As of July 12, 2023, Regulation (EU) 2022/2560 of the European Parliament and of the Council of December 14, 2022 on foreign subsidies distorting the internal market (the “Regulation”) will become partially effective. The purpose of the adopted regulations is to ensure a level playing field for competitors operating in the EU market.
Accordingly, businesses benefiting from foreign subsidies will face new notification obligations. Admittedly, as of July 12, 2023. European Commission (“Commission”, “EC”) will gain the power to initiate proceedings ex officio, and the notification obligation on businesses will not come into force until October 12, 2023, but it is worth preparing for these changes now.
What are foreign subsidies?
According to Article 5 of the Regulation, foreign subsidies are involved when: “a third country makes, directly or indirectly, a financial contribution that benefits an enterprise operating in the internal market and that is limited in law or in fact to one or more enterprises or one or more industries.” Such financial contributions include grants, loans, loan guarantees, debt forgiveness or tax exemption, among others.
By contrast, the term “third country,” according to the Ordinance, means:
(a) “government institutions at the central level and public bodies at all other levels.
(b) a foreign public entity whose activities can be attributed to a third country, taking into account such elements as the characteristics of the entity and the legal and economic environment prevailing in the country where the entity operates, including the role of the government in the economy; or
(c) a private entity whose actions are attributable to a third country, taking into account all relevant circumstances.”
The regulation also indicates indicators of potential distortion of competition in the internal market by a subsidy, these include:
- the amount of the foreign subsidy,
- the nature of the foreign subsidy,
- the situation of the enterprise, e.g. the markets in which the entrepreneur operates,
- the development of the enterprise’s business in the EU market.
The foreign subsidies that may pose the greatest threat to the internal market include:
- granted to an entrepreneur in bankruptcy,
- directly facilitating concentration or
- an unlimited guarantee to cover the company’s debts or receivables (with no limits on the amount or duration of the guarantee).
Foreign subsidies granted to remedy damage caused by natural disasters, or other extraordinary events do not have a detrimental effect on the EU market.
When is a transaction notifiable?
If the financial support received qualifies as a subsidy received by a foreign country, the notification thresholds indicated in the Regulation must be analyzed. Transactions involving the acquisition of control, the merger of businesses and the establishment of a joint venture are subject to notification to the European Commission, provided that:
- the acquired company or at least one of the parties to the transaction involving a merger or the establishment of a joint venture has its seat in the European Union, and
- the turnover generated in the Union by the aforementioned entities has reached EUR 500 million in the year preceding the notification and
- in the last 3 years, the parties to the transaction have received total foreign financial contributions of min. EUR 50 million.
Importantly, the Commission may call on entrepreneurs to notify also those concentrations that do not meet the aforementioned conditions, but it has become suspicious of the granting of foreign subsidies to these entrepreneurs in the last 3 years.
Proceedings on. control of transactions
According to the Ordinance, the proceeding can be in two phases and notification of a transaction involving a foreign subsidy must be made before the transaction is finalized. Therefore, the parties to the transaction must refrain from finalizing the transaction:
– for a period of 25 working days from the date of submission of a full notification to the European Commission – in the case of a proceeding that is a so-called preliminary review,
– for an additional 90 days if the aforementioned period the European Commission decides to initiate a detailed procedure,
– for an optional additional 15 days if the parties to the transaction offer commitments.
In the course of the proceedings, the Commission has tools analogous to those used in other antitrust cases, i.e. the primary tool is a request for information, but it will also be possible to conduct inspections at the trader’s premises within the European Union, but under certain conditions also in third countries.
The proceedings end with the Commission issuing a decision:
(a) imposing obligations on entrepreneurs,
- b) a decision not to raise objections,
- c) a decision prohibiting a concentration – in the event that a foreign subsidy is found to have an anti-competitive effect in the internal market.
Sanctions for non-compliance with the Regulation
In the case of a concentration made without the EC’s approval or made in contravention of a decision imposing obligations, the Commission may order entrepreneurs:
- a) dissolve the concentration (e.g., by divesting the acquired shares), or
- b) order entrepreneurs to introduce other measures aimed at dissolving the concentration.
The EC will be able to impose on entrepreneurs a fine of up to 10% of their total turnover achieved in the year preceding the transaction for failure to notify the concentration, or for carrying out the concentration despite the issuance of a prohibition decision.
Application of the Regulation to public procurement and other activities of entrepreneurs
The Regulation also extends the notification obligation to entrepreneurs bidding for public contracts, when:
(a) the value of the public contract is at least €250 million,
- b) the contractor (its subsidiaries, holding companies), its main subcontractors, or suppliers participating in the same bid have received total financial contributions of at least €4 million per third country within 3 years.
When the EC considers that a foreign subsidy granted to an entrepreneur competing for the award of a public contract distorts competition – it may issue a decision obliging or prohibiting the award of the contract to that entrepreneur, as a result of which the Contracting Authority is obliged to reject that bid.
In addition, the Regulation grants the Commission the power to examine ex officio also any other market activities of entrepreneurs operating in the European Union that are beneficiaries of a foreign subsidy, if, in the EC’s view, there is a possibility that it may have upset the market balance. In addition, the EC also has the authority to investigate transactions and public procurement that were not subject to mandatory notification, but which the EC believes may have had a negative impact on competition due to the foreign state’s financial assistance.
Competition and consumer law
After a brief period as a junior judge, Bernadeta developed an interest in competition law, then a new discipline in early 1990s Poland. After her first stint at UOKiK, she spent one year leading the legal department of UPC and then joined GESSEL in 2001. In 2014, after moving to the head office of UOKiK, she oversaw the authority’s activities in the realms of corporate concentrations, market collusions, and abuse of dominant market positions....
Competition and consumer law
Prior to joining GESSEL, worked for 5 years at the Office of Competition and Consumer Protection (UOKiK), first at its Gdańsk branch and then at the central Warsaw office. Conducted proceedings in the field of merger control and restrictive practices, as well as in the field of violations of the collective interests of consumers. Participated in inspections and investigations conducted by UOKiK at businesses, also as head of “dawn raid” partie...
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