Levelling the playing field on the internal market by competition law and state aid control rules has been the EU’s mantra from the very beginning. Meanwhile, the EU has become both the world’s main destination for foreign direct investment, with EUR 7,197 billion worth of foreign direct investment stocks held by third-country investors in the EU at the end of 2018. In 2016, 3% of European companies were owned or controlled by non-EU investors representing 35% of total assets and around 16 million jobs, with the increase in investments by state owned and offshore companies.
Against this background, the European Commission has identified a gap in its rulebook for keeping the internal market fair game. EU State aid rules protect the level playing field from State aid awarded by the Member States. However, neither State aid control rules nor other instruments such as competition rules or EU’s trade policy instruments allow the Commission and the Member States to control foreign subsidies which the non-EU authorities award to undertakings active on the EU market. To address this gap, the European Commission published on 17 June 2020 a White Paper launching a public consultation. The proposed instruments may also have implications on the countries in the EU accession process.
The enforcement gap
The main concerns related to foreign subsidies are: (i) market distortions brought about by the general market operation of economic operators active in the EU which receive foreign subsidies; (ii) acquisitions of EU undertakings financed though foreign subsidies; and (iii) participation of bidders financed through foreign subsidies in public procurement procedures in the EU. Neither of these concerns can be systematically addressed by the instruments currently available to the EU. The framework designed by the Commission in the White Paper to close the enforcement gap consists of three modules, with the first one addressing the general market distortions, and the other two focused on specific issues of acquisitions and public procurement.
Module 1 – General instrument to capture foreign subsidies
The rationale behind the need for control of foreign subsidies is the same as the rationale behind the EU State aid control. Foreign subsidies, in the same manner as those granted by the Member States, can distort competition in the internal market and allow the less efficient operators to strengthen their positions at the expense of more efficient ones. Moreover, there may be other, non-economic objectives behind the subsidies provided by foreign authorities, such as political or security related interests.
Within the scope of Module 1, the competent supervisory authorities (which may be either the Commission or the relevant Member State authorities) would have the power to conduct ex-post control of a suspected foreign subsidy granted to a beneficiary established or otherwise active in the EU. The Module would not apply to goods imported into the EU, which are covered by the EU trade defence instrument. The first step would be a preliminary review to assess whether there is a foreign subsidy which could distort competition. This would apply in any market situation, including the review of acquisitions facilitated by foreign subsidies (which are also separately addressed under Module 2). If the competent authority concludes that either there is no subsidy, or the subsidy is not capable of distorting competition, or that the case is not a priority, it can close the case. Otherwise, the authority would open an in-depth investigation into the subsidy.
The Commission has proposed that the subsidies under the threshold of EUR 200.000 within a period of three years (in line with the de minimis threshold under the EU State aid rules) be considered unproblematic. The Commission has also specified which subsidies would be considered “likely to distort the internal market”, such as export financing, subsidies to ailing undertakings, unlimited government guarantees, operating aids in the form of tax relief, and those directly facilitating an acquisition. For the assessment of all other aids, the Commission included a non-exhaustive list of indicators, such as the relative size of the subsidy, size of the beneficiary, situation on the market, and the market conduct and level of activity of the beneficiary.
The review would include a balancing test, where the authority would check if the possible distortion may be mitigated by a positive effect of a subsidy within the EU, in which case it would close the investigation. If the authority finds that a subsidy may have or may distort competition in the internal market, it would have the power to impose “redressive measures”. If the beneficiary proposes measures to mitigate the negative effect of the subsidy, the competent authority could also impose a decision with commitments if it finds such commitments adequate.
With respect to redressive measures, the Commission has proposed a variety of alternative measures for the competent authority to choose from depending on the specific features of the case. Following the principle from the EU State aid rules, the primary measure would be the recovery of aid by the granting foreign authority. However, in practice that may be difficult to enforce (and verify). Therefore, the Commission proposed alternative redressive measures, ranging from structural and behavioural, to redressive payments by the beneficiary to the EU or the Member States. Non-compliance by the beneficiary would result in fines and periodic penalties.
Module 2 – Foreign subsidies facilitating the acquisition of EU targets
In the context of acquisitions, the main concern of the Commission is that a subsidised acquirer may afford to pay a higher price to acquire the asset than it would otherwise have paid, which may lead to distortion of the valuation of EU assets and, at the same time, prevent non-subsidised acquirers from achieving efficiency gains from the acquisition or accessing key technologies. Foreign subsidies can facilitate acquisitions either directly, through the financing of a specific acquisitions, or indirectly, through the financial strengthening of a beneficiary or its related entity, which would in turn facilitate an acquisition.
Under Module 2, the competent supervisory authority would review the planned acquisitions ex ante under a compulsory notification mechanism. Such compulsory notification mechanism is intended as parallel to the merger control review. The review of foreign subsidy would consist of the preliminary review and an in-depth investigation. If the in-depth investigation would show that an acquisition facilitated by a foreign subsidy distorts the concerned market, the competent authority could either accept commitments from the notifying party to remedy the distortions, or prohibit the acquisition. The competent authority would also have the power to review acquisitions ex-officio, and order unwinding of a distortive acquisition which has already been completed.
This review procedure would be conducted in parallel with the EU merger control, and would encompass all potentially subsidised acquisitions, i.e. acquisition where a notifying party has received a financial contribution by a foreign authority in the past three years or expects such contribution in the coming year. The Commission has also proposed to consider certain qualitative and quantitative notification thresholds related to the target, and/or the volume of a financial contribution from a foreign authority relative to the acquisition price, although it has not specified any numbers in the White Paper. However, these thresholds should be carefully crafted to catch all potentially problematic acquisitions but not to cause unnecessary additional red tape.
To determine whether a subsidised acquisition could distort competition, the competent authority would apply the same balancing test and the same set of indicators proposed under Module 1. The standstill obligation would apply during the review. The review process would be subject to a deadline, which is not yet defined, and, presumably, to a presumption of approval if the authority does not make a decision within the deadline.
Module 3 – Foreign subsidies in public procurement procedures
Public procurement procedures on the internal market are open to both EU and non-EU economic operators, and award criteria are designed to ensure the selection of the most favourable offer in a transparent manner and regardless of the origin of the bidder. However, subsidised companies may be able to make more favourable bids in terms of price than more efficient non-subsidised companies, and the price is usually the main criterion for the contract award.
Under the instrument proposed within the scope of Module 3, EU public buyers would be required to exclude from public procurement procedures those economic operators that have received distortive foreign subsidies within the period of three years preceding the procurement or expect to receive such financial contribution during the contract term. The scope of this instrument would be defined taking into account the EU’s obligations under the WTO Government Procurement Agreement (GPA) and bilateral agreements providing for access to the EU procurement market.
The review would be conducted ex-ante, following a notification of foreign subsidy which the bidder would be obliged to submit along with the bid. In order to limit the review process only to those subsidies which have the actual potential to distort competition for the relevant contract, the Commission has proposed to introduce certain thresholds and additional indicators for notification. A failure to comply with the notification obligation could be sanctioned by the contracting authority imposing significant fines and even exclusion from the procurement procedure or a termination of an ongoing contract. If the competent authority would determine that the bidder had received a subsidy with the potential to distort competition in the public procurement procedure, it would be authorized to exclude the bidder from the procedure, and even from the future procedures for a period of maximum three years, subject to the possibility for the operator to prove that it no longer benefits from a distortive subsidy.
Problems ahead and implications for the accession countries
It is expected that the White Paper will be the subject of a vigorous debate within the EU and the proposal will most likely suffer material changes before its adoption in a form of a piece of legislation. Many crucial issues are left to be clarified and elaborated in more detail.
Many practical problems may arise in the process of enforcement, mainly stemming from the lack of transparency regarding the subsidies granted by the non-EU authorities. The current level of information on foreign subsidies is limited, mainly due to the lack of transparency and low compliance with the obligation to notify subsidies under the WTO Agreement on Subsidies and Countervailing Measures. The competent authorities within the EU could face serious obstacles in the process of collecting information from the beneficiaries, especially when a subsidy is not awarded directly to a beneficiary in the EU, but to its parent company located outside the EU, which then in turn finances the subsidiary located in the EU through intragroup transactions. Furthermore, an undertaking in the EU may also receive financing at preferential terms from foreign banks upon instruction of foreign states, or through cooperation arrangements between third countries and EU local authorities or development banks. Finally, subsidies could take many sophisticated forms which are difficult to uncover even when there is a cooperation from the granting authorities.
Furthermore, the obligatory ex-ante notification of subsidised acquisitions could create a lot of additional (unnecessary) red tape if the thresholds and the conditions for notification are not carefully designed. It could lead to many cautionary notifications of transactions involving a non-EU party.
If the proposal from the White Paper becomes EU law, it is to be expected that the accession countries would have to harmonize their laws with this new acquis. It that happens, it may significantly impact the FDI landscape in the accession countries. In Montenegro, for example, during the period 2016-2019, investments from the Russian Federation, United Arab Emirates, Serbia, Switzerland and Turkey accounted for one third of the total FDI inflow in this period. In the first four months of 2019, the largest FDI inflows came from the Netherlands, Croatia and Germany, but Russia and the United Arab Emirates remained the most important countries, with investments mainly in the sector of tourism. In Serbia, in contrast, 70% of investments is from EU, followed by Russia (9.1%), Switzerland (4.7%) and Hong Kong (3.5%). In any event, taking into account the difficulties which the regional economies will face as a consequence of the COVID19 crisis, creating additional obstacles to foreign investments will not be viewed as a positive development. Not even every EU Member State equally cares about the origin and motivation of funds invested on their markets. Therefore, the debate on the White Paper will be an interesting one to follow in the coming months.
 White paper p.6
 Source: https://china-cee.eu/2019/08/02/montenegro-economy-briefing-overview-of-foreign-direct-investment-trends-in-montenegro/#:~:text=The%20most%20significant%20EU%20countries,the%20tourism%20and%20energy%20sector.