Foreign Subsidies Regulation: The New Kid On The Block

• Published date: 05 December 2022
• Subject Matter: orporate/Commercial Law, Antitrust/Competition Law, M&A/Private Equity, Antitrust, EU Competition
• Law Firm: Schoenherr Attorneys at Law
• Author: Mr Volker Weiss and Jan Kupčík

On 28 November 2022, the Council of the European Union gave its final approval to the Regulation on Foreign Subsidies distorting the Internal Market (FSR) following the adoption of the regulation by the European Parliament on 10 November 2022. In a ground-breaking attempt to protect the level playing field in the EU and tackle distortions caused by foreign subsidies in the internal market, an unprecedented legislative tool for the control of foreign subsidies has made landfall. After being published in the Official Journal, which is expected later this year or at the beginning of next year, the FSR is bound to apply as of mid-2023.

The FSR as a means to level the playing field

The FSR will play an important role in mergers, acquisitions and public tenders within the EU. It will act in parallel to pre-existing EU and national merger control regimes, as well as EU state aid regulation and national foreign direct investment (FDI) screening rules. The enforcement of the FSR will be centralised at the European Commission (EC) level, while foreseeing an advisory function for the national governments of the Member States. The impact of the FSR is difficult to gauge. However, the EC's ambitious plan of staffing about 145 people for FSR enforcement (amounting to almost twice the expected headcount for DMA enforcement) indicates that the FSR will all but dwindle into a paper tiger.

Substantively, the FSR combines elements of EU merger control, state aid and public procurement rules. It aims to close a gap in the EU's regulatory toolbox to tackle subsidies granted by third countries, which distort the internal market. Whilst the EU has already been screening state aid granted by Member States, third-country subsidies have so far remained mostly outside effective control. Hence, the tool's proclaimed goal is to level the playing field in the internal market between those entities which are subsidised by third countries and those which are not.

A closer look at the EC's new tool

At its core, the FSR tries to identify whether a distortion of the internal market has occurred or may occur as a result of a foreign subsidy being granted. It captures all economic operators (including public undertakings) active in the internal market, receiving subsidies from third countries. As such, the scope of the regulation is agnostic to the nationality of the business, which means that EU businesses are captured by the FSR if subsidised by third countries.

The central constitutive...