State aid is one of the most important areas of competition law and at the same time one that generates the greatest political debate, due to its capacity to distort the market and even to discriminate against some operators in relation to others, violating the principles and freedoms of a market economy.

While the Member States' aid regime is circumscribed by the rules of the Treaty on the Functioning of the EU ("TFEU"), EU antitrust law does not provide an adequate response, if any, when public resources or subsidies come from third states to operators operating within the EU.

For its part, European anti-subsidy regulation in the form of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), developed within the WTO, also does not seem to cover the import of services or financial flows related to the establishment and operation of companies in the EU.

As a result, neither competition authorities nor Member States currently have adequate tools to prevent these potential foreign subsidies from outside the EU from distorting the market, affecting the pricing policies of companies operating in the EU or leading to "dumping" measures thanks to the public resources received.

In an attempt to respond to these shortcomings and the absence of effective control tools on foreign subsidies to operators from third countries operating in the EU, the Commission launched a proposal for a new regulation to tackle distortions caused by foreign subsidies in the single market granted by third countries to companies (the "Proposal") on 5^th May.

In this way, the European Commission has committed itself, as part of the new industrial strategy for Europe, to strengthen mechanisms and tools to combat distortions caused by foreign subsidies. This new instrument falls within the Commission's remit, without prejudice to possible collaboration with national competition authorities through the network of national competition authorities ("ECN" network).

The impact assessment accompanying the Proposal has shown that there are many cases where companies with a significant presence in the internal market have received financial contributions from public authorities of third countries, for example through loans not granted on market terms or specific individual payments. The review of the rules will make it possible to investigate such situations and to enforce competition rules by controlling those entities which, benefiting from excise duties and sectoral incentives, affect the competitive market in the Union by their behaviour and distort it.

The Proposal includes part of the content of the White Paper presented in June 2020 on a level playing field for foreign subsidies, but also approximates legislation on mergers.

It empowers the European Commission to exercise powers of investigation particularly, as well as actions to remedy the effects and distortions that such subsidies can have on the market. In addition, a new mandatory notification and review regime is introduced for certain mergers, complementing public procurement rules. 

To achieve this, the options considered in the impact assessment were a) to develop new guidelines; b) to change rules and regulations; and c) to develop new instruments.

In addition to the limitation to goods, existing EU trade policy and anti-subsidy rules apply, in principle, only to subsidies granted to companies in the granting jurisdiction (third country). Therefore, these features of the EU anti-subsidy regulation could only be modified if the SCM Agreement is amended.

Nor has it been considered a politically realistic option to change the state aid regime, as the only way to do so would be to adapt the rules in such a way that a Member State could grant countervailing state aid to an EU company if its competitor receives foreign subsidies. This would imply a similar application to the counterpart aid foreseen in R&D&I programmes to all regional aid policies and guidelines. Since such measures do not directly address the distortions caused by foreign subsidies, but would, on the contrary, start a race to the bottom that could harm the market, the development of such measures was ruled out.

For all these reasons, the decision has finally been taken to tackle this problem by developing a new instrument.

The Proposal has two specific objectives, identified in the Impact Assessment:

1. Identifying the most distorting subsidies. This point seeks to address the lack of transparency and generalised information on subsidies at the international level, on the one hand, and the lack of criteria and procedures for assessing possible distortion in the European market, on the other.
2. Mitigate and eliminate the distortion caused by these subsidies. The necessary tools to eliminate the distortions caused by foreign subsidies once they have been identified are not currently in place.

To this end, three tools have been proposed for introduction: two based on notifications and one based on investigative powers.

1. The first notification tool for the purpose of investigating concentrations involving a financial contribution from a third state, where the turnover to be acquired is EUR 500 million or more, and the contribution is at least EUR 50 million.
2. The second notification tool for the purpose of investigating bids on public contracts involving a financial contribution from a third state, where the estimated value of the procurement is EUR 250 million or more.
3. A third tool aimed at investigating all other market situations and smaller concentrations, as well as public procurement procedures, which could distort the single market and which the Commission could initiate, either ex officio or through ad hoc notifications.

In the first two cases, the acquirer or bidder must notify the Commission in advance of any financial contribution received from a third state meeting those thresholds, and the transaction cannot be completed unless the Commission so permits.

Consequently, the notification system will oblige acquirers or bidders to notify ex ante any financial contribution that the company has received from a government outside the Union, provided that the value of the transaction exceeds 250 million euros, so that, if a company fails to comply with the notification obligation, the Commission may impose fines of up to 10% of its total turnover in the preceding business year and, in the case of providing incorrect information in a notification, fines of up to 1% of its total turnover in the preceding business year.

The parameters to be considered for the decision include, inter alia, assessment criteria to determine to what extent the aid distorts the market, possible positive impacts that the aid could bring about, remedial measures to remedy negative effects, etc.

An objectively high turnover threshold has been proposed to limit the number of transactions requiring mandatory notification.

In short, if the Proposal for a Regulation is finally approved in these terms, there will be a rapprochement between the regulation of economic concentrations and the regulation on anti-subsidy policies, requiring a new competition analysis for those operations that fall within the objective scope, and all of this with the aim of improving the efficiency of the single market within the EU.

For further information, please contact:

Isabel Martínez Moriel

Partner

isabel.martinez@andersentaxlegal.es