Undertakings and Economic Operators under the Foreign Subsidies Regulation

The EU’s Foreign Subsidies Regulation (EU 2022/2560) (FSR) provides for a mandatory notification and suspensory regime for businesses operating in the EU who receive public funding (so-called “foreign financial contributions”) from outside the EU (e.g. funding from the US, China, the Middle East and the UK).

One question that frequently arises in practice is how entities doing business in the EU should calculate their foreign financial contributions for their reporting obligations under the FSR. The definition of foreign financial contributions is very broad and includes direct transfers of funds or liabilities (e.g. capital injections, grants, loans, loan guarantees, fiscal incentives, and debt-forgiveness), the provision of goods or services and the foregoing of monies due.

Businesses operating in the EU are obliged to notify their foreign financial contributions prior to implementing a merger or acquisition or if they are participating in public procurement processes within the EU, if certain thresholds are met. For the purposes of an FSR notification (or a declaration that foreign contributions are not notifiable), businesses will need to determine if they have received financial contributions from non-EU governments or public authorities including private entities whose actions can be attributed to a third country.

The FSR uses different concepts in referring to the specific entities to be included for calculating financial contributions for the purposes of M&A transactions and public procurements, in particular distinguishing between “undertakings concerned” and “economic operators”.

In the context of M&A transactions, the FSR thresholds are met where: (i) the acquired company, a merging party or the JV is established in the EU and generates EU turnover of at least €500m, and (ii) where the parties to the transaction were granted combined aggregate foreign financial contributions of at least €50m over the past three years. For the purposes of calculating financial contributions, the foreign financial contributions provided to the “undertaking concerned” are assessed. Under the FSR, this means all of the respective financial contributions provided by third countries to:

(a) the undertaking concerned;

(b) the undertakings in which the undertaking concerned, directly or indirectly: (i) owns more than half the capital or business assets, (ii) has the power to exercise more than half the voting rights, (iii) has the power to appoint more than half the members of the supervisory board, the administrative board or bodies legally representing those undertakings, or (iv) has the right to manage the affairs of those undertakings;

(c) the undertakings which have in the undertaking concerned any of the rights or powers referred to in point (b);

(d) the undertakings in which an undertaking as referred to in point (c) has any of the rights or powers referred to in point (b);

(e) the undertakings in which two or more undertakings as referred to in points (a) to jointly have any of the rights or powers referred to in point (b).

If the M&A transaction consists of the acquisition of parties of one or more undertakings, only financial contributions provided to those parts are to be taken into account.

In the context of public procurement procedures, the FSR thresholds are met where: (i) the estimated contract value is at least €250m, and (ii) the economic operator (including its subsidiary companies without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender in the public procurement procedure) was granted combined aggregate foreign financial contributions of at least €4m per third country over the past three years.

The meaning of an “economic operator” for the purposes of the FSR is the same as under the procurement Directives i.e. “any natural or legal person or public entity or group of such persons and/or entities, including any temporary association of undertakings, which offers the execution of works and/or a work, the supply of products or the provision of services on the market” (e.g. see Article 2(1) of Directive 2014/24/EU on Public Procurement). The definition is functional, in that it is limited to the entity / entities that are actually bidding to provide the works or services.

Accordingly, in a public procurement context, in calculating the financial contributions for the economic operator itself under the FSR, the financial contributions for any entities / companies above or below the bidding entity, including financial contributions for indirect holding companies must be included. This would typically exclude sister companies from the reporting obligation. By contrast, an undertaking would generally include all of the entities within the same group including sister companies.

The Court of Justice of the European Union has confirmed that the concept of an economic operator is narrower than the concept of an undertaking and in particular, that the well-established competition law doctrine of “single economic entity” does not apply to economic operators in the public procurement context. In Case C‑416/21 Landkreis Aichach-Friedberg, the Court held that the fact that two economic operators are part of the same economic unit (i.e. the same undertaking) does not mean that they are treated as a single economic operator in assessing the discretionary exclusionary grounds under the public procurement rules.   

Although the concept of an “economic operator” captures a narrower subset of group entities than that of an undertaking for the purposes of calculating financial contributions under the FSR, businesses will need to be careful to avoid too narrow an interpretation that excludes entities whose financial contributions are reportable. The concept of an “economic operator” must be interpreted in a genuine way in line with the reality of how the bidding entity is funded and to include those entities involved in funding the bidding entity in the reporting of financial contributions under the FSR.

The distinction between “undertakings” and “economic operators” is a subtle but important one in assessing foreign financial contributions for the purposes of the FSR.

For further information in relation to this topic, please contact any member of the ALG EU, Competition and Procurement team.

Date published: 1 May 2024