Foreign direct investment: Recommendations to regulate foreign subsidies

By Gabriel Kobus

09-2020

In line with the recent introduction of the Foreign Direct Investment (FDI) Screening Regulation in a number of EU Member States, the Commission has taken further steps to strengthen its grip on foreign investments and assets in the long-awaited White Paper on Foreign Subsidies (“the White Paper”). Should the Commission follow the recommendations in the White Paper, it could potentially have an unprecedented effect on the activities of foreign-subsidised companies in the EU and investments from third countries.

The Commission has set out an ambitious set of rules to regulate foreign subsidies in the Internal Market and mitigate the risk of distortion of the EU “playing field”. The proposed measures underline the main principles from the New Industrial Strategy. As the former Trade Commissioner Phil Hogan commented at the adoption of the White Paper: “The EU is amongst the most open economies in the world [...]. However, our openness is increasingly being challenged through foreign trade practices, including subsidies that distort the level playing field for companies in the EU.”

Specifically, the White Paper proposes the introduction of new concrete tools for national authorities or regulators instruments to exercise:

a. a general control mechanism to review distortions caused by foreign subsidies to companies active in the EU;
b. a notification mechanism to review foreign-subsidised acquisitions of EU companies, including certain non-controlling minority investments; and
c. adjustments to EU public procurement rules to exclude bidders benefitting from distortive foreign subsidies from public tenders in the EU.

Lastly, the adjustments to public procurement would apply similarly to EU funding, if foreign subsidies are included in, or as part of, a winning contest for EU grants.

The proposal comes as states have become increasingly vigilant when it comes to foreign investments, either by using the channels available through the World Trade Organisation (WTO) or through alternative trade defence instruments.

Currently, the EU trade defence regime does not allow for the regulating or screening of most foreign subsidies affecting the single market. Firstly, the main pillars of the trade defence, i.e. EU anti-dumping and anti-subsidy rules, do not apply to services. Secondly, the current instrument does not address goods sold at an unfair price because of foreign subsidies granted to an EU-based manufacturing plant.

The proposal calls for “redressive measures” to combat foreign subsidies or investments that have distortive effects on the internal market. The measures can range from divestments of assets to actual prohibitions of new investments, or acquisitions or orders to reduce market presence.

Overall, the White Paper sets out a very comprehensive set of rules that would change the landscape for foreign investments and the outlook for many third country undertakings. In its current form, the proposal could have unparalleled 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.

The consultation for the proposal is open until 23 September 2020, and the Commission is considering introducing possible new regulation in 2021.

For further information contact Gabriel Ingerdahl Kobus

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