New rules for foreign subsidies - The European Commission’s approach to level the playing field
Earlier this year, the European Commission published its proposal for a regulation to address potential distortive effects in the EU of financial benefits granted by non-EU Member States to companies (the “Proposal”). The proposed regulation appears likely to capture financial contributions to European football (and other sports) clubs, which until now had largely escaped the scope of EU State aid and merger control rules.
What is a foreign subsidy?
The Proposal builds on a Commission White Paper published for consultation in June 2020. It defines a “foreign subsidy” very broadly, to include any advantage granted by a third country to an undertaking active in the EU. The definition of ‘financial contribution’ in this context is wide-ranging and includes, inter alia, the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, setting off operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling.
A foreign subsidy shall be deemed to distort the EU internal market where it is liable to improve the competitive position of the undertaking concerned and where, in doing so, it actually or potentially negatively affects competition in the EU. The Commission's proposal also identifies the foreign subsidies most likely to distort the internal market: namely, unlimited guarantees, subsidies to a distressed company without a restructuring plan, and subsidies that directly facilitate a concentration or facilitate the submission of an unduly advantageous tender. These categories are in line with the Commission’s practice in the field of State aid.
If the Commission establishes that a foreign subsidy is distortive, it will, where warranted, consider the possible positive effects of the subsidy. Where the negative effects outweigh the positive, the Commission can impose redressive measures or accept commitments to remedy the distortion. The Proposal is now progressing through the ordinary legislative procedure and the final text shall be adopted by the European Parliament and the Council of the EU.
When can the Commission intervene?
The Commission might examine a foreign subsidy either when the subsidy triggers a mandatory notification or under the Commission’s general market investigation tool envisaged in the Proposal.
A mandatory notification obligation can be triggered by a “notifiable concentration”. A concentration shall be deemed to exist where a merger of previously independent parties or the acquisition of direct or indirect control results in the change of control on a lasting basis. To be “notifiable” the concentration must meet certain turnover thresholds (EUR 500 million within the European Union) and involve a financial contribution from a non-EU state of more than EUR 50 million.
The relevant parties (known in this context as the “undertakings concerned”) have comprehensive duties to cooperate and the Commission may issue formal requests for information similar to merger control proceedings. Under the Proposal, Transactions must not be closed before the Commission’s approval.
The notification requirements may also be triggered in the context of public procurement procedures. When submitting a tender or a request to participate in a public procurement, undertakings must either notify the contracting authority or the contracting entity of all foreign financial contributions received in the three years preceding that notification. According to the Proposal, distortion exists where foreign subsidies enable an undertaking to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned. This can cover a variety of financial benefits in the form of financial payments and advantages granted by foreign governments.
Lastly, under the Proposal the Commission would also have the power to initiate proceedings on its own initiative and investigate “all other market situations”, including concentrations and public procurement procedures that remain below the thresholds that trigger mandatory notifications. The investigatory powers of the Commission include issuing formal requests for information and conducting dawn raids.
Impact on European professional sports
Recent years have seen a significant expansion in the level of financial support from non-EU governments in European sports, and football in particular. The adoption of the rules on foreign subsidies may have a significant impact on such investment, given there are no current indications that the new regime will include a sports “exception”. First, the Proposal may impact the potential entry of an investor in European club football. The acquisition of control over professional football clubs constitutes a notifiable concentration under the Commission’s Proposal. The entry of state-owned companies in European club football has been an increasing trend. Such investments may trigger the new regime, as many larger European football clubs meet the relevant turnover thresholds. Even in the 2019/20 season, which was significantly financially impacted by the pandemic, the champions of the top French, German and Spanish leagues each generated well over EUR 500 million in revenue.
Second, since indirect subsidies from third countries via sovereign wealth funds or state-owned enterprises are also covered by the Proposal’s scope, there is a large potential field of application on European professional football clubs that benefit from financial support from non-EU countries. Even where there is no concentration, the Commission may nevertheless decide to investigate “any market situation”, where it considers a foreign subsidy to distort the EU internal market. Therefore, the new regime may concern sponsors as well as minority investors.
Primarily, foreign subsidies can cause distortions on the market for the transfer of professional football players. The players are the key competitive assets of sports clubs, determining the club’s access to other financing sources such as income from prize money and broadcasting rights. (Such distortive effect will be potentially intensified by the new proposed UEFA rules that allow overspending on team salaries if a “luxury tax” is paid.)
Third, in light of the Commission’s increased focus on infrastructure subsidies in the field of State aid, it is expected that the Proposal will have an impact on the financing of sports infrastructure, e.g., stadiums and sport facilities, by non-EU states. As these projects may be awarded in public procurements, participants would have to notify all financial contributions received from a non-EU country’s government if the estimated value is at least EUR 250 million. Given the potentially wide-ranging ramifications, the proposed extension of the Commission's monitoring to non-EU monetary transfers is a development that sports clubs should monitor closely in the upcoming seasons.
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