© Unsplash/ Erik Eastman

Protection of the single market: Commission wants to control third-country subsidies

European competition and state aid rules, as well as public procurement rules, play a crucial role in ensuring fair competition conditions in the internal market. However, none of these instruments apply to third-country subsidies that have an impact on the internal market. The European Commission now wants to close this regulatory gap.

Third-state subsidies that are not subject to strict EU state aid control can give the beneficiary an unjustified advantage when acquiring European companies, participating in public procurement procedures or carrying out other economic activities in the EU. In recent years, for example, state-subsidized takeover bids for European companies by Chinese investors have increased sharply. The bids submitted - often for strategically interesting or highly innovative industrial sectors - were far above the market price, making it impossible for European companies to compete.

Three new review instruments

In order to create a level playing field in the single market, the European Commission presented a draft regulation at the beginning of May 2021 to introduce adequate checks on third-country subsidies that distort competition in the EU's single market. Under the draft regulation, the European Commission will have the power to scrutinize financial contributions made by third-country authorities to companies operating in the EU. To this end, it proposes the introduction of three different audit instruments:

  • A general market investigation instrument that will allow the Commission to initiate ex officio an investigation into certain third country subsidies. This instrument can be used in any market situation, e.g. for new investments or for the investigation of mergers and procurement procedures where the thresholds of the second and third instruments are not met. In this case, the Commission may require ad hoc notifications from the companies involved. However, the Commission's proposal assumes that third country subsidies of less than 5 million Euro granted over a three-year period are unlikely to have a distortive effect on the single market and thus should not be subject to scrutiny by the Commission. Last year, the Commission had set out preliminary considerations for the regulation proposal now submitted. In its White Paper, the Commission initially proposed a take-up threshold of 200,000 Euro. This threshold has now been raised significantly in response to feedback on the White Paper.
  • An instrument for the examination of mergers and acquisitions in cases where a third country grants a financial contribution that amounts to at least 50 million Euro and the EU turnover of one of the European companies involved is 500 million Euro or more. In this case, there is an obligation for the companies to notify the merger in advance. Third-country subsidies granted within three years prior to the merger are taken into account in the assessment. If a merger has already been implemented prior to the Commission's decision, the Commission can require the companies involved to reverse the merger.
  • An instrument for the examination of bids in public procurement procedures in cases where foreign aid is granted and the estimated value of the contract in the procurement procedure is 250 million Euro or more. In this respect, there is also an obligation for companies to report in advance. This is intended to detect third-country subsidies that put a bidding company in a position to submit a bid that is unduly advantageous. The audit will take into account third-country subsidies that have occurred within a three-year period prior to the pre-notification of the subsidies. The instrument applies to the award of works, supplies and services by contracting authorities and sector contracting entities, as well as to the award of public works and services concessions. However, it does not apply to contracts awarded in the defence and security sectors. The notification requirement applies not only to an individual bidder, but also to bidding consortia, main subcontractors and main suppliers.

Appropriate remedies

If the Commission finds distortive third-country subsidies, it will first balance this distortion of competition against possible positive effects on society and the development of the economic sector concerned. If the negative effects outweigh the positive effects, the Commission may impose structural and behavioural measures on the companies to counter the distorting effects, such as repaying the third-country subsidy including interest, divesting certain assets, reducing capacity or market presence, granting access to certain infrastructure, or prohibiting certain market behaviour. The Commission also has the authority to prohibit subsidized mergers or the award of public contracts to subsidized bidders.

Creating a level playing field - limiting bureaucratic burdens

German industry had long called for better protection against distortions of competition in the internal market caused by companies from third countries, some of which are heavily subsidized, and welcomes the European Commission's proposal for a regulation. When it comes to takeovers and public procurement, European companies need fair opportunities and a level playing field in the single market. At the same time, however, it is also important to preserve the EU's fundamental openness to investment and to keep the bureaucratic hurdles for mergers and participation in public procurement as low and streamlined as possible. In the negotiations now pending in the Council and the European Parliament, the decisive question will therefore be whether the thresholds proposed by the Commission for the application of the three review instruments are appropriate, on the one hand to guarantee sufficient and effective protection against third-country subsidies and, on the other hand, to take up only those cases that really distort competition and keep the bureaucratic burden on companies low.