A regulatory first:

Recently, the European Union introduced the Foreign Subsidies Regulation (FSR), which aims to combat the impact of foreign subsidies on the EU's internal market. By addressing the potential distortions that foreign subsidies can create, the FSR aims to ensure a level playing field for all companies operating in the EU.

Under the FSR, the European Commission will have the authority to conduct investigations and take action against companies benefiting from foreign subsidies and engaging in activities that could harm the EU's internal market. The FSR is applicable to subsidies granted by governments outside the EU that benefit companies operating within the EU.

The FSR marks a major step towards ensuring fair competition in the EU's internal market and is expected to have a considerable impact on companies operating in the EU. Specifically, it will be relevant for companies competing with companies receiving foreign subsidies, as well as for companies receiving foreign subsidies themselves.

Starting on 12 March 2023, the regulation is applicable by all companies operating in the EU, whereby the focus here should be on the planning and execution of M&A activities as well as transactions with the public sector. If the transaction exceeds the relevant thresholds or, in the case of participation in the tendering process, exceeds the thresholds, this initially triggers a notification obligation with the European Commission and may lead to a ban on execution.

For companies, it is advisable to carefully check whether future M&A transactions and public procurement procedures are in scope of the new EU regulation. This may lead to comprehensive reporting obligations. Just to be on the safe side, companies should carefully check whether they have received financial contributions from non-EU countries. In the FSR, the term "financial contribution" is deliberately interpreted in very broad terms. As a rule of thumb, a "benefit" within the meaning of EU state aid law is likely to be a rough indicator of the existence of a financial contribution. But this does not necessarily have to correspond to a direct economic benefit for the recipient of the funds.

Going forward, companies should track and carefully document any receipt of foreign subsidies so as to avoid potential sanctions. Compliance with these documentation and reporting requirements may involve a considerable amount of time and expense. The extra effort should already be factored in ahead of M&A transactions and when participating in public procurement procedures.

Should the company concerned discover during the audit that it has received financial contributions from one or more non-EU countries, it is obliged to declare transactions ("M&A instrument" - cf. Article 21 FSR) and involvements in procurement procedures ("procurement instrument" - cf. Article 29 FSR) to the Commission if the above-mentioned thresholds are exceeded.

The FSR's introduction has drawn applause from many individuals and organizations, including those who have called for stronger action against the impact of foreign subsidies on the EU's internal market. But some have expressed concern that in some cases the FSR could be used to unfairly discriminate against certain companies or countries.

Indeed, the FSR fits into a broader trend toward greater scrutiny of foreign investment and trade practices, both within the EU and globally. It is a trend that reflects growing concerns about issues such as fair competition, intellectual property protection, and national security.

The Commission is currently drafting an implementing regulation that will provide extensive procedural guidance. In particular, it will include notification forms and explanations of the procedures relevant to notification and file inspection. Naturally, the notification form is of central importance for companies here, as it specifies how detailed the companies must be in the future, both in the case of mergers and in notifying their participation in public contracts. Within the next few days, we are also expecting a further statement from the Commission on this matter.

And, as always, we encourage our readers to stay abreast of the latest developments in business and trade regulation and take the necessary steps to ensure compliance with the relevant rules and laws.

We look forward to keeping you up-to-date with the latest news and developments in this important area.

Source: KPMG Corporate Treasury News, Edition 129. January/February 2023
Authors:
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Hansjörg Behrens-Ramberg, Senior Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG