EC sets up tools against harmful foreign subsidies

These unfair practices distort markets and provide competitive advantages due to the support received

Photo: EU Valdis Dombrovskis, Margrethe Vestager and Thierry Breton (L_R).

The Commission proposed this week a new instruments to address potential distortive effects of foreign subsidies in the Single Market, as to make sure every company, that comes to operate in the EU respects the “host’s house rules”. 

The legislative proposal aims at closing the regulatory gap in the Single Market, as subsidies granted by non-EU governments currently go largely unchecked, while subsidies granted by Member States are subject to close scrutiny.

The new tool is designed to effectively tackle foreign subsidies that cause distortions and harm the level playing field in the Single Market in any market situation.

EC Executive Vice-President Margrethe Vestager, in charge of competition policy and responsible for the cluster Europe Fit for the Digital Age, commented that Europe is a trade and investment superpower. Openness of the Single Market is our biggest asset, but openness requires fairness, she said recalling that in 2019 the stock of foreign direct investments was worth more than €7tn, or a quarter of all the FDIs in the world.

“For more than 60 years, we've had a system of State aid control to prevent subsidy races between our Member States. And today we are adopting a proposal to also tackle distortive subsidies granted by non-EU countries. It is all the more important to ensure a level playing field in these challenging times, to support the recovery of the EU economy,” EVP Vestager explained.

According to EC Executive Vice-President Valdis Dombrovskis, responsible for An Economy that Works for People and for Trade, unfair advantages accorded through subsidies have long been a scourge of international competition.

He said that the Commission has made a priority to clamp down on such unfair practices, as they distort markets and provide competitive advantages on the basis of the support received, rather than on the quality and innovativeness of the products concerned.

The new proposal complements our international efforts in this regard and it will level the playing field within the EU and encourage positive change, while maintaining the openness that is so vital to our economic strength, he made clear.

Our Single Market is fiercely competitive and attractive to foreign investors and companies, EU Commissioner for the Internal Market, Thierry Breton, stressed noting that “being open to the world only works if everyone who is active in the Single Market, invests in Europe or bids for publicly funded projects, plays by our rules”.

Today we are closing a gap in our rule book to make sure that all companies compete on an equal footing and that no one can undermine the level playing field and Europe's competitiveness with distortive foreign subsidies, Commissioner Breton asserted.

So far, none of EU rules on competition, public procurement and trade defence applies to foreign subsidies which provide their recipients with an unfair advantage when acquiring EU companies, participating in public procurements in the EU or engaging in other commercial activities in the EU. Such foreign subsidies can take different forms, such as zero-interest loans and other below-cost financing, unlimited State guarantees, zero-tax agreements or direct financial grants.

Under the proposed regulation, the Commission will have the power to investigate financial contributions granted by public authorities of a non-EU country which benefit companies engaging in an economic activity in the EU and redress their distortive effects, as relevant.

It suggests the introduction of three tools, two notification-based and a general market investigation tool. One of these is a notification-based tool to investigate concentrations involving a financial contribution by a non-EU government, where the EU turnover of the company to be acquired, or of at least one of the merging parties, is €500m or more and the foreign financial contribution is at least €50m.

Other tool will investigate bids in public procurements involving a financial contribution by a non-EU government, where the estimated value of the procurement is €250m or more.

A separate instrument is proposed to investigate all other market situations and smaller concentrations and public procurement procedures, which the Commission can start on its own initiative (ex-officio) and may request ad-hoc notifications.

The acquirer or bidder will have to notify ex-ante any financial contribution received from a non-EU government in relation to concentrations or public procurements meeting the thresholds. Pending the Commission's review, the concentration in question cannot be completed and the investigated bidder cannot be awarded the contract. Binding deadlines are established for the Commission's decision.

If a company does not comply with the obligation to notify a subsidised concentration or a financial contribution in procurements meeting the thresholds, the Commission may impose fines and review the transaction as if it had been notified.

The general market investigation tool will enable the Commission to investigate other types of market situations, such as greenfield investments or concentrations and procurements below the thresholds, when it suspects that a foreign subsidy may be involved. In these instances, the Commission will be able to start investigations on its own initiative and may request ad-hoc notifications.

On redressive measures and commitments, the proposed regulation includes a range of structural or behavioural remedies, such as the divestment of certain assets or the prohibition of a certain market behaviour.

For notified transactions, the EU executive will also have the power to prohibit the subsidised acquisition or the award of the public procurement contract to the subsidised bidder.

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