The European Commission has recently provided guidance on assessing market distortions under the Foreign Subsidies Regulation (FSR). This guidance aims to offer clarity on the interpretation of how foreign subsidies impact the internal market and the application of the balancing test. While the guidance is a step in the right direction, there are still many questions surrounding the interpretation and application of key concepts that need further clarification.
The FSR, which came into effect just over a year ago, has already prompted numerous notifications and investigations by the EC. The Commission Staff Working Document (CSWD) published on July 26, 2024, provides some initial insights into the substantive assessment of market distortions under the FSR.
One key aspect highlighted in the CSWD is the two-step assessment process for determining market distortions. The EC must establish a connection between the foreign subsidy and economic activity in the internal market, as well as assess whether the subsidy negatively impacts competition. This assessment involves analyzing various indicators outlined in the FSR to understand the effect of foreign subsidies on competition.
The CSWD also emphasizes that the indicators provided in the FSR are not exhaustive, giving the EC discretion to determine which indicators to apply in evaluating the impact of subsidies on market competition. Additionally, subsidies falling under the category of “most likely to distort” competition do not require a detailed assessment based on specific indicators, shifting the burden of proof to the undertaking to demonstrate that the subsidies do not distort the internal market.
In the context of mergers and acquisitions (M&A), the CSWD clarifies that market distortions can relate to the acquisition process itself and the post-merger market activities. The EC will assess whether subsidies granted before a merger could distort the internal market post-merger. Foreign subsidies received by the acquirer are more likely to be scrutinized for potential distortive effects compared to those received by the target or seller.
When it comes to public procurement, the EC will focus its assessment of market distortions on the specific procurement procedure in question. The evaluation will consider whether a subsidized economic operator has an undue advantage in the tender process and if there is a link between the subsidy and the tender that risks distorting the procurement procedure.
The CSWD also introduces the concept of the balancing test, which allows the EC to weigh the negative effects of foreign subsidies on market distortion against their positive effects. While the guidance on this test is limited, the EC must consider the positive impacts of subsidies on the development of economic activities in the internal market and broader EU policy objectives.
Overall, the guidance provided by the EC offers some clarity on assessing market distortions under the FSR. However, further elaboration through case practice and law will be necessary to address key questions and provide more comprehensive guidance for companies navigating the regulatory landscape.
