The EU Foreign Subsidies Regulation – the Birth of a New Area of Competition Law

In July 2023, the European Union introduced a new competition law regime called the EU Foreign Subsidies Regulation (FSR) to address a longstanding regulatory gap. Whilst subsidies awarded by EU and EFTA Member States are tightly regulated on an ex-ante basis under EU State aid law,1 this is not the case for subsidies awarded by other countries. Indeed, it is possible for a business to benefit from significant subsidies awarded outside the scope of EU State aid law and to subsequently trade, at an advantage, within the EU Single Market.

The Objective of the FSR 

The objective of the FSR is to close this gap by addressing the impact of such subsidies at the point they are considered to distort the Single Market. In doing so, the EU is protecting the concept of the Level Playing Field and therefore the day-to-day functioning of the EU Single Market.

However, the move is contentious because of its wider political context. Although the

head of the unit responsible for the new rules has stated that the FSR was not drafted to target Chinese companies, the legislation has been supported by EU politicians articulating concerns that countries, including China, might have been able to gain an unfair advantage by awarding excessive subsidies to businesses which have then distorted the EU Single Market. The FSR White Paper explicitly refers to concerns around “financing from government supported investment funds or intermediaries”, affecting the market, citing the “Sino-CEEF fund (EUR 10 billion), an investment fund especially created for investments in the EU”. Therefore it is perhaps unsurprising that the FSR is seen by many as a strategic move to counter such subsidies.

It remains to be seen whether the FSR will address distortive foreign subsidies or whether it will become a burden and barrier for foreign companies operating in the single market – and the impact that it will have on the appetite for companies active in the single market to accept subsidies from non-EU governments.

How Does the FSR Apply?

The FSR adds to the European Commission’s armoury of powers by allowing them to investigate and take action against businesses which have received financial assistance outside of the scope of EU State aid law which have the potential to distort the EU Single Market.

Under the FSR the concept of a “foreign subsidy” arises when “a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries”.

A ‘foreign subsidy’ is a direct or indirect financial contribution awarded by a non-EU country, which confers a selective benefit on a company active in the Single Market – a definition which has a strong resemblance to the definition of State aid.2

A foreign subsidy is distortive if it “is liable to improve the competitive position of an undertaking in the internal market [and] … actually or potentially negatively affects competition in the internal market.”

The size of the subsidy is a key factor in whether it has the capacity to distort the single market.3 As general rule, foreign subsidies not exceeding €4 million over a consecutive period of three years are considered unlikely to be distortive. Likewise, there are certain types of subsidies which the FSR would expect to be considered distortive, such as a subsidy to an organisation which is likely to go out of business in the short or medium term in the absence of any subsidy or where the subsidy will enable the recipient to submit an unduly advantageous tender.

Investigative Powers

Under the FSR, the European Commission will have three main new powers to investigate foreign subsidies:

• a power to investigate notifiable mergers and acquisitions (ie “concentrations” defined in similar terms to the EU Merger Control Regulation.4) where there is a financial contribution from non-EU public sources (where the turnover of the company being acquired exceeds €500m and the public funded contribution is at least €50 million). These must be notified to the European Commission before implementation, with a 25-day waiting period from notification. The Commission has the power to initiate an in-depth investigation for a further 90 working days, following which it may raise no objections, adopt a decision including commitments from the parties or prohibit the concentration;
• a power to examine bids in public procurements where there has been a financial contribution to a bidder and its group by a non-EU government of at least €4 million in the last three years prior and the estimated value of the procurement is €250 million or greater. Bidders will have to provide details of relevant foreign subsidies received. The declaration has to be made to the authority running the procurement and passed to the Commission. Failure to provide a declaration can be grounds for exclusion from the tender. The Commission has to conduct an expedited review within 20 working days (extendable by another 10) and can potentially investigate further. An in-depth investigation should take no more than 110 working days. The Commission may adopt a decision finding no concerns, allow the bidder to continue subject to commitments or prohibit the award of the contract to the bidder concerned. Public procurements may continue while the Commission is making evaluations under this procedure but not awards, unless the authority concerned concludes that the most economically advantageous tender is from a bidder who has submitted a relevant declaration and the Commission has not sought an extended review; and
• a general market investigation tool, under which the European Commission can investigate any situation in which it suspects that a distortive foreign subsidy may affect the operation of companies established or active within the European Union Single Market (the Investigatory Tool). This could cover any scenario in which companies involved in business in the EU have benefited from subsidies elsewhere.

What Actions Can the Commission Take Under the FSR? 

The Commission has the power to levy fines of up to 10 % of the aggregate turnover of a business in the preceding financial year if a notification is not made prior to the implementation of a measure.

Where a distortive subsidy is identified, then the FSR gives the Commission significant discretion as to the redressive measures it chooses to implement. Options available to the Commission include prohibiting the award of the public procurement contract to the subsidised bidder, ordering the recipient to refrain from certain investments and requiring a recipient to adapt its governance structure. The Commission is required to balance the negative effects of the subsidy against the positive effects when deciding the appropriate redressive measures to implement.

FSR Applied to Professional Football 

Although the FSR has not been devised specifically to regulate football, the first two complaints (which are in the public domain) relate to professional football clubs that have benefited from investment from the Middle East.

   1) The FSR Complaint by La Liga Against Paris St Germain

The potential for a complaint against Paris St Germain was foreseeable, not only because of the high profile and spending of the French club, but also because financial assistance from the Spanish Government to football clubs has previously been the subject of State aid cases involving Real Madrid and Barcelona.

On Saturday 12 August 2023, La Liga published its allegation that a breach of the FSR has occurred because distortive subsidies have been awarded to Paris St Germain by “the State of Qatar, which has allowed it to improve its competitive position, thus generating significant distortions in several national and EU markets”.  La Liga called on the European Commission to use the FSR to “eliminate market distortions” affecting European football.

   2) The FSR Complaint by Virton Against SK Lommel

The first complaint under the FSR was made, with little publicity, in May 2023 by Royal Excelsior Virton (Virton), a professional football club in Belgium’s second division, against SK Lommel (SKL), which has the same owners as the Premier League’s Manchester City FC.

The allegation by Virton primarily focussed upon an investment of €16.8 million which SKL had used to obtain its professional licence from the Belgian Football Federation, which the complaint alleged originated from the Emirate of Abu Dhabi and was in breach of the FSR.

How Has the European Commission Responded to the Complaints?

So far, no formal statement has been made in response to the complaints.

Will More FSR Complaints Be Made about Football Clubs?

It seems inevitable that further complaints will be made about football clubs, noting that there is significant interest in how football clubs are financed, but also that no cost arises to a party choosing to make a complaint. Indeed, it seems probable that other complaints have been made, but have not been announced by the complainant.

Will the European Commission use the FSR to Tackle Football Financing? 

The objective of FSR is not to clean up football. Rather the FSR has been designed to ensure a level playing field for all types of businesses operating in the EU Single Market by regulating how State subsidies, originating from outside the EU, affect businesses trading in the EU. The European Commission would therefore probably prefer that the first complaints did not involve an emotive subject like football. However, we anticipate that the Commission will act upon any information submitted to it and consider the issue in line with the relevant framework.

However, reviewing the way certain clubs are financed is not the same as taking action. Indeed, the European Commission’s powers under the Foreign Subsidies Regulation are wide, but not precisely defined. Therefore, we anticipate that the European Commission will be able to exercise discretion as to whether to act in these early cases.

Could the FSR Be Used Against Premier League Clubs?

The Commission has shown in its State aid law decisions, such as this one against Valencia, Hercules and Elche in 2017 that it regards club football to have cross border impact on the grounds that players are sold between countries but also viewing as integrated the markets for “broadcasting rights, merchandising and sponsoring” which it stated were “sources of revenue for which such clubs compete with other clubs within and outside their home country”.

Therefore, it cannot be ruled out that the European Commission might bring an action against a Premier League club, such as Manchester City or Newcastle United, but it would be much harder than for Paris St Germain. After all, Paris St Germain operates in the French League week in, week out. Whereas a club such as Manchester City plays in international competitions, which may primarily be in EU countries, but are not necessarily synonymous with the EU Single Market.

Conclusion

The EU Foreign Subsidies Regulation is a new area of competition law, which needs to be considered when subsidies are awarded to businesses that will operate in the EU Single Market. There is a level of uncertainty around how the rules will be applied at this stage, but the picture will become clearer as cases come forward. Whilst the European Commission likely would have preferred not to be drawn into a sector as emotive as professional football for one of the earliest cases, it seems inevitable that the European Commission will be required to look into whether Paris St Germain has benefited from distortive subsidies.