The European Commission has recently provided guidance on assessing market distortions under the Foreign Subsidies Regulation (FSR). The guidance clarifies the interpretation of how foreign subsidies may negatively affect competition in the internal market. It is essential to understand the two-step assessment process outlined in the FSR when evaluating the impact of foreign subsidies on competition.
According to the Commission Staff Working Document (CSWD), there are indicators provided in Article 4 of the FSR that must be considered when assessing if a foreign subsidy distorts the internal market. These indicators are not exhaustive, giving the EC the discretion to determine which indicators to apply in each case. Additionally, subsidies falling under Article 5, considered “most likely to distort” competition, require a different assessment approach, shifting the burden of proof to the undertaking to show that the subsidies do not distort the internal market.
In the context of mergers and acquisitions (M&A), the CSWD highlights that the distortion can be related to the acquisition process itself or the market in which the combined entity operates 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. The assessment of concentrations under the FSR differs from that under the EU Merger Regulation, potentially leading to different outcomes.
When it comes to public procurement, the EC will focus on assessing distortion in the internal market within the specific procurement procedure. The analysis will consider whether the tender submitted by a subsidized economic operator provides an undue advantage and if there is a link between the subsidy and the tender, potentially causing a distortion in the procurement process.
The CSWD also introduces the concept of the balancing test, where the EC may weigh the negative effects of a foreign subsidy against certain positive effects. This test considers the impact of subsidies on the development of economic activities in the internal market and broader EU policy objectives such as environmental protection and social standards. The outcome of the balancing test can only be positive or neutral for the undertaking, ensuring that it does not suffer as a result of the assessment.
It is important to note that the guidance provided by the EC is still evolving, and further clarification on the application of the FSR will come through case practice and law. Companies engaging in economic activities within the EU should stay informed about these developments to ensure compliance with the regulations.