May 2021

By Mathilde Defarges

On 5 May 2021, the European Commission released a proposal for a new Regulation on foreign subsidies distorting the internal market. The legal document is the latest step in a process initiated last summer, and is the European Union’s latest attempt to weather rising geopolitical tensions without jettisoning Europe’s economic openness.

At present, existing European state aid control aiming at ensuring fair competition inside the EU market only apply to subsidies granted by EU Member-States. This means that while the Commission closely monitors its member states’ subsidies, and their impact on competition, foreign conglomerates using massive state subsidies to increase their economic footprint in strategic European activities go unchecked. The new regulation aims to plug the gap, by regulating subsidies from non-EU governments when they are used to finance economic activities in the internal market. But while Chinese giants are clearly the new measure’s main target, the new rules will apply to all companies benefitting from non-EU state subsidies.

The new regulation would grant the European Commission three avenues through which to investigate companies benefitting from foreign state subsidies. First, it would require entities using at least €50 million worth of financial support from a non-EU state to acquire a company to notify ex ante the Commission if the target company’s turnover in the EU is worth at least €500 million. Second, it would require ex ante notification from entities using financial support from a non-EU state when they bid in public procurement procedures in the EU worth at least €250 million. Lastly, it would grant the Commission a general power to investigate on its own initiative all other market situations and smaller acquisition or public procurement procedure – even those falling below the previously described thresholds – and request ad-hoc notifications.

Under all three procedures, the Commission would then investigate whether or not the non-EU state’s financial support distorts competition in the internal market and undermines the level playing field in the Union. Were the Commission to find that the state subsidy does indeed distort competition, it would have the power to demand that the entity benefiting from the state subsidy take a range of structural or behavioral remedial actions. These actions would range from reimbursing the distortive financial support, to divesting of certain assets, to unwinding an acquisition enabled by a distortive state subsidy. In addition, should a distortive state subsidy not be adequately notified to the Commission, the proposed regulation would impose fines worth up to 10% of infringing companies’ aggregate turnover.

The Commission is collecting feedback on the proposal until 5 July 2021. After that, the new regulation will be submitted to the ordinary legislative procedure, at the end of which it should be jointly adopted by the European Parliament and the Council. 

The recitals of the proposed regulation underline the EU’s continued commitment to multilateralism and its intention to keep its new foreign subsidies rules compliant with the WTO Agreement. However, Beijing’s sanctions on several EU officials and institutions in March have cooled Europeans’ enthusiasm for the China-EU investment deal negotiated in late 2020. This has given new momentum to this regulation and its ambition to protect EU companies from Chinese giants propped up by massive amounts of state subsidies. All companies benefitting from non-EU state subsidies should take stock now.