On May 5, 2021, the Commission proposed a draft regulation to tackle potential distortions in the internal market caused by foreign subsidies (“Draft Regulation”).
The Draft Regulation—the adoption of which is a “key action” of the EU Industrial Strategy—is born out of a concern that the current regulatory framework makes for an uneven playing field. While there are rigorous EU State aid rules concerning subsidies issued by EU Member States, foreign aid is not scrutinized under the same standards.
The Commission has concluded that none of the currently available instruments (antitrust, trade, public procurement, and foreign investment rules) can be used to level the playing field between undertakings that receive foreign aid, and undertakings that do not. The Draft Regulation aims to fill this gap.
Definition of “Foreign Subsidy”
The Draft Regulation sets out rules and procedures for investigating foreign subsidies that distort the internal market and for remedying such distortions. Under the Draft Regulation, a “foreign subsidy” exists if three cumulative conditions are met:
- A financial contribution has been granted by the relevant public authorities of a non-EU The term “financial contribution” is not defined, but the Draft Regulation explains that such contributions may include, e.g., the transfer of funds or liabilities, foregoing revenue owed, etc.;
- This contribution confers a “benefit” to an undertaking engaging in an economic activity in the EU; and
- The contribution is limited “to an individual undertaking or industry or to several undertakings or ”
For a subsidy to be prohibited under the Draft Regulation, the Commission will have to establish the existence of a distortion of the internal market. A distortion of the internal market occurs when the foreign subsidy (i) can improve the competitive position of the beneficiary; and (ii) in doing so, negatively affects competition. Such a finding will be based on a series of parameters, including the amount, nature, purpose, conditions, and use of the subsidy.
By way of guidance, the Draft Regulation lists particular types of subsidies that are likely to distort competition on the internal market, e.g., those granted to an ailing undertaking, involving unlimited guarantees, or directly facilitating a transaction. It also sets out a de minimis criterion for subsidies of less than € 5 million over three fiscal years, which it considers unlikely to be distortive.
The Draft Regulation provides the Commission with broad review powers, including over subsidies that have already been paid out as of its enactment. Indeed, the Draft Regulation will apply to foreign subsidies received in the ten years prior to the start of its application where the subsidies still distort the internal market.
If the existence of a distortion is established, the Commission will then need to carry out a “balancing test” between “the negative effects of a foreign subsidy in terms of distortion on the internal market” and the “positive effects on the development of the relevant economic activity.” If negative effects prevail, the Commission can impose restorative measures and the beneficiary may offer commitments to remedy the distortions created by the foreign subsidy.
The Commission may also impose fines. The two types of fines available under the Draft Regulation mirror those under the EUMR. First, the Commission may fine undertakings that either fail to provide information requested by the Commission or provide misleading information up to 1% of the aggregated worldwide turnover of the undertaking and levy periodic penalty payments of up to 5% of the undertaking’s average daily aggregate worldwide turnover.
Second, if the undertaking does not comply with the measures imposed, breaches commitments, fails to notify a subsidy, or does not file an acquisition that was reportable, the Commission can levy fines of up to 10% of the company’s aggregated worldwide turnover.
The Commission’s investigative tools
The Draft Regulation envisages providing the Commission with three investigative tools. These include two obligations on companies to notify financial contributions to the Commission and one general market investigation tool.
- Notification of concentrations. The Draft Regulation imposes a mandatory pre-closing notification of concentrations where two cumulative conditions are met: (i) the undertaking being acquired or, in the case of a merger, at least one of the merging undertakings, is “established” in the EU and generates an aggregate turnover in the EU of at least € 500 million; and (ii) the undertakings concerned received from non-EU countries an aggregate financial contribution of more than € 50 million in the three calendar years prior to 
Notifiable transactions are subject to a standstill obligation pending the Commission’s investigation. At the end of its investigation, the Commission may prohibit the transaction if it finds that the foreign subsidy distorts the internal market and the undertaking offered no suitable commitment to remedy the distortion.
- Notification of public procurement bids. The Draft Regulation applies to public tenders worth € 250 million or more. For such tenders, it imposes a mandatory prior notification to the contracting authority (for further transmission to the Commission) of any foreign financial contribution received in the three years preceding participation in the bid. As a result, the public bid procedure may be significantly delayed as the contracting authority is prevented from awarding the contract during the Commission’s 60 day preliminary 
If the Commission decides to open an in-depth investigation, which lasts an additional 140 days, the contracting authority may not award the contract to the relevant party during that period unless the tender evaluation has established that the party has submitted the most economically advantageous tender. At the end of this process, if the Commission maintains a concern, it may either (i) accept commitments addressing any distortive effects; or (ii) prohibit the award of the contract in the absence of suitable commitments.
- Market Investigation The Draft Regulation also includes a general market investigation tool that grants the Commission broad powers to investigate of its own accord a potentially distortive foreign subsidy relating to an (EU or foreign) undertaking’s “economic activity” in the EU. These powers include the ability to request information, carry out on-site inspections (including outside the EU), as well as to order interim measures.
The procedure starts with a preliminary review followed by an in-depth investigation if the initial assessment reveals that a foreign subsidy could distort the internal market. If the Commission confirms a distortion at the end of this review, it may impose redressive measures or make binding any commitments offered to address the distortion.
Next steps and practical considerations
The Commission is collecting public feedback on the Draft Regulation until July 20, 2021. The feedback received will be published on the Commission’s website, and presented to the European Parliament and Council for discussion. The debate is likely to be extensive (particularly within the Council, as some Member States still appear doubtful about the need for a new instrument), and several open questions remain unaddressed.
Nevertheless, it is not too soon for companies backed by non-EU governmental entities to start considering the practical implications the Draft Regulation may have on their economic activities in the EU. Companies receiving any foreign subsidies would benefit from carefully factoring the requirements of the Draft Regulation into their decisions to invest and conduct economic activity in the EU in the coming years.
 Proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market, Explanatory Memorandum, pp. 1–2, COM(2021) 223 final of May 5, 2021, available at: https://ec.europa.eu/competition/international/overview/proposal_for_regulation.pdf. For a detailed analysis, see our May 19, 2021 Alert Memorandum “The European Commission Proposes A Far-Reaching Regulation To Tackle Foreign Subsidies.”
 Communication from the Commission on updating the 2020 new industrial strategy: building a stronger Single Market for Europe’s recovery, COM(2021) 350 final of May 5, 2021, p. 15, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021DC0350&from=EN.
 Draft Regulation, Article 1.
 Draft Regulation, Article 2.
 Draft Regulation, Article 3.
 Draft Regulation, Article 4 and Recitals 12–15.
 Draft Regulation, Article 3.
 Draft Regulation, Article 47. Based on its current text the Draft Regulation should not, however, apply to triggering events initiated before its date of application (notification would not be required with respect to already initiated public procurement procedures, or to concentrations for which the deal was already concluded, the public bid announced, or a controlling interest acquired).
 Draft Regulation, Article 5.1.
 Draft Regulation, Article 15.
 Draft Regulation, Article 15.5, 25 and 32.
 The notification obligation applies to the same types of transactions as under the EU Merger Regulation (“EUMR”).
 Draft Regulation, Article 18.
 Draft Regulation, Article 27. After the first phase review (25 working days), the Commission may open an in-depth second phase review (90 working days, plus 15 more if the undertaking offers commitments). Draft Regulation, Article 23.1. As explained below, Article 6 of the Draft Regulation enables the Commission to impose redressive measures and accept commitments offered by undertakings to remedy the distortions to the internal market caused by a foreign subsidy.
 Draft Regulation, Article 24.
 Draft Regulation, Articles 29 (2) and 31 (1).
 Draft Regulation, Article 31.
 Draft Regulation, Article 30.
 Draft Regulation, Articles 11, 12 and 13.
 Draft Regulation, Article 10. The Commission may impose interim measures if: (i) there are indications that a financial contribution constitutes a foreign subsidy and distorts the internal market; and (ii) there is a serious risk of substantial and irreparable damage to competition on the internal market.
 Draft Regulation, Article 8.2. On the contrary, if there are not enough grounds to do so, it will close the preliminary review and inform the undertaking. Draft Regulation, Article 8.3
 Draft Regulation, Article 9.4.