The Foreign Subsidies Regulation (FSR) is a tool nominally designed to assess and counter foreign subsidies that are likely to produce distortions in the EU’s internal market. For the FSR’s purpose, a foreign subsidy exists where a financial contribution is provided, directly or indirectly, by a third country, which confers a benefit on a business active within the EU, and which is limited, in law or in fact, to one or more businesses or industries. The European Commission (EC) is responsible for ascertaining whether a foreign subsidy exists and for determining whether such foreign subsidies lead to negative effects that outweigh their positive impact.

Businesses do not have to assess whether they have received foreign subsidies, but they need to track and report their foreign financial contributions instead. This is because the notification tools in the FSR, in the case of an acquisition or participation in a public tender procedure, are triggered when the relevant businesses receive foreign financial contributions exceeding certain thresholds.

Financial contributions are defined very widely within the FSR, and this expansive definition is one of the most criticized parts of this new regulatory tool. This definition captures all forms of contributions, regardless of their nature and rationale, and includes, inter alia:

(a) Any transfer of funds or liabilities, such as grants, capital injections, loans, loan guarantees, below-cost financing, fiscal incentives, debt forgiveness, setting off of operating losses, compensation for financial burdens imposed by public authorities, and debt-to-equity swaps);
(b) Any foregoing of revenues that are otherwise due, such as tax exemptions and the granting of special or exclusive rights without adequate remuneration); and 
(c) the provision or purchase of goods or services, even if at fair-market terms and prices.

The above categories are not exhaustive, and all forms of financial contributions are relevant at the notification stage, regardless of their type or value.

Such financial contributions are considered foreign if they are provided by:

(a) A third country’s central government and its public authorities at all other levels; or
(b) A foreign public entity or a private entity whose actions can be attributed to the third country.

The question of whether an entity’s actions can be attributed to a third country requires a fact-specific assessment which will be heavily influenced by the EU’s caselaw on State aid law and the concept of imputability of an act to a state. The recommended approach for businesses for the purposes of monitoring the FFCs they have received is to include any financial contributions they receive from the governments of non-EU countries, as well as entities with significant legal, economic, organic, or decisional connections to a third country’s government.

For more information on the FSR and to find out how your business can navigate its way through this new regulatory tool, please check Reed Smith’s Roadmap to the Foreign Subsidies Regulation.