EU Foreign Subsidies Regulation Q&A: Public Procurement

The EU’s Foreign Subsidies Regulation (“EU FSR”)¹ establishes a new mandatory notification regime aimed at addressing distortions caused by foreign subsidies, ensuring a level playing field for companies operating in the EU internal market. Certain public procurement procedures in the EU and certain M&A transactions will now be subject to mandatory notification to, and approval by, the European Commission (the “Commission”).

While the EU FSR applies the same legal test to all tools within its framework, the public procurement tool has some distinct features that differentiates it from the concentrations tool. Click here to see our separate EU FSR Q&A on Concentrations. 

Why does the EU FSR apply to public procurement?

If a bidder receives / has received non-EU subsidies from a third country² this may significantly affect the fairness of the public procurement process and influence the likelihood of submitting an unduly advantageous tender. The EU FSR, therefore, establishes a notification obligation for participants in public procurement procedures³.

An undertaking (an economic operator) considering participation in an EU tender process governed by EU public procurement directives⁴  will now have to take into account the EU FSR mandatory notification and declaration obligations irrespective of its prior establishment in the EU, or prior its operation on the EU internal market⁵.

When is a tender participant subject to notification or declaration?

A public procurement procedure falls within the scope of the EU FSR when the estimated value of a public work, supply, or service contract is at least €250 million (net of VAT).

The value threshold relies on the public procurement value estimation rules, and it is the public purchaser’s obligation to estimate the value of the tender⁶. If the public procurement is divided into lots, a notification must be made if the aggregated value of all the lots to which the tender participant applies is equal to or greater than €125 million.

Whether a tender participant falls within the ‘declaration regime’ or the more complex and detailed ‘notification regime’ depends on the so called foreign financial contribution (“FFC”) threshold. If the aggregate FFCs granted meet or exceed €4 million per third country in the prior three years, the tender participant must notify the Commission under the more complex and detailed notification regime. In other cases, the declaration regime applies.

What constitutes a FFC for the purposes of the EU FSR is very wide ranging and includes, inter alia: capital injections, loans, grants, loan guarantees, tax exemptions, the foregoing of revenue otherwise due and the provision or purchase of goods or services.

How is the foreign financial contribution (FFC) threshold calculated?

In respect of public procurement, the EU FSR requires that economic operators, including certain corporate affiliates⁷, such as ‘subsidiary companies without commercial autonomy’ and any holding companies, must be considered for the purposes of the FFC calculations.

The FFC assessment may also require considering other unrelated entities if they are involved in the same tender in public procurement. Specifically, it applies to main subcontractors and suppliers if their contribution value exceeds 20% of the submitted tender or if they provide the so called ‘key elements’ for performance of the contract. The elements for the performance of a contract will be deemed to be ‘key elements’ if they play a crucial role in fulfilling selection criteria during the public procurement process. These may include specific know-how, technology, specialised staff, patents, or other advantages⁸.

The FFC threshold calculation requires aggregating the amount of FFCs granted individually in the three years prior to the notification. The obligation to notify applies if the contribution threshold is equal to or above €4 million per third country. In cases where there is more than one notifying party, e.g. consortium members of a bidder consortium, and any one member (economic operator) individually does not reach the €4 million threshold, then there is no notification obligation. However, there is still a need to submit a declaration.

What is the role of the public purchaser under the EU FSR?

The role of the public purchaser under the EU FSR involves two key responsibilities. First, it is required to pass on notifications to the Commission regarding any FFCs received by economic operators involved in the public procurement process. Second, a public purchaser must notify the Commission if it suspects that any FFCs have not been properly declared or notified.

By fulfilling these duties, public purchasers play a crucial role, but it remains the Commission’s exclusive power to enforce the EU FSR.

What is a foreign subsidy for the purposes of the EU FSR, and how does the EU FSR legal test work?

The Commission will first check if the relevant FFC meets the requirements specified in the EU FSR for the existence of a ‘foreign subsidy’. A foreign subsidy exists for the purposes of the EU FSR where a non-EU country (including through central government, or a foreign public or private entity whose actions can be attributed to a non-EU country) provides, directly or indirectly, a “financial contribution” conferring a benefit on an undertaking engaging in an economic activity in the EU internal market, limited to one or more companies or industries.

If the Commission determines that the relevant FFC constitutes a foreign subsidy, the Commission will then assess whether the foreign subsidy has a distortive effect on the EU internal market. In the context of a public procurement procedure, the Commission will examine whether a tender is unduly advantageous in relation to the works, supplies or services concerned⁹.

Finally, the Commission will weigh the positive and negative effects of the foreign subsidy within the EU internal market to determine the appropriate redressive measures and/or commitments.

The Commission may allow the awarding of contracts it would otherwise prohibit under the EU FSR based on a balancing test of positive and negative effects. The balancing test essentially obliges the Commission to weigh the negative economic effects of a foreign subsidy against the positive ones in terms of broader policy objectives, such as environmental protection or promotion of R&D.

When might a foreign subsidy be considered distortive?

A foreign subsidy is deemed to be distortive where it is liable to improve the competitive position of a company in the EU internal market, and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the EU internal market.

In this regard, Article 5 of the EU FSR includes a list of foreign subsidies most likely to be considered distortive:

• a foreign subsidy granted to an ailing company which will likely go out of business in the short to medium term without the subsidy;
• a foreign subsidy in the form of an unlimited guarantee for the debts or liabilities of the company (unlimited in amount or duration);
• an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
• a foreign subsidy directly facilitating a concentration; and/or
• a foreign subsidy enabling an undertaking to submit an unduly advantageous tender based on which it could be awarded the relevant contract.

 

What decision(s) can be made by the Commission under the EU FSR?

The Commission may close the first phase of its investigation (the preliminary review) without a decision or adopt a decision initiating an in-depth investigation. Following an in-depth investigation, the Commission has the choice of adopting: (i) a no-objection decision; (ii) a decision accepting commitments, if the commitments effectively remedy the distortion; or (iii) a decision prohibiting the award of the contract.

When can a public contract that falls under the EU FSR be awarded?

A public contract cannot be awarded until the relevant time for the preliminary review lapses, or it has been approved by the Commission.

Does the Commission have the power to review public procurement procedures below the notification thresholds?

Yes, the Commission is empowered to review a public procurement procedure despite its estimated value being below the notification threshold.

The Commission may do so where it suspects that foreign subsidies have been granted to the bidding parties in the three years prior to the submission of the tender or the request to participate in the public procurement procedure. Furthermore, under its ex officio powers the Commission may also review awarded contracts.

Additionally, the Commission may ask for any information it deems necessary in case of a suspected or attempted circumvention of the notification obligation¹⁰.

What are the penalties for non-compliance?

The Commission has the power to impose significant fines or periodic penalties to enforce the EU FSR.

Under the public procurement tool, the Commission has powers to impose fines of up to 1% of aggregate turnover if the notifying party, intentionally or negligently, provided incorrect or misleading information in a notification / declaration or during the investigation.

The Commission may also impose fines of up to 10% of aggregate turnover where the economic operator, intentionally or negligently, failed to notify FFCs during the procurement procedure, or where they circumvented or attempted to circumvent the FSR notification requirements.

What are the likely compliance challenges?

In our experience, the primary challenges in complying with the EU FSR are likely to revolve around establishing a well-functioning data gathering system and implementing a methodology for reporting FFCs in accordance with the requirements and exceptions specified by the Commission. Notably, the data must be up-to-date and collected in the three years preceding the triggering event, even if this task is substantial and burdensome¹¹. Parties should also consider incorporating EU FSR considerations into their due diligence and in a consortium or subcontractor/suppliers’ contractual arrangements. This includes seeking information on third-country subsidies received, cooperation, understanding the source of funds, as well as considering appropriate condition precedents dealing with potential remedies and/or provisions addressing the likelihood of a Commission investigation.

How will businesses likely be impacted?

The introduction of the EU FSR has highlighted the importance of international businesses being vigilant when considering its potential application, so as to ensure compliance with its requirements. The Commission can act on its own initiative to investigate any sector and any potentially distortive foreign subsidy granted to companies operating in EU Member States. Recent months, and the first EU FSR dawn raids initiated by the Commission, have shown a continuing eagerness by the Commission to apply, and enforce, the EU FSR.

The EU and Competition Team at Eversheds Sutherland has substantial experience in advising clients on these issues and in ensuring compliance with the EU FSR.

 

¹ Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market.
² E.g. US, UK, Lichtenstein, Iceland or Norway.
³ The EU FSR excludes certain public procurement procedures from the notification regime. E.g. defence and security contracts are dealt with by Directive 2009/81/EC. Nonetheless, the Commission retains the power to start investigations on its own initiative if there are suspicions that foreign subsidies may be involved in such procurement procedures, Recital 41 EU FSR. Furthermore, the income generated from these sales constitutes a FFC which counts for determining whether the notification threshold concerning foreign financial contributions, the EU FSR Q&A published by the Commission, question 10.
⁴ Article 2 of the EU FSR.
⁵ Tender participation is considered as engaging in an activity in the internal market.
⁶ Article 28 (6) EU FSR, the relevant public purchaser should include in the contract notice, or procurement documents that tender participants are under a notification obligation. However, the absence of such a statement does not affect the application of EU FSR.
⁷ Recital 40 and Article 28 (1)b of the EU FSR.
⁸ Recital 54 of the EU FSR,[…] Elements of the contract can be considered to be key elements, in particular, on the basis of the specific relevance of the element to the quality of the tender including specific know-how, technology, specialised staff, patents or similar advantages available to the subcontractor or supplier, especially where those elements are relied upon for fulfilling the majority of at least one of the selection criteria in a public procurement procedure.
⁹ Article 27 the EU FSR and Recital 46 FSR.
¹⁰ Article 39 of the EU FSR.
¹¹ The Implementing Regulation (EU) 2023/1441 sets up conditions for waivers and dispenses.