EU proposal on foreign subsidies and its place in an evolving EU policy framework

The European Commission (Commission) adopted a White Paper on 17 June 2020 dealing with the distortive effects caused by foreign subsidies in the Single Market (White Paper). The White Paper is designed to assist the Commission in preparing for EU legislative proposals to deal with such effects. The White Paper follows its recent announcement of a public consultation on a possible new competition tool to address structural competition problems in the context of, among others, digital markets.

What is the background to the White Paper?

The Commission is looking for tools to ensure that foreign subsidies do not distort the Single Market. By way of comparison, the EU has State aid rules under the Treaty on the Functioning of the European Union (TFEU) to control the distortive effects of Member State subsidies on the Single Market.

What concerns does the EU have with foreign subsidies?

Subsidies granted by non-EU governments to companies in the EU are considered to have an increasingly adverse impact on competition in the Single Market. The State aid rules under the TFEU do not control the distortive effects of those foreign subsidies. The Commission has also identified situations where foreign subsidies facilitate the acquisition of EU companies or distort bidding in public procurement procedures which remove the benefit of fair access to public contracts. As a result, these foreign subsidies are considered to operate to the detriment of non-subsidised companies.

Aren't the existing EU trade defence rules sufficient to control foreign subsidies?

The Commission does not believe so. The existing EU trade defence rules relate to exports of goods from third countries. They do not address all distortions caused by foreign subsidies granted by non-EU countries. The Commission believes that there is a "regulatory gap" in the control of such foreign subsidies.

What are the tools are proposed by the Commission to address this regulatory gap?

The White Paper proposes new tools (i.e. "Modules") to address the distortive effects caused by foreign subsidies regarding: (i) their distortive effect on the Single Market, (ii) the acquisition of EU companies and (iii) EU public procurement procedures. The White Paper also sets out how to deal with foreign subsidies in the context of EU funding.

Module 1 - Dealing with the distortive effects of foreign subsidies regarding the Single Market

Module 1 proposes the establishment of a general market scrutiny instrument to capture market situations in which foreign subsidies may cause distortions in the Single Market. There would be a supervisory authority (either a national authority or the Commission) which could act upon any indication or information that a company in the EU benefits from a foreign subsidy. If the existence of a foreign subsidy is established, that supervisory authority would then impose measures to remedy the likely distortive impact (such as by way of payments and structural or behavioural remedies). On the other hand, it could also consider that the subsidised activity or investment has a positive impact which outweighs the distortion and not pursue the investigation further (described as the “EU Interest Test”).

Module 2 - Foreign subsidies facilitating the acquisition of EU companies

Module 2 is intended to address distortions caused by foreign subsidies facilitating the acquisition of EU companies. This module aims at ensuring that foreign subsidies do not confer an unfair benefit on their recipients when acquiring stakes in EU companies, either directly by linking a subsidy to a given acquisition or indirectly by increasing the financial strength of the acquirer. Companies benefitting from financial support of a non-EU government would need to notify their acquisition of an EU company, above a given threshold (one of which proposes the target having turnover of €100m), to the competent supervisory authority (i.e. to the Commission). The acquisition of "material influence" is being proposed as part of the basis for control of such acquisitions – this differs from the requirement of the acquisition of "control" under the EU Merger Regulation (and also the basis for the notification of acquisitions of companies to the Irish Competition and Consumer Protection Commission (CCPC) under Part 3 of the Competition Act 2002 (as amended) (Competition Act)).

Such acquisitions being reviewed could not be closed while the Commission's review is pending. If the Commission finds that the acquisition is facilitated by the subsidy and distorts the Single Market, it could either accept commitments by the notifying party that remedy the distortion or, "as a last resort", it could prohibit the acquisition. Under this Module, the Commission could also apply the EU Interest Test (see Module 1 above).

The precise interaction between Module 2 and separate merger control requirements (e.g. to the CCPC under Part 3 of the Competition Act) will be watched with interest.

Module 3 - Foreign subsidies in EU public procurement procedures

Foreign subsidies could have a harmful effect on the conduct of EU public procurement procedures by enabling bidders to gain an unfair advantage, for example by submitting bids below market price or below cost, allowing them to obtain public procurement contracts that they would otherwise not have obtained. Module 3 proposes a mechanism where bidders would have to notify the relevant contracting authority of financial contributions received from non-EU countries. The relevant competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. If so, the bidder would be excluded from the procurement procedure.

Dealing with foreign subsidies in the context of applications for EU financial support

Foreign subsidies may distort applications for EU financial support by putting beneficiaries of such subsidies in a better position to apply. Among the options proposed by the White Paper to prevent such unfair advantage is, in case of funding distributed through public tenders or grants, a similar procedure as applies under the EU public procurement procedures.

What is the wider policy context for the White Paper and what are other proposed EU measures to strengthen the Single Market?

At the core of the White Paper is the Commission's proposal for new measures by the EU to protect the Single Market. The White Paper is one of a number of recently launched strategic initiatives by the EU including the:

  • New Industrial Strategy - announced by the EU on 10 March 2020 and designed to maintain EU industry's global competitiveness, making the EU climate-neutral by 2050 and shaping the EU's digital future (this includes a review of the EU competition law rules and an Intellectual Property Action Plan). The New Industrial Strategy provides the direct policy basis for the White Paper.
  • Digital Services Act - announced by the EU on 29 January 2020 (under the Commission's Work Programme 2020 (and as part of the overall European Digital Strategy). The Digital Services Act is intended for Q4 2020 (likely in the form of a Regulation) and is designed to reinforce the Single Market for digital services. The main proposed provisions are:

    • to modernise the 2000 e-Commerce Directive (2000/31) and in particular to provide for rules on responsibilities of digital services to address risks faced by their users as well as to protect their rights - the legal obligations would ensure a system for the supervision of platforms and effective enforcement), and

    • rules to ensure that markets characterised by large platforms with significant network effects acting as gatekeepers, remain fair and contestable for businesses and new entrants (such rules may include prohibition or restriction of certain unfair trading practices by large online platforms and "tailor-made remedies addressed to large online platforms" such as "platform-specific non-personal data access obligations, specific requirements regarding personal data portability, or interoperability requirements"). The EU public consultation is open until 8 September 2020. The Irish Department for Business, Enterprise and Innovation (DBEI) also has a consultation process on the Digital Services Act and this is open until 24 July 2020.

  • New Competition Tool - this is intended to address perceived gaps in current EU competition law rules (in particular to control larger entities such as platforms which have become gatekeepers for digital and non-digital products and services – this would be by way of dominance-based and/or structure-based remedies). The EU public consultation is open until 8 September 2020 with a possible new Regulation for Q4 2020. The DBEI also has a consultation process on the new competition tool and this is also open until 24 July 2020.
  • Foreign Direct Investment (FDI) Regulation - the 2019 Regulation (2019/452) establishes a framework for screening FDI into the EU – it will apply from 11 October 2020. This FDI Regulation is a response to growing issues amongst Member States about the purchase of strategic EU companies by foreign-owned firms from third countries. Investment screening under the Regulation is the procedure allowing Ireland to assess, investigate, authorise, condition, prohibit or unwind FDI based on security and public order criteria. The DBEI is responsible for implementing the Regulation in Ireland.

What are the next steps for the White Paper?

The White Paper is open for public consultation until 23 September 2020 (EU Commission's public press release). The Commission will later present legislative proposals to tackle the distortive effects of foreign subsidies on the Single Market. The proposals are far-reaching and, combined with the Digital Services Act, the new competition tool, control of FDI and the proposals generally under the New Industrial Strategy, there are likely to be material EU law developments in the near future. The increased activism of the EU in these areas will likely further distance the EU from the UK once Brexit takes clearer shape.

For more information on this topic please contact Alan McCarthy, Partner or any member of A&L Goodbody's EU, Competition & Procurement team.

Date published: 22 June 2020