European Union Moves Toward New Framework for Foreign Subsidies Control

July 01, 2020

The European Commission has published a White Paper proposing to grant the Commission new enforcement powers to address competition distortions caused by companies operating in, or entering into, the European Union’s Internal Market, which benefit from subsidies from third-country governments.

A proposal by the European Commission (EC or Commission) is the latest in a series of measures demonstrating that the European Union (EU) has become increasingly sensitive with regard to the economic and financial influence of third-country governments on its Internal Market. These fears have increased during the coronavirus (COVID-19) pandemic, which has left many companies vulnerable.

The objective of the Commission’s proposed White Paper is to empower the EC to tackle foreign government subsidies currently beyond its reach. Under the current EU State Aid rules, the EC can only fully challenge subsidies when these are from member state governments. Other tools at the EC’s disposal have also proven to be insufficient to tackle unfair behavior of foreign state–backed companies active in the EU. Antitrust and merger rules do not specifically address the impact of foreign subsidies, and trade defense instruments do not cover trade in services, investment, or other financial flows in relation to the establishment or operation of companies in the EU.

While the White Paper seems to primarily be targeted at Chinese state-backed investors, its scope of application is much broader, extending to all third-country state-owned or -backed enterprises and offshore investors, and also including the United Kingdom post-Brexit.

The White Paper proposes three enforcement modules to regulate these subsidies:

  • A general review mechanism to control distortive effects of foreign subsidies within the EU
  • A mandatory and suspensory notification mechanism for foreign subsidy–backed acquisitions of EU assets
  • An obligation for bidders to disclose within a new suspensory review mechanism financial contributions by governments when participating in tender procedures in the EU

We previously reported the key features of the proposal under discussion prior to its publication. The following provides a more detailed overview of the published proposal.

What Is at Issue? The White Paper’s Notion of Foreign Subsidy

The White Paper defines a foreign subsidy as “a financial contribution by a government or any public body of a non-EU State (or a private body entrusted with functions normally vested in the government or directed by the government), which confers a benefit to an undertaking established in the EU or in a third country, and which is limited, in law or in fact, to an individual undertaking or industry or to a group of undertakings or industries.”

This broad definition encompasses not only direct payments but also the transfer of funds or liabilities, forgone or not collected public revenue, or the provision of goods, services, or other assistance at favorable conditions (benchmarked against typical market or industry practice).

There will, however, be a limit to the EC’s future enforcement: In order to target subsidies that actually have an impact, the EC will not investigate foreign subsidies below a threshold of €200,000 (approx. $225,000) to an undertaking over a period of three years.

As far as companies established outside the EU are concerned, subsidies are targeted only to the extent that a financial contribution is channeled to a related party in the EU or is used for investment into an EU company, or the subsidy is to take part in a public procurement procedure in the EU.

Module 1: Foreign Subsidy Control Mechanism in Case of Market Distortions

The “foreign subsidy control mechanism” would empower the EU and its member states’ authorities to detect and prohibit subsidies causing a distortion on the EU’s Internal Market, and potentially impose measures to correct said distortion.

Presumptions and Indications of a Distortion

The White Paper offers a typology of subsidy categories that presumptively have a distortive effect:

  • Subsidies in the form of export financing (unless in line with OECD rules)
  • Subsidies to companies in financial difficulties at conditions no market investor would offer
  • Government guarantees for debts or liabilities that are unlimited in amount or duration
  • Individual tax reliefs that are not generally applicable to all undertakings
  • Subsidies to directly finance an acquisition

Additionally, the EC will consider a number of other criteria to identify whether the EU Internal Market has been distorted, including the following:

  • The large size of the subsidy
  • The situation of the beneficiary (large company and/or with unutilized production capacities)
  • The situation on the market concerned (structural excess capacities, higher concentration, fast moving high-tech markets)
  • The market conduct in question (outbidding in acquisitions or distortive bidding)
  • A high level of activity of the beneficiary in the EU’s internal market

The “red flag” behavior typically prompting an EC investigation would include, e.g., production conditions below cost inconsistent with market benchmarks, sales prices not reflecting market prices, and/or production costs or investments in assets that are insufficiently or not at all profitable.

Procedure: A Two-Step Investigation

The White Paper foresees a two-step procedure: First, a preliminary review will take place to establish that a foreign subsidy may distort the internal market. Second, if the authorities reach the preliminary view that there is a foreign subsidy capable of distorting the proper functioning of the Internal Market, an in-depth investigation will follow; absent which, the case is closed.

Substantive Assessment: EU Interest Test

Should a distortion be found, the substantive test on the table is an “EU interest test,” according to which the distortive effects of the foreign subsidies would be weighed against positive effects brought about by the restriction of competition, such as the promotion of digital transformation, environmental protection, promotion of climate neutrality, job creation, security, public order, public safety, and resilience. This is somewhat similar to the balancing test used under current antitrust rules, but is more open to overall policy considerations such as job creation or resilience.

Remedial Measures: Structural Remedies, Behavioral Commitments, and Increased Transparency

If the in-depth investigation finds the existence of a foreign subsidy creating a distortion, remedial measures can be imposed or the company can be bound to commitments it has offered during the procedure. Requesting repayment of the foreign subsidy to the foreign country seems impossible to enforce in practice. Accordingly, alternative structural and behavioral remedies are proposed. Structural measures would include divestments of assets, reductions of capacity, or market presence. Behavioral remedies would include the prohibition of certain investments or a specific market conduct linked to the foreign subsidy or access and disclosure obligations (such as third-party access, licensing on FRAND terms, or the obligation to publish certain R&D results). Further measures proposed include remedial payments to the EU or to EU member states.

Enforcement here will go hand in hand with future reporting and transparency obligations, with regard to the financial relationships with the home government, of any company subject to remedial measures.

Shared Competences Between European Commission and Member States

Module 1 will function under a system of shared competences between the EC and the EU member states, same as in the area of antitrust. However, irrespective of the competent supervisory authority, the Commission remains exclusively competent to apply the EU interest test and member states are bound by the EC’s opinion. A consultation and coordination mechanism is designed to allocate the case to the EU authority best placed to handle it.

Module 2: Mandatory Notification Mechanism for Foreign Subsidy–Backed Takeover of EU Assets

Under Module 2, the EC proposes to review foreign subsidies granted to companies allowing them to invest in EU assets through a centralized “one-stop shop” review system, akin to the current merger control process. The EC—and not the member states—would review proposed acquisitions of EU assets backed by foreign subsidies through a mandatory notification regime. The foreign state backing might be through direct subsidies for a given acquisition or indirectly through increasing the financial strength of the acquiring undertaking.

Triggering Events: Qualitative and Quantitative Thresholds

Notification of share or asset acquisitions will be mandatory for a subsidized acquisition (1) of control within the meaning of the EU merger rules[1], or (2) of at least 35% of shares or voting rights, or (3) otherwise of “material influence”[2] over a target established in the EU that generates €100 million (approx. $112 million) in the EU, or where the assets are likely to generate a significant EU turnover in the future or exceed a quantitative threshold set in reference to the value of the transaction.[3]

Alternatively, the triggering event could be set with regard to the total amount of the financial contribution received over the last three years prior to notification or with regard to a given percentage of the purchase price. Lower thresholds could be applied if a member state with a smaller economy in the EU were concerned.

Procedure: Three-Step Procedure with Suspensory Effect

The idea is to establish a three-step procedure, the exact duration of which is yet to be determined: (1) a mandatory notification; (2) a preliminary review of whether the subsidy helped the deal; and (3) an in-depth probe if concerns arise.

Importantly, closing of the transaction would be suspended as long as the review were ongoing, similar to merger reviews and FDI screening.

Substantive Assessment: Facilitating an Acquisition, Distortion of Competition, and EU Interest Test

In the assessment, the supervisory authority would have to show not only that the foreign subsidy facilitated the acquisition but also a resulting distortion of the EU Internal Market. Such a distortion would be presumed in case of foreign subsidies directly facilitating the acquisition, i.e., where the link to the acquisition can be established. In all other cases, the same indicators used under Module 1 would be applied to assess the existence of a subsidy (i.e., the situation of the beneficiary, the situation on the market, and the level of activity of the transaction parties, in particular the target, in the EU Internal Market).

In addition, consideration will also be given to the sales process, i.e., to the existence of competing offers and whether the acquirer could outbid the competitors thanks to the financial contribution received. Also, and specific to Module 2, the EC will examine whether the acquirer can leverage a privileged market position on its domestic market (such as through special or exclusive rights).

Should a distortion be found, the same EU interest test would apply as for the control mechanism for foreign subsidies, i.e., the EC would weigh the distortion against the benefits brought about in other areas, such as environmental protection or the digital economy.

Remedial Measures: Remedies or Prohibition

Should the EC reach the conclusion that an acquisition is subsidized and has distortive effects on the market, it can either render a conditional clearance making structural or behavioral commitments offered by the acquirer legally binding or, as a last resort, decide to prohibit the acquisition altogether.

Module 3: Mandatory Notification and Exclusion of Subsidized Bids in EU Public Procurement Procedures

As with the other areas, public procurement rules do not currently specifically address the existence of foreign subsidies in bidding procedures. Only indirectly do the rules allow tender authorities to reject “abnormally low bids” that are financed by EU member state financial contributions incompatible with the State Aid rules of the Treaty on the Functioning of the European Union.[4]

While companies from countries that have not entered into an agreement with the EU providing for reciprocal opening of procurement markets, such as China, do not have guaranteed access to the EU’s procurement markets—and could theoretically be excluded from the tender—this does not apply to EU subsidiaries of such companies.

Mandatory Notification of Subsidies and Ground for Exclusion

Similar to the proposed regime for mergers and acquisitions (M&A) transactions under Module 2, the Commission proposes a mandatory notification for bidders that have benefitted from foreign subsidies received over a period of three years prior to notification and including the year following the expected completion of the contract to the European contracting authorities. The notification is published by the contracting authority.

The quantitative subsidy threshold triggering intervention is yet to be determined, but could be set at a level higher than the thresholds bringing a tender within the scope of the application of the EU Public Procurement Directives.

Procedure: Two-Step Review with Suspensory Effect

Here again, the investigation takes place in two steps, a preliminary review (of 15 days), and an in-depth review (of no more than 3 months). The supervisory authority has to consult with the Commission prior to adopting a final decision.

Importantly, during the investigation, the contracting authority is barred from awarding the contract to the company under investigation. The rest of the tender procedure can, however, continue. If, therefore, the economic operator to whom the contract would be awarded is not the company being investigated for the foreign subsidy distortion, the contract can be awarded and the procedure closed.

Substantive Assessment: Presumptions and Indicators of Distortion

The distortion is assessed with regard to the specific tender procedure. On the one hand, and in keeping with the analysis under Module 2, a distortion would be presumed where the subsidiary enables the bidder to submit an offer, which would otherwise not be sustainable (bidding significantly below market price or below cost). In other cases, indicators similar to those used in Modules 1 and 2 would be used to determine the distortion.

Remedial Measures: Exclusion from Bid and Possibly Future Bids

If at the end of the in-depth procedure the supervisory authority finds that there is a foreign subsidy and a distortion resulting therefrom, the bidder is excluded from the tender in question and possibly also from future procurement procedures for a period of up to three years.

Extending New Enforcement Powers to EU Funding

A final area in which the EC has identified a regulatory gap under this Module 3 is the area of EU funding. This refers to funding available through various EU instruments to implement EU policy objectives. This is done either through tender award procedures or through grant awards.

As far as the procurement procedures are concerned, a similar system is proposed as for public procurement procedures in EU member states; in other words, adding a new exclusion ground and introducing a notification obligation for procedures directly managed by the EU institutions. The same mechanism could be introduced in the grant eligibility conditions.

In addition, in the case of substantial expenditure, high-tech, capital intensive or fast-growing markets, contracting authorities should conduct preliminary market consultations in order to collect information about the markets and its key players, a tool already provided by the EU Financial Regulation.[5]


Last year, the EC published its first foreign investment screening tool (FDI Framework Regulation),[6] which member states have to implement by October 2020. The pandemic has accelerated implementation in many member states and the EU had called upon member states to take all measures, including “stake building” in the meantime, to protect EU companies from “predatory buyers” that would buy them at a value significantly decreased by the pandemic.

The White Paper is yet another step toward plugging existing regulatory gaps to protect EU companies from perceived unfair competition from companies benefitting from foreign subsidies, which are not controlled and/or limited in the same way as funding from EU member states or EU funds.

The Commission has sought inspiration from its existing arsenal of regulations while seeking to cast the net much wider. Nonetheless, a number of open questions remain. Fundamentally, the notion of “distortion” of competition is yet to be more precisely defined. The White Paper refers to a “uniform assessment” guidance for competent authorities, which is still to be adopted. This will not be an easy task, given how much this notion is open to interpretation and given the extent to which it needs to be adapted to the specific situation at hand, which would defy a one-size-fits-all definition. By the same token, setting the quantitative and qualitative thresholds for intervention will directly determine the EU’s level of intervention with regard to foreign investment.

From a procedural standpoint, the division of powers between the EC and member states will also be a difficult issue, looking at the often highly politicized issues at stake. Not all member states will be willing to give away any powers to the EC and some may not want to introduce stricter supervision of foreign subsidies at all. Additionally, the interplay among the three modules and among existing enforcement tools in the area of antitrust, foreign investment screening, and trade defense instruments will be a challenge.

Suspending M&A transactions and public procurement, increasing transparency requirements for third-country investors not used to such level of financial disclosure, and subjecting investment, deals, and tenders to longer deadlines will likely have a strong impact on foreign investment into the EU.

The new enforcement powers in the area of public procurement have long been called for as a necessary corollary tool by many within the EC, as the EU is currently at a loss to negotiate its International Procurement Tool designed to ensure a level playing field between the EU and signatory third states in the field of public procurement. However, the White Paper’s Module 3 goes right to the heart of the financing of essential, critical, and high-tech projects, which are often very politicized. Different sources of EU financing may be required as a result, as extended timelines and increased transparency requirements may well deter many third-country-backed bidders.

Overall, the White Paper reflects a general policy shift toward increased ex ante intervention to create a level playing field between those EU operators subject to the EU legal framework, in particular EU State Aid rules, and those who are not.

The White Paper is now open for public consultation until September 23, 2020, after which it will go to the EU Parliament and the Council (representing the member state governments), in the form of a legislative proposal, by next spring. Whether the EU and the member states will be willing to adopt such a game-changing new enforcement tool and reach agreement on the delicate issue of jurisdiction is not yet entirely clear. Ultimately, the historic openness of the EU Internal Market for investment is at stake.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Izzet Sinan
Christina Renner

Michael Masling

Frances Murphy
Omar Shah
Joanna Christoforou 

Washington DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Katelyn M. Hilferty
Christian Kozlowski

[1] See Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings.

[2] The notion of “material influence” is already familiar in some EU member state jurisdictions, such as Austria and Germany, but this will be a new test for the EU and its content is yet to be defined precisely by the EC.

[3] The latter refers to so-called killer acquisitions of still small companies, which are set to rapidly grow into strong competitors.

[4] Art. 69 (4) of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repeating Directive 2004/18/EC, OJ L 94, 28.3.2014, p. 65. See also point 23, Annex 1 to the Financial Regulation.

[5] Article 166(1) of Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012, OJ L 193, 30.7.2018, p. 1.

[6] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 791 of 21 March 2019, p.1.