Balancing act: dissecting the EU's white paper on foreign subsidies

The Commission’s White Paper on Foreign Subsidies, which was under public consultation until 23 September 2020, focuses on how to address distortions caused by foreign subsidies in the EU.

It proposes three alternative/cumulative “modules” to control foreign subsidies granted to undertakings operating in the EU: (1) ex post monitoring of foreign subsidies, (2) ex ante monitoring of foreign state-subsidised acquisitions of EU target companies and (3) ex ante monitoring of foreign subsidies in the context of public tender procedures.

In October 2020, the Commission published its inception impact assessment laying down four policy options: (1) do nothing (baseline scenario); (2) developing “soft” guidance; (3) taking legislative action by amending the current rules and/or creating new rules; and (4) improving international rules. The Commission is now in the process of drafting legislation and the accompanying impact assessment. The indicative date for legislation is the second quarter of 2021.

Our contribution

As a preliminary remark, please note that most of the public consultation questions were formatted in such a way that the respondent first selects a “yes / no / other” answer (answer chosen underlined in the below) and then provides an explanation for this answer.

Questions relating to the three modules - general questions

1. Do you think there is a need for new legal instruments to address distortions of the internal market arising from subsidies granted by non-EU authorities (foreign subsidies)?

Yes – No – Other

There currently is an enforcement gap, as certain third countries grant subsidies that would be problematic if granted by EU member states and assessed under EU state aid rules. In this context, it is as such legitimate to propose new legal instruments.

However, the scope and set-up of such instruments need to be targeted, based on clear legal standards and should not lead to unnecessary procedural delays.

At a jurisdictional level, triggering thresholds should be clear-cut, quantitative and mechanical. There should also be clear allocation mechanisms if both member states and the Commission are competent to review such cases.

On the procedural level, the expedite treatment of unproblematic cases should be guaranteed, and the duplication of procedures should be avoided.

In terms of substantive assessment, the new legal instruments should be aligned to the greatest possible extent with existing legal concepts established under EU state aid rules.

2. Do you think the framework presented in the White Paper adequately addresses the distortions caused by foreign subsidies in the internal market?

Yes – No – Other

The framework centres around three modules. These three modules, as presented in the White Paper, will have a wide scope of application and therefore are intended to catch all scenarios where a foreign subsidy could have distortive effects on the EU internal market. The current envisaged set-up may lead to duplications and unnecessary bureaucracy.

In our view it would be preferable to work Module 2 into the existing merger control rules rather than to create an additional layer of bureaucracy (we already have merger control and FDI screening). This would also avoid a duplication of remedies negotiations, if any.

Module 3 could be worked into the existing public procurement rules in order to leave it to the contracting authorities to deal with the subsidies issues.

Module 1

1. Do you consider that Module 1 appropriately addresses distortions of the internal market through foreign subsidies when granted to undertakings in the EU?

Yes – No – Other

Module 1 gives a broad scope of intervention to the Commission, rendering the need for a clear jurisdictional, procedural and substantive framework all the more necessary.

The White Paper indicates that the notion of foreign subsidy is built around the subsidy definition of the EU Anti-Subsidy Regulation. However, footnote 65 of the White Paper also makes a reference to the Commission Notice on the notion of state aid, which suggests that the scope may be broader. In any case, the definition of foreign subsidies should not be overly broad and should be coherent with the gap in trade defence instruments the Commission aims to address.

The indicators listed in section 4.1.3.2 seem very broad and will not contribute to clarifying the scope of subsidies caught under the definition. In this context, it may be preferable to focus the assessment of Module 1 on pre-defined categories of subsidies likely to distort the internal market (as outlined in section 4.1.3.1).

2. Do you agree with the procedural set-up presented in the White Paper, ie, two-step investigation procedure, the fact-finding tools of the competent authority, etc.? (See section 4.1.5. of the White Paper)

Yes – No – Other

The procedural set-up as such seems adequate but the precise procedural framework still needs to be further clarified. A 2-step investigation procedure means that in-depth review will be limited only to those more problematic cases (as in merger control). Such a system is efficient.

However, from a jurisdictional perspective it appears relevant to clarify the sequence in which each authority (EU and national) will be allowed to conduct its own investigation. There should be clear communication, coordination and cooperation between the various authorities throughout the procedure to make sure the procedure is as efficient as possible. Furthermore the statute of limitation should be short in order to guarantee that investigations take place in a timely manner.

In relation to fact-finding tools, on-site visits in third countries may be difficult. As for information requests, large private groups may find it difficult to trace where and when a subsidy has been granted.

3. Do you agree with the substantive assessment criteria (section 4.1.3) and the list of redressive measures (section 4.1.6) presented in the White Paper?

Yes – No – Other

In relation to the substantive assessment criteria, apart from the indicators listed in section 4.1.3.2 which appear to be vague, another issue is the notion of “distortion of the internal market” which is somewhat unclear. It may be preferable to refer instead to distortions of competition in order to have a clearer view on the types of harm caught under the definition.

On a more general note, applying existing substantive concepts developed under EU state aid rules would allow relevant stakeholders to rely on existing case-law and guidance to have a clear understanding of the concepts used.

The list of redressive measures in section 4.1.6 is heavy and fragmented but may also raise problems to the extent that foreign governments are involved (eg, redressive payments to the EU or member states).

4. Do you consider it useful to include an EU interest test for public policy objectives (section 4.1.4) and what should, in your view, be included as criteria in this test?

Yes – No – Other

The EU interest test as presented in the White Paper should allow the distortion caused by foreign subsidies to be exempted (ie, case closed) to the extent that the subsidy in question serves a wide range of EU interests. This test would be similar to the efficiencies test developed under Article 101(3) TFEU. In our view, it is good to have such a flexible test as it allows to avoid rigidity and false negatives. However, to make sure this test is able to serve its purpose, it should not make it too difficult to demonstrate the positive impact of the foreign subsidy in question. This test needs to be practical and sufficiently broad to take into account all EU policy interests.

Furthermore, at a minimum the existing body of EU state aid policies could be used as a benchmark to determine what are the EU interests. Indeed, where specific aid would be compatible if granted by an EU member state, it should also be compatible where granted by a foreign government.

5. Do you think that Module 1 should also cover subsidised acquisitions (eg, the ones below the threshold set under Module 2)? (section 4.1.2)

Yes – No – Other

The idea of introducing thresholds under Module 2 is to create legal certainty by limiting the number of situations in scope of the Commission’s review. It would seem counterproductive to also allow the review of a foreign subsidy which does not fulfil the thresholds of Module 2 under Module 1. Modules 2 and 3 should be viewed as “lex specialis” to Module 1.

6. Do you think there should be a minimum (de minimis) threshold for the investigation of foreign subsidies under Module 1 and if so, do you agree with the way it is presented in the White Paper (section 4.1.3)?

Yes – No – Other

A de minimis threshold is indeed needed should be set at a much higher threshold in the wider context of foreign subsidies from third countries, in particular where the subsidy is granted in the home country of the company.

7. Do you agree that the enforcement responsibility under Module 1 should be shared between the Commission and member states (section 4.1.7)?

Yes – No – Other

A sharing of institutional oversight has upsides and downsides. Local cases are better dealt with locally. It will be of paramount importance to limit the risk of parallel investigations with contradictory outcomes. There should also be time-limits in which follow-on investigations can be opened by other member states. Where two or more member states investigate, a referral mechanism to the Commission might be helpful. Generally, the Commission should have jurisdiction by default; this seems only logical considering the Commission has the last word on the application of the EU interest test and is the only authority able to make an “internal market” assessment of the distortive effects of the foreign subsidy in question.

Module 2

1. Do you consider that Module 2 appropriately addresses distortions of the internal market through foreign subsidies that facilitate the acquisition of undertakings established in the EU (EU targets)?

Yes – No – Other

The difficulty in applying such a tool lies in establishing the causal link between the foreign subsidy and the acquisition in question. Further, the concept of “potentially subsidized acquisition” is not sufficiently detailed and it will be difficult for large companies to determine when and where a subsidy was granted and whether it facilitated a specific acquisition.

2. Do you agree with the procedural set-up for Module 2, ie, ex ante obligatory notification system, 2-step investigation procedure, the fact-finding tools of the competent authority, etc.? (See section 4.2.5 of the White Paper)

Yes – No – Other

The timing of a Phase I review should be aligned with the timeline of a merger control Phase I review to avoid unnecessary delays. A general mandatory notification, however, seems excessive. Such an obligation should be limited to specific cases, eg, where the company was found to have received Module 1 subsidies in the past.

Another option could also be to incorporate this procedure into the merger control procedure by modifying the EUMR to cover subsidies assessment.

3. Do you agree with the scope of Module 2 (section 4.2.2) in terms of definition of acquisition, definition and thresholds of the EU target (4.2.2.3) and definition of potentially subsidised acquisition?

Yes – No – Other

Thresholds should be clear-cut and quantitative.

The notion of “material influence” has never been applied before at EU level and is not a standard used under EU merger control. Using such a standard which allows for the review of an acquisition of non-controlling stakes in the context of an already complex tool is likely to lead to inconsistencies. Furthermore it is unclear how an acquirer of a non-controlling stake could distort the internal market. Venture capital investments and/or portfolio investments should in any case be excluded from the scope of review.

In relation to the definition of an EU target, one of the thresholds suggested is based on expected revenues. Using such a non-quantifiable threshold is likely to lead to diverging interpretations and ultimately legal uncertainty.

Finally, in relation to the notion of potentially subsidised acquisitions, including within the scope future foreign subsidies carries a risk of legal uncertainty.

4. Do you consider that Module 2 should include a notification obligation for all acquisitions of EU targets or only for potentially subsidised acquisitions (section 4.2.2.2)?

Yes – No – Other

Subject to the above, only potentially subsidised acquisitions should be notified to not unduly increase the administrative burden of foreign investors and/or restrict business activities.

Furthermore, a constitutional question could be raised over the Commission’s competence in intervening in relation to all acquisitions of EU targets (ie, de facto FDI control by the Commission).

5. Do you agree with the substantive assessment criteria under Module 2 (section 4.2.3) and the list of redressive measures (section 4.2.6) presented in the White Paper?

Yes – No – Other

The range of remedies should be aligned with that available under EU state aid (recovery).

6. Do you consider it useful to include an EU interest test for public policy objectives (section 4.2.4) and what should, in your view, be included as criteria in this test?

Yes – No – Other

See answer in relation to the EU interest test under Module 1.

7. Do you agree that the enforcement responsibility under Module 2 should be for the Commission (section 4.2.7)?

Yes – No – Other

This would be consistent with the scope of the tool which is limited to EU targets, meaning targets with a certain level of activities/turnover in the EU.

Module 3

1. Do you think there is a need to address specifically distortions caused by foreign subsidies in the specific context of public procurement procedures?

Yes – No – Other

This is an area where the need for a monitoring tool is most pressing in order for contracting authorities to be able to take into account foreign subsidies and their potentially distortive effects which may have a strong impact on public procurement procedures (namely by allowing a bidder to bid significantly below market price or below cost).

However, it may be questioned whether a new procedural layer is needed or whether this issue could be dealt with through a modification of existing public procurement rules to allow contracting authorities to deal with subsidies.

2. Do you think the framework proposed for public procurement in the White Paper appropriately addresses the distortions caused by foreign subsidies in public procurement procedures?

Yes – No – Other

In terms of procedural set-up it is important for the notification procedure to impose a minimal burden on foreign bidders and contracting authorities alike. The set of information required in the notification as detailed in the White Paper is broad (including information on subcontractors and suppliers) and includes “expected subsidies” to the detriment of legal certainty.

3. Do you consider the foreseen interplay between the contracting authorities and the supervisory authorities adequate, eg, as regards determination of whether the foreign subsidy distorts the relevant public procurement procedure?

Yes – No – Other

Review timelines of supervisory authorities would have to be short but also aligned with the timeline of the tender process.

If existing public procurement rules could be modified to authorise public authorities to take into account foreign subsidies, one might question whether Module 3 and the involvement of a supervisory authority is in fact needed.

Furthermore, the involvement of a supervisory authority in bidding procedures by constitutionally autonomous contracting authorities could raise constitutional and subsidiarity issues under EU and member state law.

4. Do you think other issues should be addressed in the context of public procurement and foreign subsidies than those contained in this White Paper?

Yes – No – Other

Interplay between Modules 1, 2 and 3

1. Do you consider that (a) Module 1 should operate as stand-alone module, (b) Module 2 should operate as stand-alone module, (c) Module 3 should operate as stand-alone module, (d) Modules 1, 2 and 3 should be combined and operate?

Yes – No – Other

The White Paper suggests that subsidised acquisitions of EU targets falling outside the scope of Module 2 and subsidised bidding in public procurement procedures falling outside the scope of Module 3 could still be reviewed under Module 1.

However, the three modules should operate independently in order to guarantee legal certainty and could in fact be integrated into existing legislation (at least in the case of merger control and public procurement).

Questions relating to foreign subsidies in the context of EU funding

1. Do you think there is a need for any additional measures to address potential distortions of the internal market arising from subsidies granted by non-EU authorities in the specific context of EU funding?

Yes – No – Other

Economic operators competing for EU funding should also be able to operate on a level playing field. It would seem sufficient to modify the Financial Regulation in order to include foreign subsidies within its scope.

2. Do you think the framework for EU funding presented in the White Paper appropriately addresses the potential distortions caused by foreign subsidies in this context?

Yes – No – Other

See answer above.