The EU recently added a powerful instrument to its regulatory arsenal: the Foreign Subsidies Regulation (FSR). The FSR grants the European Commission powers to investigate subsidies granted by non-EU countries and take redressive measures in case the subsidies cause distortive effects on the EU market. Besides granting the Commission general investigative powers, the FSR imposes notification obligations on operators in relation to certain mergers and acquisitions (M&A) and public procurement deals in the EU.

The adoption of the FSR was controversial and  lots of questions remain on how this novel instrument will be interpreted and applied in practice. Existing EU anti-subsidy rules provide useful guidance.

Plugging a regulatory gap

The FSR is a tool to counter foreign subsidies that are perceived to distort the proper functioning of the EU internal market. It aims to plug what the EU considers to be a regulatory gap left unfilled by existing tools.

EU state aid rules regulate subsidies granted by EU member states, but not by non-EU countries. Merger control is limited to M&A transactions and to assessing whether a transaction would significantly reduce competition, without considering whether an investment plan is unfairly driven by distortive subsidies. Foreign direct investment (FDI) regimes are also limited to M&A transactions and review investments for national security and public order concerns, without specifically addressing foreign subsidies. And World Trade Organization (WTO) rules only prohibit certain subsidies, make other types of subsidies “actionable,” and allow WTO Members to impose anti-subsidy duties (provided certain conditions are met).

The EU has traditionally disciplined foreign subsidies using anti-subsidy legislation, which allows the EU to impose anti-subsidy (countervailing) duties on imports of subsidised goods. However, this instrument does not catch the distortive effects of foreign subsidies on investments, services, or other activities. 

The FSR was hence adopted to operate at the intersection of the aforementioned tools. And yet, the existing anti-subsidy rules are likely to have a significant impact on how the EU will apply the FSR in practice.

Lessons from anti-subsidy rules

The legislative background to the FSR, and especially the EU’s longstanding practice in anti-subsidy investigations, should provide some guidance on the future application of the FSR. Below we provide three examples. 

First, key concepts of the FSR are borrowed from EU anti-subsidy rules.

One of the key concepts is a “financial contribution,” which triggers notification requirements and is a constituent element of a subsidy. The FSR does not provide for a strict definition, but for a non-exclusive list of what may amount to “financial contribution.”

The decades of anti-subsidy practice will likely inform how to construe the concept to cover, among others, capital injections; taxes (such as value-added tax and export duties) owed but not collected; government provision of primary inputs (such as water and electricity); and preferential lending, including lending both by state-owned banks and by privately owned banks acting according to government industrial policy. 

Second, under the FSR, the Commission will have powers to impose redressive measures in case the financial contributions given by non-EU countries amount to distortive subsidies.

The distortion assessment will resemble the one carried out under anti-subsidy rules where the Commission investigates whether there is injury to the EU industry (considering trends in EU consumption, productivity and employment); assesses whether there is a causal link between the injury and the foreign subsidies (considering the effects of other factors, such as structural characteristics of the market concerned and overall economic circumstances); and balances pros and cons to determine whether redressive measures are in the EU interest.

Third, the Commission’s investigative powers will reflect those the it enjoys in anti-subsidies proceedings. Consequently, the Commission may require information/documentation from interested parties; conduct on-site checks; and decide on the basis of ‘facts available’ (generally disadvantageous to the parties involved) in case of lack of cooperation.

What comes next

There are still a lot of unknowns around the application of the FSR. Nonetheless, the practice developed in anti-subsidies may guide operators in navigating its ambiguities and preparing for the application of the FSR.

Sven De Knop is a partner with Sidley Austin LLP

Alessandra Moroni is a managing associate with Sidley Austin LLP

Oscar Beghin, a trainee with Sidley Austin LLP, also contributed to this article