Year One Update: EU Foreign Subsidy Regulations
TL/DR –
The European Commission’s (EC) Foreign Subsidies Regulation (FSR), a year after its introduction, allows the EC to investigate non-EU government financial contributions to EU-active companies and impose measures to correct distortion effects. The FSR regulation affects investment funds, such as those from the Middle East, highlighting a recent EC investigation into a €2.2 billion telecom deal involving a buyer from the UAE suspected of receiving distortion subsidies. The Inflation Reduction Act introduced by the USA in 2022 may heighten US companies’ FSR obligations, with companies operating in the EU that have benefited from FFCs under the IRA likely to face notification requirements if they participate in a European tender.
One Year On: The Impact of the Foreign Subsidies Regulation (FSR)
On July 12, 2023, the Foreign Subsidies Regulation came into effect, enabling the European Commission (EC) to investigate financial contributions from non-EU governments to companies operating within the European Union. Despite initial skepticism, the EC has effectively utilized this tool to rectify market distortions caused by foreign subsidies. For an in-depth analysis of the first implementation, see our previous article here.
Speculation suggests the FSR will see heightened enforcement in the coming years due to rising national protectionism. The 2022 US Inflation Reduction Act, which provides production subsidies and tax incentives, may subject US companies to FSR notification requirements and intensified EC investigations.
Despite some clarity gained over the past year, questions remain for economic operators and private equity investors regarding the FSR’s implementation and the EC’s priorities.
Private Equity, Merger Control, and Increased Scrutiny
Investment funds, including large Chinese companies and Middle Eastern Sovereign Wealth Funds, are now under the EC’s microscope. Recently, the EC launched an investigation into a €2.2 billion telecom deal involving a buyer from the United Arab Emirates suspected of receiving distortive subsidies. This case highlights the need for investment funds to closely monitor FSR enforcement particularly during large-scale mergers.
Private equity firms must establish effective monitoring and quantification of Foreign Financial Contributions (FFCs) to assess notification requirements. For more insights, check out our previous post here.
For the EC’s assessment, the FSR provides certain exemptions for funds and PE firms. However, two conditions must be met. One, the fund controlling the acquiring entity must be subject to EU Directive AIFM or equivalent third-party legislation. Two, financial transactions between the controlling fund and other funds managed by the same company must be limited or non-existent.
The Impact of IRA on Public Procurement Procedures
The EC’s investigations into public procurement procedures involving non-EU government financial contributions highlight that thresholds for FSR notification are easily exceeded. Companies operating in the EU that benefited from the IRA’s FFCs are likely to face notification requirements if bidding in a European tender. For more information, read the EC Executive Vice-President’s response.
The IRA has raised concerns among investors, EU operators, and authorities about potential adverse effects on non-US companies and compatibility with World Trade Organization rules. Alongside the FSR, the EU’s Anti-Subsidy Regulation also permits the EC to apply countervailing measures against imported subsidized products harming EU industry. For more details, click here.
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