This is a guest post by Victor Crochet of Van Bael & Bellis
The European Commission puts forth its legislative proposal to tackle “foreign subsidies” in the European Union. The text of the proposal can be found here.
There has been lots of discussions on this blog over the Commission’s White Paper on foreign subsidies published by the European Commission last summer (see here, here and even here).
The European Commission’s proposal more or less follows the structure of the White Paper by addressing foreign subsidies ‘actually or potentially negatively affects competition on the internal market’. The proposal focuses on corporate acquisitions, public procurement bids, as well as any undertaking ‘engaging in an economic activity in the internal market’. The potential scope is thus very broad.
In terms of determining what constitutes a ‘distortion on the internal market’, the proposal contains a list of factors to take into account and also an illustrative list of subsidies ‘most likely to distort the internal market’ (e.g. direct facilitation of corporate acquisition, unlimited guarantees). Financial contributions of less than €5 million over the past three years are generally not considered distortive. This substantially raises the much criticised de minimis threshold of €200,000 proposed in the White Paper. In addition, a rather vague ‘balancing’ test is provided for, giving the EU important discretion to exempt subsidies it considers will have ‘positive effects on the development of the relevant economic activity’.
Enforcement is partly modelled on the EU’s existing competition and State aid frameworks, although the Commission will be in the driver’s seat with Member States having an advisory role only (similar to trade defence). Investigations will follow a two-step model with a ‘preliminary review’, followed by an ‘in-depth investigation’, if justified. There is also the possibility to take ‘interim measures’. Importantly, there is no formal complaints mechanism. The review is thus ex-officio and ex-post for general subsidies. In contrast, for public tenders and corporate acquisitions, there is an obligation of pre-notification. This applies to public tenders with a value above €250 million, and to corporate acquirers with a turnover of €500 million having received a foreign financial contribution of at least €50 million in the past three years.
At the end of the in-depth investigation, if distortive subsidies are identified, the investigated entity may either offer binding commitments or have ‘redressive measures’ imposed on it. These can include divestments; licensing of technology; providing access to infrastructure; or reductions in capacity or market presence. Notably, fines of up to 1% of annual turnover can be imposed on companies which ‘intentionally or negligently’ provide incorrect or misleading information, and fines of no less than 10% of annual turnover can be imposed for failure to comply with a redress decision or agreed commitments. Failure to promptly comply can also lead to additional ‘periodic penalties’ of up to 5% of daily turnover. The incentives to cooperate in the investigations will thus be high and calls for a robust implementation of the brief article on rights of defence (for instance, there is no mention of an independent Hearing Officer as exists in both EU competition and trade defence proceedings).
The proposal is now out of the hands of the European Commission. It is the European Parliament’s turn to debate and amend the European Commission’s proposal before sending it to the Council. The Council can then make further amendments, which in turn would have to be agreed by the European Parliament and so on. It is thus likely that it will take some time, possibly a couple of years, until the legislation is finalised.
For those interested in the potential WTO implications of this proposal, Marcus Gustafsson and I recently published a paper highlighting how to ensure that the final instruments are in line with WTO rules (accessible here). Most of the concerns we expressed with regard to the instruments put forth in the White Paper are equally applicable to the legislative proposal.
Putting aside the procedural differences between State aid rules and foreign subsidies rules or the different remedies available to tackle them, one of our main concerns lies with the raison d’être of the two instruments.
The goal of State aid rules is not to prevent State aid/subsidisation in the European Union altogether but rather to avoid a race to the bottom between EU Member States by centralizing the granting of aid with the European Union’s institutions. Indeed, there is no prohibition on aid being granted by the European Union and its related agencies. On the other hand, the proposed foreign subsidies rules put forth by the European Commission targets all forms of governmental assistance without distinction as to whether this assistance is granted by a central government (as the European Union) or by regional governments (as EU Member States). Such a difference in treatment would be difficult to justify under WTO rules.
