placement of headquarters or offices for all sectors with major players originating from outside the EU.

"Foreign direct investment has been under scrutiny over the last years in Europe and a new instrument addressing foreign subsidies may contribute addressing concerns about a lack of a playing field for Union companies in the EU market. 2021 is expected to be a decisive year – key questions are whether the EU will adopt a new instrument following its recently published white paper; what form such an instrument will take; which authority or authorities will enforce any new rules; and whether administrative burdens on companies can be kept limited."
Hein Hobbelen, Partner 

For more information, contact Hein Hobbelen.

[1] European Commission, White Paper on Levelling the Playing Field as Regards Foreign Subsidies, COM(2020) 253 final, 17 June 2020, ("Commission's White Paper") available at https://ec.europa.eu/competition/international/overview/foreign_subsidies_white_paper.pdf , p. 9. 

[2] Annex I of the Commission's White Paper. 

[3] Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union, OJ L 176, 30.6.2016. 

[4] The Commission's White Paper, p. 4. 

[5] The Commission's White Paper, p. 20. 

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