First trip around the sun: FSR – one year in review
The Foreign Subsidies Regulation (FSR), which introduced a framework for targeting and mitigating the potentially distortive effects of foreign subsidies, has celebrated one year of its application. The first year was a busy one for the Commission which was (and still is), along with the business and practitioners alike, in a learning mode on how to navigate the new rules.
Time to take stock of the lessons learnt from this inaugural year. An unanticipated number of filings, dawn raids, two pulled tenders, questioned legality of extraterritorial information requests, and the launch of in-depth investigations, together with the Commission’s recent clarifications on the FSR’s substantive test, have given companies plenty to think about when dealing with the FSR’s requirements. However, ambiguities remain and more is yet to come. Watch this space!
The long awaited Foreign Subsidies Regulation (FSR) entered into force on 12 January 2023 to close an enforcement gap in the Commission’s enforcement toolbox (see our July 2023 newsletter for the regime details). It became applicable in two stages: its rules became generally applicable on 12 July 2023, while the mandatory notification regimes for the in-scope transactions and public procurements kicked in on 12 October 2023.
Ever since it entered into force, the FSR has captured the regulatory spotlight and sparked debates and commentaries from various stakeholders. The Commission has also played its part. The enforcement actions it has taken are a testament to the fact that the Commission is determined to enforce the FSR rules vigorously.
The Commission’s enforcement actions
The first year was a busy one for the Commission. By the end of July 2024, it engaged in pre-notification talks on concentrations alone in 106 cases, 76 of which led to a formal filing – considerably more than the estimated 30 cases per year it had originally predicted when it first proposed the regulation.
The Commission has availed itself of its new tools in six instances. It has launched (A) four in-depth investigations following mandatory notifications in the context of three public tenders and one M&A deal; and (B) two ex officio investigations. As reported in our April 2024 newsletter, the Chinese companies were central to the Commission’s initial investigative actions. However, recent enforcement activities confirmed the FSR application goes beyond targeting China.
(A) In-depth investigations
(i) In February 2024, the Commission opened its first in-depth investigation following the notification by CRRC, a Chinese state-owned train manufacturer, bidding for a Bulgarian train contract. The investigation resulted in CRRC dropping out of a public tender (see our March 2024 newsletter).
(ii) In April 2024, the Commission launched two in-depth investigations into public procurement bids made by economic operators from China (LONGi Solar Technologie and Shanghai Electric) for a solar photovoltaic park in Romania (see our April 2024 newsletter). Again, the in-depth probes prompted the Chinese operators to withdraw from public procurement.
(iii) On the M&A front, in June 2024, the Commission announced its first in-depth investigation into an M&A deal. The transaction concerned a proposed takeover by e&, a United Arab Emirates’s (UAE) state-owned telecom operator, of the telecom assets from Czech conglomerate PPF Telecom Group in Bulgaria, Hungary, Serbia, and Slovakia for approximately EUR 2.2 billion. The Commission considered an exemption that e& enjoys from the UAE bankruptcy laws to amount to an unlimited state guarantee. Along with the loans granted to e& by state-controlled banks, this heightened the Commission’s concerns that, on the one hand, such subsidies may have bolstered e&’s ability to perform the transaction and, on the other hand, the competitive position of the merged entity in the EU post-transaction, by allowing e& to finance its EU activities at favourable terms. To alleviate these concerns, e& offered a generous behavioural remedy package, which the Commission has sent for market feedback. The Commission has until 4 December 2024 to consider the offer and conclude the investigation.
(B) Ex officio investigations
(i) Early in April, the Commission launched its inaugural ex officio investigation under the FSR, targeting Chinese suppliers of wind turbines, reportedly offering much lower prices than their European counterparts and generous financing terms (see our April 2024 newsletter).
(ii) At the end of April 2024, the Commission raided the Chinese security scanner company Nuctech’s premises in the Netherlands and Poland. The Commission received tipoffs that the companies inspected may have benefited from distortive foreign subsidies from China, allowing it to outbid competitors in EU tenders (see our April 2024 newsletter). Nuctech brought the first appeal against the FSR investigation in May 2024, seeking an interim injunction to stop sharing of Nuctech’s data and annulment of the Commission’s decision. It claims, among other things, that the investigation is unlawful and infringes the company’s right of defence. The General Court dismissed Nuctech‘s suspension request, confirming the Commission’s ability to request information from all businesses, including those located outside the EU, to assess whether their conduct infringes EU law and is likely to produce substantial effect in the internal market.
The Commission’s preliminary guidance on the notion of distortive subsidy
To respond to stakeholders’ calls for clarifications on the substantive test application, the Commission published a Staff Working Document in July, providing preliminary guidance on the distortion test under Article 4(1) FSR. The three main takeaways are the following:
- Two-step assessment: the assessment under Article 4(1) FSR involves two steps. First, there must be a nexus between the foreign subsidy and the beneficiary’s activities in the internal market. However, this does not prevent the Commission from investigating possible cross-subsidisations of companies active in the EU through entities belonging to the same group but active outside the EU. Second, the foreign subsidy must actually or potentially negatively affect competition in the internal market, whereby the effects may be assessed in relation to any activity in which the beneficiary engages (or is likely to engage) in the internal market.
- Presumption of distortion only for the “likely distortive” subsidies: the Commission must assess whether a foreign subsidy distorts the internal market on a case-by-case basis and bears the burden of proof. Only where the beneficiary has been granted a foreign subsidy “likely to distort” the internal market under Article 5 FSR is the foreign subsidy presumed to be distortive (assuming the two conditions mentioned above are satisfied), which shifts the burden of proof.
- Different distortion tests for public procurement and M&A: in public procurement, the distortion test is limited to the public tender, whereby the Commission assesses whether the tender is unduly advantageous and whether there is a link between granting the subsidy and the tender. In M&A, the Commission examines an actual or potential distortion in relation to the acquisition process and the market(s) where the merged entity is active post-acquisition.
Conclusion
The first year of the FSR’s application has been a steep learning curve for the market players and practitioners as well as the Commission. While the former have been busy collecting data and documents responsive to the FSR requirements, the Commission has been dealing with an unexpectedly high number of cases whilst at the same time closing some interpretation gaps. However, ambiguities around various concepts remain, and businesses and practitioners will need to wait until mid-January 2026 when the Commission is required to publish the guidelines on the substantive analysis or hope some further clarity comes sooner with upshots of the ongoing investigations.
