New Regulation Against Distortive Foreign Subsidies in the European Union

On 14 December 2022, the EU Parliament and EU Council adopted Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (the “Foreign Subsidies Regulation” or the “Regulation”).

This new legislation regulates the competitive distortions caused by foreign subsidies; and attempts to ensure a level playing field for all companies operating in the EU. It is part of the EU Economic Security Strategy that aims to create “a model of open strategic autonomy” by, inter alia, avoiding unfair and abusive practices in the EU internal market. It entered into force on 12 January 2023.

The Foreign Subsidies Regulation introduces three new rules enforced exclusively by the Commission, as follows.

Key dates for the Foreign Subsidies Regulation include the following.

The Foreign Subsidies Regulation applies to any undertaking engaged in an economic activity in the EU internal market to whom a foreign subsidy is granted.

A foreign subsidy targets any financial contribution by a non-EU country conferring a benefit on an undertaking engaging in an economic activity in the EU internal market. Contributions may, for example, consist of the transfer of funds or liabilities, including grants, loans, loan guarantees, tax incentives or debt forgiveness, and the forgoing of revenues otherwise due amounts to financial contributions.

Non-EU-country or third-country governments include central governments, government authorities and foreign public entities whose actions may be attributed to a third country’s government, as well as any subsidies by private entities whose actions may be attributed to a third country.

When a foreign subsidy causes a market distortion (ie, provides a benefit improving the beneficiary’s competitive position in the internal market and which may, actually or potentially, negatively affect competition in the EU), the Commission has to balance the negative impact of the market distortion caused by the grant of a subsidy against its possible positive effect, such as the development of an economic activity.

If the positive effect does not sufficiently counterbalance the negative impact of the market distortion, the Commission will have the possibility to adopt different types of decisions to redress the distortion.

The Commission may order:

In the case of non-compliance with a decision, the Commission may impose a fine of up to 10% of the aggregate turnover, and/or periodic penalty payments.

Companies can identify whether they benefited from foreign subsidies in the past. To this end, companies should:

Companies may use the Foreign Subsidies Regulation to complain about distortion. For example, in the USA, the Inflation Reduction Act of 2022 may encourage EU companies to invest in the USA, as this Act aims to fight inflation by (for instance) granting tax credits and allocating money to environmental justice priorities. This situation raises the question of whether goods manufactured in the USA and benefiting from the US Inflation Reduction Act that are imported in the EU could be caught under the Foreign Subsidies Regulation. Executive Vice-President Vestager considers that financial contributions “are expected to be granted to companies engaging in an economic activity in the USA” and that “the application of the Foreign Subsidies Regulation will, therefore, need to be assessed on a case-by-case basis”. She added that this situation might be caught under the WTO Agreement on Subsidies and Countervailing Measures.

In May 2023, a Belgian football club, the Royal Excelsior Virton, lodged an informal complaint with the Commission based on the Foreign Subsidies Regulation, denouncing foreign subsidies granted to other European football clubs distorting the professional football market in the EU (via inflated sponsorship agreements or capital injections). According to informed observers, Qatar granted subsidies to PSG and KAS Eupen (Belgium), the United Arab Emirates granted subsidies to Manchester City and four other EU clubs, and Saudi Arabia granted subsidies to Newcastle FC. Such subsidies would generate inflation of transfer prices and player salaries, which would distort national and UEFA competitions.