Foray into foreign subsidies follows the footsteps of State aid

The European Commission has published an anticipated proposal that lays down rules to investigate foreign subsidies that distort the EU’s internal market. In this post, we explore how much of the new proposal bears the imprint of the block’s well-established State aid regime.

The EU’s State aid regime is a European peculiarity, aimed at having a single EU internal market free from subsidy races triggered by national interests. The reach of this regime is however finite as it only covers handouts by EU Member States. It does not capture subsides granted by non-EU countries to companies competing and active in the EU. Attempts to bring this regime to the global scene are therefore nothing new and a number of recent free trade agreements between the EU and third countries include state aid-like provisions to fill this gap. The focus on a (unilateral) tool to counter what the EC deems as potentially distortive subsidies granted by non-EU countries has further increased over the past few years. The momentum has only grown stronger due to public support measures to deal with the economic impact of Covid-19, as a level playing field is deemed even more important in these challenging times. And as we all know, a crisis is a terrible thing to waste.

A sibling…

As we noted in our commentary on the initial White Paper (here), the suggested regime borrows elements from State aid, merger control, antitrust and trade defence to create a hybrid investigative tool. Some elements draw heavily on merger control, such as the notification requirement over certain thresholds, and others borrow from trade defence.

While the new tool would not precisely mirror the State aid rules, the test for a ‘distortive foreign subsidy’ - a key feature of the proposal – shows marked similarities with the five building blocks of ‘State aid’:

  • The concept of a ‘foreign subsidy’ is very broad and akin to what we know well from State aid law; covering both direct support (such as grants, loans and guarantees) and foregone revenue (such as tax cuts);
  • To fall within the scope of the new regime, the company must be engaged in an ‘economic activity’ in the EU. The State aid rules have a similar limitation, excluding non-economic activities from its reach. This alignment also reflects an important expansion from the earlier draft of June 2020, which would only target companies “established” in the EU;
  • The subsidy must confer a ‘benefit’ to the company. This seems – at least at a first glance – to resemble the concept of ‘advantage’ in State aid law;
  • The benefit must be linked, in law or fact, to an individual company(ies) or industry(s). This brings the much-debated notion of ‘selectivity’ in State aid law to mind; and
  • Lastly, the subsidy must distort the EU internal market in that it improves the competitive position of the beneficiary. Again, a similar criterion is part of the State aid concept.

Further distinct similarities include the role of the EC as sole enforcer, and the inclusion of a balancing exercise, weighing up pros and cons of a subsidy to determine whether it does more good than harm. Such probes are familiar territory for State aid practitioners, as State backed support measures often give rise to conflicting interests.

But are these similarities sufficient to consider the foreign subsidy regime a sibling to the EU State aid rules?

… or a cuckoo in the nest

As always, the devil lies in the detail, and how these parallels will play out is yet to be seen. The EC has relied on State aid rules to target novel scenarios, including its clamp down on sweetheart tax deals. The EC now appears keen on a new vocabulary to ensure a margin of manoeuvre and avoid being tied to established State aid terms. This raises questions about how the new regime will strike a balance between the organic development of these concepts and the need for legal certainty and neutrality between players that have received support from EU Members State and those who have received from non-EU countries.

Also the considerations relevant to the balancing test may differ from those well-established in State aid law. As noted, balancing public policy objectives – such as job creation, green objectives and innovation – is a well-known State aid feature. The proposal reveals very little detail on how to weigh the interests of Member States eager to reap the rewards of lucrative foreign investments and other States keen to protect competitors that risk being side-lined. A robust system to ensure consistency and close the door to political pressure will be needed.

Other features draw on State aid at first glance, but differ widely in practice. For example, similar to the State aid rules, there is safe harbour for handouts deemed unlikely to cause distortions. However, while the EC’s June 2020 proposal suggested an aligned approach with a EUR 200,000 de minimis threshold, the EC now suggests a threshold of EUR 5 million (over three fiscal years). While this may be welcome to avoid excessive interference, the effect is a maximum 25 times higher than the State aid cap.

How far does the apple fall from the tree?

The proposed regime seeks to build on the strengths of the EU’s established toolbox and create a hybrid approach. The similarities with the State aid regime are marked, but the EC seeks to give itself considerable flexibility in applying the new regime, both in terms of substance and procedure. The proposal is now to be scrutinised and debated, and it is likely to still change.

The jury is still out on whether the EU will ultimately be armed with a tool against subsidies from the outside to match its current weaponry to counter harmful subsidies from the inside.

In our series on the White Paper we took stock of the powers proposed in the White Paper and the impact these would have on the existing frameworks for EU antitrust, merger control, foreign investment control, trade, state aid and procurement.

In this new series we give you our fresh perspective on how the Regulation will impact each of these frameworks. Our posts will deal with the issues raised by clients and with the implications for M&A transactions and, more generally, doing business in the EU.