The EU's new Foreign Subsidies Regulation (FSR), which came into effect on July 12, 2023, marks the European Commission's attempt to level the playing field by addressing the potential distortive effects of non-EU subsidies on the EU market. The mandatory notification regime started on October 12, 2023.

The FSR targets companies operating in the EU that have received financial contributions from outside the EU—also known as foreign financial contributions, or FFCs—and, in particular, recipient companies that are involved in M&A and public tenders in the EU.

The Commission now has the power to investigate and assess if businesses operating in the EU have been backed by foreign subsidies, and whether these contributions impact competition in the internal market. In case of distortion, the Commission can impose various redressive measures, block M&A deals or public tender awards, and even dissolve already-concluded M&A deals.

The Commission’s investigative powers

The FSR empowers the Commission through two regimes: mandatory filings for large M&A deals and major public procurement, plus the possibility for the Commission to open investigations into any other market situation on its own initiative.

For M&A deals, the FSR imposes mandatory filing obligations for transactions in which at least one of the merging companies, the target or the joint venture is established in the EU and has generated EU-wide turnover of at least €500 million in the previous financial year, and the parties involved have received combined FFCs exceeding €50 million in the three years prior to the conclusion of the deal. No deal can be closed until the Commission's approval is received.

For EU public tenders, the filing obligation arises where the contract value is at least €250 million—or €125 million if the tender is divided into lots—and if the bidding party, on a group level, or its main suppliers or subcontractors have received FFCs of at least €4 million per non-EU country in the three years prior to the filing. Again, the tender cannot be awarded until the Commission's approval is received.

The two notifying forms were published in July alongside the FSR Implementing Regulation: Form FS-CO for M&A deals and Form FS-PP for public tenders.

The Commission may also request M&A deals and EU tenders falling below the filing thresholds to be referred to the Commission prior to their conclusion, if it suspects that these transactions may be backed by distortive foreign subsidies.

Further, the FSR permits the Commission to retrospectively investigate M&A deals or public tenders that have already been concluded—but not those closed before July 12, 2023—as well as any other market situation in which foreign subsidies may be involved.

Disclosure obligations in FSR filing forms

Under Forms FS-CO and FS-PP, companies making an FSR filing must provide a description of the M&A deal or public tender, as well as information about the parties, the financing of the deal, and the relevant FFCs received in the past three years.

All parties to a transaction, including the target, must file a detailed disclosure for all FFCs above €1 million that they have received in the three years prior to signing the deal or submitting an FSR filing of the tender, if the FFCs fall under the "likely distortive" category. This covers FFCs that:

• Support a failing business
• Give unlimited guarantees
• Directly facilitate a concentration, in the case of M&A
• Are an export financing measure not in line with the OECD Arrangement on officially supported export credits
• Enable a company to submit an unduly advantageous public tender in the EU

FFCs that do not fall within the "likely distortive" category must be included in a general disclosure if they are individually more than €1 million and in total exceed €45 million for M&A deals or €4 million for public tenders, per non-EU country, over a three-year period. Some of these FFCs will be subject to exemptions.

Implications of the FSR

Traditional trade defense instruments have only tackled subsidized traded goods, not subsidized M&A deals, public tenders, services or other market situations. The FSR attempts to fill this gap by imposing filing obligations for large M&A deals and public tenders in the EU, and by empowering the Commission to investigate any other market situation that causes distortions to the EU's internal market.

The filing obligations may have a significant impact on Taiwanese companies doing large M&A deals and public tenders in the EU. The relatively low FFC threshold for public tenders—€4 million in the three years prior to the FSR filing—is likely to catch most bidders for major public tenders in the EU.

The potential impact of the FSR on M&A deals is also considerable, as it represents an additional hurdle to merger control and foreign direct investment filing. It remains to be seen whether the risk of the deal being investigated, and possibly blocked, under the FSR will disincentivize companies from engaging in M&A in the EU.

It will be intriguing to see how the broader investigative tool will be used in practice. The Commission may need to prioritize the industries and subsidies on which it will focus.

Finally, given the broad definition of FFCs under the FSR, the data collection process will be burdensome. Developing systems for FSR-relevant data collection will be a challenge for all multinational companies, including EU companies and those in non-EU countries such as Taiwan.

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