EU Regulation regulates third-country subsidies

  • 01/26/2023
  • Reading time 4 Minutes

A new European Union (EU) Regulation is to close the regulatory gap for third-country subsidies. This will entail new hurdles for M&A transactions (mergers & acquisitions) and participation in public procurement procedures.

A few days ago, Regulation (EU) 2022/2560 came into force, which deals with third-country subsidies that distort the internal market. It will apply from July 12, 2023 and is intended to eliminate distortions of competition caused by third-country subsidies.

While subsidies from EU member states are subject to the strict rules of EU state aid law and thus to control by the European Commission, subsidies from non-EU countries have so far been subject to a regulatory gap which is now to be closed. In the future, the new Regulation will have an impact in particular on M&A transactions (mergers & acquisitions) and public procurement procedures.

Three new tools for the European Commission

The new regulations provide for three tools for the EU Commission’s investigation of financial contributions granted by non-EU countries: 

•    a notification-based merger control for M&A transactions,

•    a notification-based control for public procurement procedures, and

•    the possibility of investigating third-country subsidies on the European Commission’s own initiative.

In the following cases, there is a notification requirement:

M&A transactions must be notified if

•    at least one of the merging companies, the acquired company or the joint venture is established in the EU and generates sales of at least EUR 500 million in the EU, and
•    the participating companies received financial contributions from non-EU countries in a total amount of more than EUR 50 million during the last three years. 

The notification must be made after conclusion of the contract, publication of the takeover offer or the acquisition of a controlling interest, however, in any case prior to the closing. 

When participating in a public procurement procedure, the receipt of third-country financial contributions must be notified to the contracting authority if

•    the estimated contract value is at least EUR 250 million, and
•    the economic operator has received financial contributions in a total amount of at least EUR 4 million per third country in the past three years.

If these requirements are not met, a declaration must be submitted listing the third-country financial contributions received and confirming that they are not subject to a notification requirement.

Consequences of a failed notification

Failure to notify can result in severe penalties for the companies involved, with fines of up to 10 % of the total sales generated by the companies in the previous fiscal year.

However, there is no notification requirement until October 12, 2023.

Examination of third-country subsidies irrespective of notification thresholds

•    The Commission may also act on its own initiative without regard to the above notification thresholds.
•    The right of initiative also covers financial contributions granted by non-EU countries in the past five years prior to July 12, 2023.
•    The Commission may even review already consummated M&A transactions and order that they be reversed.

Receipt of “third-country financial contribution” as a prerequisite for notification obligations

The notification requirements presuppose the “receipt of third-country financial contributions”. This term has a very broad scope of application. It is sufficient to obtain an advantage through a direct/indirect financial contribution from the non-EU country. Such advantage can even be deemed to arise from the provision or purchase of goods or services by or from private entities. In practice, this broad definition will lead to considerable investigative effort and assessment difficulties for the companies concerned.

Consequences of the Regulation

In future, companies will have to carefully check not only possible EU state aid issues in M&A transactions and public procurement procedures, but also whether these are covered by the scope of application of the new EU Regulation and whether this results in notification obligations. In the future, companies should track and document the receipt of financial contributions from non-EU countries in order to avoid possible sanctions. They should take this considerable amount of time and cost into account already prior to M&A transactions and when participating in public procurement procedures and seek professional advice if they have any questions on the subject.

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