The Foreign Subsidies Regulation (“FSR”) is a new EU law concerning subsidies granted by non-EU states to companies active in the EU. It came into force on 12 January 2023, with the EU having power to investigate any mergers or public procurement processes initiated after 12 July 2023.
The finalised Implementing Regulation for the FSR (“FSR IR”) was published on 10 July 2023. We have been considering the challenges that the FSR may create for firms, including the requirement to identify and consolidate a wide range of non-standard financial data, and how firms may be able to effectively meet these challenges.
EU Member States are subject to EU State Aid laws when granting subsidies, but non-EU states are not subject to the same rules. The EU is concerned that subsidies granted by non-EU states may provide recipients with an unfair advantage in acquiring companies or obtaining public procurement contracts within the EU.
The FSR enables the European Commission to investigate financial contributions granted by non-EU states to companies active in the EU. If the Commission finds that these financial contributions constitute distortive subsidies, it can impose measures to remedy the distortion.
As set out in the FSR IR, transactions meeting the notification thresholds [See FSR, Articles 20 and 28. We note that the notification thresholds are based on the value of all financial contributions received, including those below €1m in value.] must submit a notification form to the EC detailing the financial contributions (not just subsidies) received from a non-EU government or government-controlled entity in the last three years.
After notification, the EC will conduct a preliminary review of the submission. This gives the EC 25 days to decide whether to launch an in-depth investigation into whether the firm is in receipt of a foreign subsidy that could distort the EU market.
The FSR IR sets out the procedures and processes that firms will need to follow to comply with the FSR in advance of concluding concentrations or public procurement bids. There are some changes from the draft Implementing Regulation that was published on 6 February 2023, most notably that:
- the threshold for an individual contribution to be disclosable has risen from €250k to €1m;
- contributions over €1m are only required to be disclosed if either:
- they fall into one of the categories of most likely distortive subsidies[See FSR, Article 5.]; or
- the combined value of all contributions received from that country in the past three years is over €45m (for concentrations) or over €4m (for public procurement bids).
- contributions that do not fall into one of the categories of most likely distortive subsidies set out in Article 5 of the FSR may be presented in aggregated form; and
- certain transactions, such as sale or purchase of goods on market terms, or non-selective tax deferrals, do not need to be disclosed.
While these changes may reduce the burden of compliance somewhat, they do not change the fundamental requirement for firms to have complete and accurate data on the financial contributions that they receive from non-EU governments or government-controlled entities.
The requirement for financial information on foreign contributions is likely to be very challenging. Group-wide information going back three calendar years is required, and in our experience, companies are unlikely to have this level of detail readily available from their financial systems. This challenge is particularly acute given the potential breadth of what might be considered to be a ‘financial contribution’ under the FSR.
For example, for some categories of financial contribution, such as purchases, it is likely to be necessary to analyse a large volume of granular data to identify qualifying transactions. This information is unlikely to be held at group level, so may need to be consolidated from multiple financial systems, potentially owned by different legal entities.
A key challenge is likely to be identifying whether a counterparty is a government‑controlled entity, as this is unlikely to be currently recorded in finance systems. Examples of entities that could be judged to be under government control include sovereign wealth funds, government-owned infrastructure operators, or joint ventures where the government is one of the joint venture parties. Learnings from customer due diligence activities are likely to be helpful in efficiently and reliably identifying government-controlled counterparties.
Separately, tax measures are also likely to cause significant challenges. Tax measures have historically presented unique challenges within the State Aid rules and in principle, many of them could come within the meaning of ‘financial contribution’. For example, UK R&D credits or equivalent tax measures overseas could, in principle, come within the scope of financial contribution. Our experience is that identifying these measures can be particularly difficult for businesses.
Gathering and collating the required information in a disclosable format is therefore likely to present significant challenges. Firms that have not prepared in advance will face challenges in both identifying whether a notification is required, and if necessary completing the notification form within the timelines of a merger or public procurement procedure.
Preparing to Meet the Challenges
We have designed a roadmap to assist firms in meeting the challenges discussed above. This entails:
- Gap Identification, comparing available financial information against ‘gold standard’ data.
- Gap Assessment and Resolution, considering the appropriate actions to be taken for each gap identified, and then implementing them.
- Economic Assessment of disclosable financial contributions identified by this process, in relation to potential market distortions.
- Documentation and Future Controls, ensuring that the basis for key decisions is documented, and robust compliance procedures are in place.
We provide more detail on what each of these steps would entail below.