Explanatory Memorandum to COM(2021)223 - Foreign subsidies distorting the internal market

Please note

This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2021)223 - Foreign subsidies distorting the internal market.
source COM(2021)223 EN
date 05-05-2021


1. CONTEXTOFTHE PROPOSAL

• Reasons for and objectives of the proposal

The European Union (EU) is closely intertwined with the global economy. With trade in goods and services worth EUR 5 984 billion in 20191, it accounts for 16.4% of overall global trade. As a result, trade accounts for almost 35% of the EU’s gross domestic product (GDP), with 35 million jobs in the EU dependent on exports. The flow of products, services and capital into and out of the EU contribute to its growth by enhancing competitiveness, creating jobs, stimulating innovation and opening up new markets2.

In 2017 the EU28 was the destination for a third of the world’s investment stocks and home to roughly 100 000 companies owned by foreign entities3. Foreign direct investment (FDI) is a welcome source of employment (16 million jobs4), growth and competitiveness.

A strong, open and competitive single market enables both European and foreign companies to compete on merit in as far as a level playing field in the internal market is ensured. Accordingly, on 10 March 2020 the Commission presented a new industrial strategy for Europe5, which mapped out a path whereby EU industry could lead the green and digital transitions on the basis of competition, open markets, world-leading research and technologies, and a strong single market. The EU is pursuing a model of open strategic autonomy6 by shaping the system of global economic governance and developing mutually beneficial bilateral relations, while protecting its internal market from unfair and abusive practices. The Communication on the trade policy review adopted on 18 February 2021 set the direction for an open, sustainable and assertive trade policy, building on openness as a strategic choice while also being equipped with the tools to combat unfair trading practices.7

In recent years, foreign subsidies appear in some instances to have had a distortive impact on EU’s internal market, creating an uneven playing field for competition. While there is still a general lack of reliable data on subsidies granted by third countries, there is a growing

DG Trade Statistical Guide, August 2020, excluding intra-EU trade;

https://trade.ec.europa.eu/doclib/docs/2013/may/tradoc_151348.pdf

Report from the Commission on the implementation of the trade policy strategy – Trade for all: delivering a

progressive trade policy to harness globalisation (COM(2017) 491 final).

2.

Eurostat, Foreign AffiliaTes Statistics (FATS), Foreign control of enterprises by economic activity and a


selection of controlling countries (from 2008 onwards) [fats_g1a_08]. The 100 000 figure includes the

3.

United Kingdom as part of the EU-28. Preliminary data shows that this figure is not likely to change


significantly for the EU-27. In 2018, an estimated 84 000 enterprises in the EU-27 were owned by foreign

entities (excluding the UK), while in 2015-2017 there were around 18 000 UK-owned enterprises in other

EU-27 countries.

Commission staff working document on Foreign direct investment in the EU (SWD(2019) 108 final),

following up on the Commission Communication Welcoming foreign direct investment while protecting

essential interests (13 September 2017).

Commission Communication, A new industrial strategy for Europe (COM(2020) 102 final), as updated in

2021. See also the Commission Communication, The European economic and financial system: fostering

openness, strength and resilience (COM(2021) 32).

Commission Communication, Europe’s moment: repair and prepare for the next generation

(COM(2020) 456 final). See also the Commission Communication, The European economic and financial

system: fostering openness, strength and resilience (COM(2021) 32).

Commission Communication, Trade Policy Review – An Open, Sustainable and Assertive Trade Policy

(COM(2021) 66 final).

2

3

4

5

6

4.

number of instances in which foreign subsidies seem to have facilitated the acquisition of EU


undertakings, influenced investment decisions, distorted trade in services or otherwise

influenced the behaviour of their beneficiaries in the EU market, to the detriment of fair competition8.

In this context, foreign subsidies can take different forms, e.g. zero-interest loans, unlimited State guarantees, tax exemptions or reductions in respect of foreign investments or trade or dedicated State funding. In many cases, they would be problematic if granted by EU Member States and assessed under EU State aid rules.

Since 2017, the EU has been actively engaged in trilateral talks with the United States and Japan to improve multilateral cooperation in a number of key areas. In June 2018, the European Council gave the Commission a mandate ‘to pursue WTO modernisation in pursuit of the objectives of making the WTO more relevant and adaptive to a changing world, and strengthening the WTO’s effectiveness’9. In January 202010, senior trade representatives of the EU, US and Japan agreed on the need to strengthen World Trade Organization (WTO) rules on industrial subsidies. In this context, the EU intends to start work on developing WTO rules to address a range of competitive distortions due to state intervention in the economy, including industrial subsidies, as outlined in the Annex to the Communication on the Trade

Policy Review.11

Considering the challenge to find a multilateral solution to subsidies within a reasonable timeframe, the Commission committed (as part of the new industrial strategy for Europe) to explore how best to strengthen the EU’s anti-subsidy mechanisms and tools12. On 17 June 2020, the Commission adopted a white paper on foreign subsidies13 to explore the issue, launch a public debate and propose possible solutions. The white paper and, in more detail, Section 2 of the impact assessment report accompanying the present proposal describe a legislative gap in EU competition, trade and public procurement rules, which effectively prevents the EU from taking action when foreign subsidies cause distortions in the internal market including by financing concentrations or procurement bids.

The white paper notes that, while the granting of support by Member State authorities is subject to EU State aid control, no comparable regime is in place for support granted by non-EU countries. This puts undertakings that engage in an economic activity in the EU without subsidies at a disadvantage vis-à-vis beneficiaries of foreign subsidies.

The white paper further identified problems linked to access to EU funding by operators receiving foreign subsidies, which could distort the competition for EU funds. The impact assessment accompanying this proposal notes that any Union measures addressing the

8

5.

A recent report by the European Court of Auditors finds that certain subsidies granted by the Chinese state


would constitute State aid if granted by an EU Member State, and notes that this ‘difference in treatment can

distort competition in the EU’s internal market’; European Court of Auditors, ‘The EU’s response to China’s

state-driven investment strategy’, Review 03 (2020);

www.eca.europa.eu/Lists/ECADocuments/RW20_03">https://www.eca.europa.eu/Lists/ECADocuments/RW20_03

European Commission, Concept paper: WTO modernisation (September 2018).

6.

Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European


Union (Washington, D.C., 14 January 2020).

Annex to the Commission Communication, Trade Policy Review – An Open, Sustainable and Assertive

Trade Policy (COM(2021) 66 final).

A new industrial strategy for Europe (COM(2020) 102 final), as updated in 2021.

White paper on levelling the playing field as regards foreign subsidies (COM(2020) 253 final).


distorting effects of foreign subsidies in public procurement will apply to the EU budget expenditure under shared management distributed through public procurement. The direct management of EU funds is subject to the EU’s Financial Regulation. The Commission will explore the possibility to propose to the co-legislators amendments to the Financial Regulation during the next revision, to take into account the impact of foreign subsidies. To the extent EU funding is distributed through public procurement under shared management, possible distortions would be addressed through the public procurement provisions of this proposal.

Recently, several Member States have made suggestions for action aimed at addressing the possible distortions from foreign subsidies14. In addition, the German Monopolies Commission has proposed a foreign State aid instrument to address the negative effects of foreign subsidies on the internal market15.

The co-legislators have also raised the issue of foreign subsidies on several occasions. The Council referred to the Commission’s white paper in its conclusions of 11 September 202016 and, in its conclusions of 1-2 October 202017, the European Council called for ‘further instruments to address the distortive effects of foreign subsidies in the single market’. In its February 2020 report on competition policy18, the European Parliament called on the Commission to ‘investigate the option to add a pillar to EU competition law that gives the Commission appropriate investigative tools in cases where a company is deemed to have engaged in distortionary behaviour due to government subsidies or to have made excessive profits based on a dominant market position in its home country’. In a joint letter to Commission Executive Vice-Presidents Vestager and Dombrovskis and Commissioner Breton19, a group of 41 Members of the European Parliament expressed strong support for an instrument to tackle ‘companies from third countries that have received substantial state support’.

As announced in the Commission’s work programme for 2020-2021, this proposal for a regulation therefore sets out the features of a new tool to address the regulatory gap and to ensure a level playing field in the internal market. It is also mentioned under point 3.2.6 of the

14

15

16

The Netherlands has suggested targeting undertakings that receive foreign subsidies or have an unregulated dominant position in a non-EU market, in order to prevent potentially disruptive behaviour;

www.permanentrepresentations.nl/documents">https://www.permanentrepresentations.nl/documents.

France, Germany, Italy and Poland have called for the Union’s competition rules to be adapted, in particular to take account of the possible distortions created by foreign State support and protected markets; https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2020/02/Letter-to-Vestager.pdf.

Biennial Report XXIII of the Monopolies Commission (‘Competition 2020’);

www.monopolkommission.de/images/HG23">https://www.monopolkommission.de/images/HG23 Council of the European Union, Conclusions on a deepened single market for a strong recovery and a competitive, sustainable Europe (11 September 2020);

www.consilium.europa.eu/media/45641">https://www.consilium.europa.eu/media/45641

Special meeting of the European Council (1 and 2 October 2020) – Conclusions (2 October 2020); www.consilium.europa.eu/media/45910">https://www.consilium.europa.eu/media/45910

European Parliament, Report on competition policy — annual report 2019 (A9-0022/2020; 25.2.2020); www.europarl.europa.eu/doceo/document">https://www.europarl.europa.eu/doceo/document

Letter to EU telecom and trade ministers and Commissioners Breton, Vestager and Dombrovskis (14.10.2020);

https://reinhardbuetikofer.eu/2020/10/14/letter-to-eu-telecom-and-trade-ministers-and-to-european-commissioners-thierry-breton-margrethe-vestager-and-valdis-dombrovskis/

7

8

9

Communication on the trade policy review on strengthening the focus on implementation and enforcement and ensuring a level playing field.

• Consistency with existing policy provisions in the policy area

At present, there are no specific EU rules to address the distortive effects that foreign subsidies may have on the internal market. While the EU has a system of State aid control enshrined in Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU), it applies only where an EU Member State grants financial support to an undertaking or group of undertakings, giving rise to an advantage that distorts competition and affects trade between Member States. The EU antitrust rules20 prohibit agreements or concerted practices of undertakings having the object or effect of distorting competition in the internal market, and abuses of dominant positions by undertakings irrespective of their forms or the way they are financed. The EU merger rules21 provide for a system of prior notification and approval for concentrations entailing permanent changes of control over undertakings above certain EU turnover thresholds irrespective of whether or not such concentrations may be financed by way of foreign subsidies granted.

This proposal addresses distortions on the internal market caused by foreign subsidies that fall outside the EU State aid, merger control and antitrust rules. It complements and is fully coherent with the existing competition rules. It addresses the detrimental effects of distortive foreign subsidies in the cases of concentrations and public procurement ex ante, without limiting the EU’s ability to intervene ex post in other market situations, including in smaller concentrations and public procurement procedures.

The proposal is fully coherent with the EU public procurement rules. The EU Directives on public procurement22 cover tenders that are expected to be worth more than a given amount. They are designed to ensure a competitive, open and well-regulated procurement market. They also ensure that EU companies have access to rapid and effective review. The present proposal is concerned specifically with distortions that foreign subsidies may cause to public procurement procedures within the EU. It therefore complements the existing rules.

• Consistency with other Union policies

The proposal is coherent with the new industrial strategy and the trade policy review in its contribution to ensuring the EU’s competitiveness and open strategic autonomy, by strengthening its anti-subsidy mechanisms and tools. The proposal also takes into account the objectives of the European Green Deal. It will constitute a coherent, effective and proportionate framework for addressing distortions in the internal market that currently cannot be tackled.

7.

20 21


Articles 101 and 102 TFEU.

8.

Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between


undertakings (OJ L 24, 29.1.2004, p.

1).

9.

Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public


procurement and repealing Directive 2004/18/EC, OJ L 94, 28.3.2014, p. 65.

10.

Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement


by entities operating in the water, energy, transport and postal services sectors and repealing Directive

11.

2004/17/EC, OJ L 94 28.3.2014, p. 243


Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of

concession contracts OJ L 94 28.3.2014, p. 1

22

This proposal complements the amended proposal for the International Procurement Instrument (IPI)23 aimed at encouraging trading partners to negotiate with the EU on the opening of their procurement markets to EU businesses. The IPI proposal, as presented by the Commission, aims at improving access to public procurement markets outside the EU. However, it will not tackle distortions of procurement processes in the internal market arising from foreign subsidies granted to undertakings participating in EU procurement markets24.

The proposal is coherent with EU trade policy and complements existing trade instruments. The WTO Subsidies and Countervailing Measures (SCM) Agreement (at multilateral level), bilateral free-trade agreements and the EU anti-subsidy regulation25 discipline the use of subsidies in their scope and regulate actions that can be taken to counter the effect of those subsidies. Measures to counteract unfair practices usually take the form of extra import duties to eliminate the injury of the subsidisation granted by other WTO countries. However, the EU anti-subsidy rules only address the injury caused by the import of goods into the EU that have benefitted from a foreign subsidy. At international level, the EU can bring litigation against a WTO member for breaches of the SCM Agreement, but the scope of the Agreement is also limited to trade in goods. The WTO General Agreement on Trade in Services (GATS) contains an inbuilt mandate to develop rules for subsidies in the area of trade in services, but no such rules have been developed to date.

This proposal complements the FDI Screening Regulation26, the purpose of which is to determine the likely impact of FDI on security and public order by considering its effects on, among other things, critical infrastructure, technologies and inputs. In contrast, this proposal specifically tackles the issue of distortions to the level playing field caused by foreign subsidised investments in the internal market, including strategic industries, critical assets and technologies.

The proposal is aligned with other EU instruments, including the EU Charter of Fundamental Rights.

The proposal is also coherent with the targeted and tailor-made regulation of specific sectors, including the maritime technology and the aviation sectors27.

2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY

• Legal basis

12.

The proposed regulation would impose disciplines with regard to foreign subsidies that have a distortive impact on the internal market, including situations where a subsidised investor plans


23

13.

Amended proposal for a Regulation of the European Parliament and of the Council on the access of


third-country goods and services to the Union’s internal market in public procurement and procedures

14.

supporting negotiations on access of Union goods and services to the public procurement markets of third


countries (COM(2016) 34 final, 29 January 2016). This proposal is being discussed in the Council.

Following the call by the Commission and the European Council in March 2019 to resume the discussions,

15.

the co-legislators are currently engaged in constructive discussions on the IPI, on the basis of the 2016


amended legislative proposal from the Commission.

16.

Regulation (EU) 2016/1037 of the European Parliament and of the Council on protection against subsidised


imports from countries not members of the European Union (OJ L 176, 30.6.2016, p. 55).

17.

Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a


framework for the screening of foreign direct investments into the Union (OJ L 79I , 21.3.2019, p.

1).

18.

As covered by Regulation (EU) 2016/1035 (which however does not apply as the conditions in Article 18 are


not fulfilled), Regulation (EC) 1008/2008 and Regulation (EU) 2019/712.

24

25

26

2

to acquire an EU target or participate in an EU public procurement procedure. Article 207(1) of the Treaty on the Functioning of the European Union (TFEU) defines the scope of the Union’s common commercial policy as encompassing inter alia measures to be taken ‘in the event of subsidies’, ‘foreign direct investment’ and trade in goods and services. Consequently, the proposed regulation falls largely within the scope of Article 207(2) TFEU, which provides for the adoption of measures defining the framework for implementing the common commercial policy.

At the same time, the proposed regulation may apply as well to certain activities performed by an entity already established in one Member State in another Member State, such as the acquisition of another entity in another Member State or the participation in a public tender in another Member State. To that extent, the proposed regulation may affect the right of establishment and the free movement of goods and services within the Union. In view of that the proposal should be based as well on Article 114 TFEU, which provides for the adoption of measures for the approximation of measures of the Member States which have as their object the establishment or functioning of the internal market. While to date there are no national rules dealing with foreign subsidies, several Member States28 have indicated that they see a need to address the distortions caused by foreign subsidies. It cannot be ruled out that, in the absence of an EU action, at least some Member States could decide to adopt national legislation. Consequently, and in order to avoid unnecessary obstacles that could result from the disparity of national laws, the Commission should propose EU-wide legislation on distortive foreign subsidies.

It is therefore proposed that the proposal be based on Articles 207 and 114 TFEU.

• Subsidiarity (for non-exclusive competence)

Trade policy is an exclusive competence of the EU. Consequently, if the proposal were based solely on Article 207 TFEU, the EU institutions, rather than the Member States’ governments, could put in place new legislation in relation to distortive foreign subsidies.

On the other hand, the internal market is an area of shared competence. Therefore, for a proposal based on Article 114 TFEU, the Member States can also legislate and adopt legally binding acts, unless the objectives of the proposal could be better achieved at EU level. To date, no Member State has adopted national legislation to address potential distortive effects of foreign subsidies. Furthermore, several Member States have instead called on the Commission to propose draft legislation in this area29.

The objectives of the proposal cannot be achieved by Member States acting alone. Foreign subsidies cause distortions on the internal market, including in the context of acquisitions of EU targets and of public procurement. The situation is comparable to State aid granted by EU Member States, which by nature has effects on more than one Member State. Likewise, distortions caused by foreign subsidies may have a Union dimension, affecting several Member States.

19.

Addressing distortive foreign subsidies at EU level allows potential beneficiaries of foreign subsidies to know in advance the rules that the Commission will use to assess the existence of


28 Among others The Netherlands, France, Germany, Poland and Italy

29 See, for example, above-mentioned contributions from the Netherlands, France, Germany, Poland and Italy.

foreign subsidies and possible distortions they may cause. This guarantees predictability and improves the legal certainty of the system across Member States.

• Proportionality

The proposal aims to protect the level playing field in the internal market so that it is not distorted by foreign subsidies. It therefore focuses on two issues: identifying distortive foreign subsidies and remedying the distortions they cause.

For concentrations and public procurement, the proposal involves a system of ex ante notification of the largest and potentially most distortive cases. The ex ante approach ensures the systematic identification of distortive foreign subsidies in situations where the highest economic value is at stake. In all other market situations, including smaller concentrations and smaller procurement procedures, such subsidies are subject to an ex officio procedure that enables the Commission to focus on the most relevant cases. Based on relevant market information, the supervisory authority will then assess the degree of distortion. In any event, foreign subsidies below EUR 5 million are unlikely to be distortive.

The redressive measures in the proposal are based on measures applied in EU State aid control to remove the distortive effect of State aid. As the potentially distortive impact of foreign subsidies on the internal market is similar to that of State aid, the State aid toolbox of remedies provides an efficient set of measures to remedy distortions caused by foreign subsidies. In the case of large concentrations and large procurement procedures, the ex ante approach ensures that measures can be decided before the transactions are closed, which gives legal certainty to the undertakings concerned.

The measures in the proposal are proportionate, since they achieve their objective by imposing a burden, in a targeted manner, only on undertakings engaged in an economic activity in the internal market that receive foreign subsidies. The proposal requires the cooperation of the companies under investigation, but the administrative costs will be reasonable and proportionate. The costs will imply some resources to prepare notifications of large subsidised concentrations or public procurement procedures, communicating with the Commission and responding to requests for information.

• Choice of instrument

Only a legislative instrument can effectively address the problems identified. A regulation is necessary, as it is directly applicable in Member States, establishes the same level of rights and obligations for private parties, and enables the coherent and effective application of rules across the EU. This is the most suitable instrument for addressing the potential distortions of the internal market by foreign subsidies.

3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER

Contents

1.

CONSULTATIONS


ANDIMPACTASSESSMENTS

• Stakeholder consultations

The Commission consulted widely30 on the proposal:

30 A detailed overview of the results of the consultations is presented in Annex 2 and Annex 6 to the impact

assessment.

20.

on 17 June 2020, it adopted and published a white paper on foreign subsidies, which launched a 14-week public consultation that finished on 23 September


202031;

– on 6 October 2020, it opened a consultation to stakeholders on an inception impact assessment outlining possible policy options, their potential impacts and other elements to be assessed in a detailed impact assessment report;

– between October 2020 and January 2021, it organised a number of bilateral targeted consultations with the most relevant stakeholder representatives32; and

– it carried out a structured dialogue with Member States, notably through Council working parties, the public procurement expert group, and bilateral and multilateral exchanges and conferences contributed to the design of policy options.

In general, the public consultations showed strong support for intervention to tackle distortive foreign subsidies in the internal market. Almost all respondents who provided feedback on the inception impact assessment supported legislative action at EU level, possibly complemented by international rules.

The replies received in the consultation on the white paper were highly relevant for the drafting of the proposal. Almost all EU stakeholders, including Member States, welcomed the initiative and agreed on the need for action. The majority agreed with the scope of the approach outlined in the white paper, but stressed the need for a proportionate measure so as not to stifle foreign investment, a concern echoed also by non-EU stakeholders. Many respondents highlighted the need to deal with the lack of transparency of foreign subsidies.

To address distortive foreign subsidies while minimising the administrative burden on companies and public authorities, it is proposed that the notification thresholds for subsidised concentrations and public procurement procedures be set relatively high, in order to capture only the potentially most distortive subsidies. The Commission can pursue cases below the thresholds on its own initiative. Similarly, to increase legal certainty for companies engaged in economic activity in the EU, it is proposed that a minimal level be set below which foreign subsidies are unlikely to distort the internal market. This will have a positive impact particularly on SMEs. Given the numerous requests for consistency in the application of the instrument, it is proposed that the Commission be responsible for enforcing the regulation.

In addition, the feedback in the targeted consultations was used to generate examples of types of subsidy, sectors affected and concrete distortive effects. These were discussed in the impact assessment and used to shape the proposal.

Collection

and use of expertise

This initiative is supported by an impact assessment. In addition, the Commission carried out several consultations in 2020 (see above). In-house economic research by the Joint Research Centre further informed the impact assessment. Member States were consulted in several meetings of the Council working parties on competition and public procurement, and in expert group meetings. Finally, a number of Member States’ position papers on dealing with

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12621-Addressing-distortions-

21.

caused-by-foreign-subsidies


https://ec.europa.eu/competition/international/overview/foreign su bs id ies.h t m l


3

32

subsidies33 and several reports and studies34

22.

foreign subsidies and several reports and studies contributed to the design of the


instrument.

Impact

assessment

The impact assessment underpinning the proposal was considered by the Commission’s Regulatory Scrutiny Board, which issued a positive opinion with reservations on 5 March 2021. The Board’s opinion, its recommendations and an explanation of how they have been taken into account are included in Annex 1 to the impact assessment accompanying this proposal. Annex 3 to the impact assessment provides an overview of who will be affected by this proposal and how.

The Commission examined various policy options for achieving the general objective of the initiative, i.e. to ensure a level playing field in the internal market for companies that receive foreign subsidies and those that do not:

Option 1 — do nothing (status quo);

Option 2 — issue guidance on what information on public support to submit when notifying an acquisition;

Option 3 — amend existing legislation; and

Option 4 — develop a new EU legal instrument with alternatives for various parameters.

The inception impact assessment report proposed a fifth option, which entailed changing international rules. The impact assessment report no longer presented such fifth option and instead included its substantive elements in the baseline scenario, as the Commission will in any event pursue such policy initiative, namely to aim to promote the development of international rules to address negative impacts of subsidies. Options 2 and 3 were discarded at a preliminary stage, as they were unlikely to be effective. Consequently, only option 4 was considered in more detail.

Option 4 proposed several alternatives that were analysed. These alternatives concerned the following parameters:

i) investigative approach;

ii) competence level;

iii) threshold below which foreign subsidies would not be considered distortive;

iv) assessment criteria;

23.

v) a balancing test, allowing to take into account negative and positive effects; and


vi) redressive measures.

24.

Based on the assessment of the impacts of option 4, the sub-options relating to the above parameters were combined to form possible policy packages for all three areas in which


33 See footnote 15.

34 Biennial Report XXIII of the Monopolies Commission (‘Competition 2020’); www.monopolkommission.de/images/HG23">https://www.monopolkommission.de/images/HG23 Mercator Institute for China Studies (MERICS), Made in China 2025: The making of a high-tech superpower and consequences for industrial countries, MERICS Papers on China No 2 (December 2016); https://merics.org/sites/default/files/2020-04/Made%20in%20China%202025.pdf


distortive subsidies can be found, i.e. concentrations, public procurement procedures and other market situations.

The preferred option for each of the areas can be presented as a three-tiered investigative tool with the following components:

• Component 1: A noti ficati on - base d investigative tool for concentrations where the turnover of the EU target exceeds EUR 500 million and the foreign financial contributions exceed EU R 50 million;

• Component 2: A noti ficati on - base d investigative tool for bids in public tenders with a contract value above EUR 250 million; and

• Component 3: An ex officio investigative tool for all other market situations and for concentrations and public procurement procedures below the thresholds for components 1 and 2.

It is proposed that the Commission be the authority enforcing the regulation. Foreign subsidies below EUR 5 million are considered unlikely to be distortive.

The preferred option largely corresponds to the approach presented in the white paper, with two main exceptions35:

• while the white paper envisaged a role for Member States in scrutinising public procurement procedures, the proposal involves enforcing all components at EU level. This responds to widespread stakeholder concern that a new instrument on

25.

foreign subsidies would be applied inconsistently across


Member States

and

overburden national authorities

36

26.

; and


• the preferred option includes more detail than the white paper, notably on notification thresholds and the threshold below which foreign subsidies would be considered not to distort the internal market. Such thresholds also respond to widespread stakeholder concerns about administrative burden and are in line with feedback from several stakeholders that the threshold below which subsidies are considered non - distorti v e should be higher than EUR 200 000 OVCF & 3-year period, as initially proposed.

The ex ante notification for the largest and potentially most distortive cases will ensure systematic identification of distortive foreign subsidies in situations of highest economic value. For all other market situations (including smaller concentrations and smaller procurement procedures), distortive foreign subsidies would be identified in an ex officio procedure. This approach enables the supervisory authority to focus its attention on the most relevant cases. The preferred option also provides for an effective toolbox of redressive measures to remedy the d istortion caused by foreign subsidies.

27.

While some stakeholders raised doubts about the approach presented in the white paper, the majority of EU


stakeholders (Member States and other stakeholders) and some non-EU stakeholders support the initiative

(see contributions referenced in Annex 2 and Annex 6 to the impact assessment).

28.

See e.g. the contributions of the Netherlands, European Services Forum (ESF), European Semiconductor


Industry Association (ESIA), Government Experts Group on Public Procurement and other stakeholders in

Annex 2 and Annex 6 to the impact assessment.

29.

e.g. Czechia, Poland, European Round Table for Industry, Confederation of Danish Industry, Bundesverband


der Deutschen Industrie, Eurometaux.

35

36

3

The benefits of the preferred option are expected to include a level playing field in the internal market between companies receiving foreign subsidies and those that do not. This will improve the competitiveness of the latter. Businesses, especially those receiving large foreign subsidies, may incur certain administrative costs when preparing notifications or complying with information requests. However, these costs are reasonable and proportionate.

The impacts of the policy options on different categories of stakeholders are explained in detail in Annex 3 to the impact assessment. To the extent possible, the assessment is both qualitative and quantitative. In view of the high threshold below which subsidies would be considered not to distort the internal market and the high proposed notification thresholds for subsidised concentrations and public procurement transactions, this initiative will not impose an additional burden on SMEs. The burden on the Commission of implementing this initiative is reasonable (mainly redeployment or creation of posts) in the light of the benefits for the economy.

Regulatory

fitness and simplification

The proposal is not linked to REFIT, as it concerns an area in which there is currently no EU (or national) legislation.

In view of the high notification thresholds for subsidised concentrations and public procurement transactions, this proposal lays down measures that will apply mainly to recipients of large foreign subsidies, which are also likely to be the most distortive. This will limit the administrative burden on undertakings and public authorities. In addition, because of the high proposed notification thresholds, SMEs will not be impacted by additional administrative burdens as a result of having to submit notifications.

By remedying the distortive effects of foreign subsidies in the internal market, the proposal will create a level playing field for companies that receive foreign subsidies and those that do not, thus improving the competitiveness of companies in the EU. In view of the limited administrative burden on undertakings and the clear framework that this proposal establishes, the risk that the new instrument will negatively impact trade and investment flows is deemed low. Apart from the risk due to administrative burden, the new instrument may reduce the number of concentrations by preventing subsidised concentrations. However, this is the intended effect and should be outweighed by the benefits of restoring undistorted price signals and company valuations, and facilitating concentrations that were previously hindered.

The proposal is internet-ready and appropriate for both physical and digital environments.

• Fundamental rights

The proposal is aligned with the EU Charter of Fundamental Rights and respects the freedom to conduct business. The introduction of a new legislative instrument to tackle distortive foreign subsidies is subject to ensuring full respect for the fundamental rights to fair proceedings and good administration.

When acting under the legislative instrument, the Commission’s investigation powers would be subject to the full scope of fair process rights, such as the right to a reasoned decision and access to judicial review, including the possibility to challenge enforcement and sanctioning measures. These rights apply in the event of administrative proceedings.


4. BUDGETARYIMPLICATIONS

In order most effectively to achieve the objectives of this initiative, it is necessary to finance a number of actions at Commission level, involving the redeployment or creation of posts amounting to around 145 full-time equivalents38. The human resources expenditure in 2021-2027 will amount to approx. EUR 80.490 million. Other administrative expenses are projected to reach EUR 0. 800 million over that period. Operational expenditure, which will be used to finance the necessary IT infrastructure, studies and consultations to ensure effective enforcement of the instrument will reach approx. EUR 7.825 million. IT development and procurement choices will be subject to pre-approval by the European Commission Information Technology and Cybersecurity Board. Other appropriations of an administrative nature financed from the envelope for specific programmes is budgeted at approx. EUR 1.225 million.

The total administrative expenditure for the implementation of the proposal in 2021-2027 will thus amount to EUR 90.340 million, part of which will be financed from the single market programme. The financing will support investigative and enforcement actions, monitoring activities and market investigations. It will also support a regular review of specific provisions, an evaluation of the regulation and ongoing evaluation of the effectiveness and efficiency of the measures taken. A detailed overview of the costs involved is provided in the financial statement linked to this initiative.

5. OTHERELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

Monitoring and evaluation constitute an important part of the proposal. The monitoring will be continuous and based on operational objectives and specific indicators. Regular and continuous monitoring will cover the following main aspects:

30.

i) the number of distortive foreign subsidies (based on cases); and


ii) the effectiveness of the redressive measures imposed.

In addition, the Commission may monitor developments relating to distortive foreign subsidies in the context of a market investigation.

The effectiveness and efficiency of the proposal will be monitored using pre-defined indicators to establish whether additional rules may be required (e.g. as regards enforcement) to ensure that foreign subsidies no longer distort the internal market. Consequently, the impact of the intervention will be assessed in the context of an evaluation exercise and, if required, a review clause will be activated under which the Commission may take appropriate measures, including legislative proposals.

Detailed

explanation of the specific provisions of the proposal

Chapter 1 sets out general provisions, including the subject matter and scope of the regulation (Article 1). It establishes when a foreign subsidy is deemed to exist (Article 2), under what conditions it is considered to distort the internal market (Article 3) and what types of subsidy are most likely to have a distortive effect (Article 4). It describes the balancing that the Commission performs (Article 5) before imposing any redressive measures, and the possible types of redressive measure and commitment (Article 6).

38 See also impact assessment (Annex III, point 2).


Chapter 2 governs the ex officio review of subsidies. More specifically, it establishes that the Commission may, on its own initiative, examine information from any source regarding alleged distortive foreign subsidies (Article 7) under a preliminary review (Article 8) or in the context of an in-depth investigation (Article 9). It then establishes rules in relation to various tools that can be used in the context of procedures under the regulation, which include Commission interim measures (Article 10) and requests for information (Article 11). In addition, the Commission will be able to conduct on-site inspections within the Union (Article 12) and elsewhere (Article 13). In the event of non-cooperation by the undertaking concerned, the Commission can take a decision on the basis of the facts available (Article 14). It can impose fines and periodic penalty payments (Article 15) for procedural infringements, such as the supply of incorrect, incomplete or misleading information in the context of an investigation, and for non-compliance with Commission decisions imposing redressive or interim measures, or commitments. It may also revoke a previous decision and take a new decision (Article 16) where the undertaking concerned acts contrary to its commitments or it appears that the previous decision was based on incomplete, incorrect or misleading information.

Chapter 3 contains specific rules for concentrations. In particular, it lays down the conditions under which a foreign subsidy in a concentration is considered to distort the internal market (Article 17), defines what a concentration is (Article 18) and prescribes when notification of a concentration should be given (Article 19). It provides more detail on the notification obligation by defining the concept of control (Article 20) and explaining how to calculate turnover (Article 21) and the level of financial contribution (Article 22). It sets out when a concentration should be suspended and the corresponding time limits (Article 23). It specifies which procedural rules from Chapter 2 apply to notified concentrations during the preliminary review and in-depth investigation, adapted to the specificities of a notification system (Article 24). The fines and periodic penalty payments (Article 25) set out in Chapter 2 also apply to notified concentrations, complemented by the possibility of imposing them in the event of a notification providing incorrect or misleading information, or of failure to notify or non-compliance with the suspension obligation or a decision prohibiting a concentration.

Chapter 4 contains specific provisions on public procurement procedures. In particular, it lays down the conditions under which a foreign subsidy is considered to distort the internal market in a public procurement procedure (Article 26), sets the notification thresholds (Article 27) and prescribes when a notification in the context of such a procedure is mandatory (Article 28). It specifies which procedural rules from Chapter 2 apply to notified financial contributions in public procurement procedures and the time limits for initiating and ending an in-depth investigation (Article 29). It describes the types of decision that the Commission can adopt (Article 30) and when the award of a public contract to potentially subsidised bidders in public procurement procedures should be suspended (Article 31). Finally, it provides that fines and periodic penalty payments can be imposed as set out in Chapter 2, complemented by the possibility to do so in the event of a notification providing incorrect or misleading information, or of failure to notify (Article 32).

Chapter 5 contains common procedural provisions. It describes the relation between ex officio review, notification of a concentration and notification of public procurement (Article 33). It provides for the possibility of opening a market investigation (Article 34) and prescribes limitation periods (Article 35). It also contains an obligation to publish decisions adopted under the regulation (Article 36) and specifies to whom such decisions should be addressed (Article 37). Several provisions set the procedural guarantees before the Commission, in

particular the rights of defence (Article 38) and the protection of professional secrecy (Article 39).

Chapter 6 describes the relationship between the regulation and other legal instruments (Article 40).

Chapter 7 contains further general provisions, such as the committee procedure for decisions (Article 41), as well as the possibility of adopting implementing provisions (Articles 42, 43) and delegated acts (Article 44), in accordance with specific rules on the delegation of powers (Article 45). In addition, there is a provision for a review of the regulation (Article 46). Finally, the regulation contains certain transitional provisions (Article 47) and states when it will enter into force and when it will be applied (Article 48).