The Flanders-China Chamber of Commerce and the China Chamber of Commerce to the EU, in collaboration with Baker McKenzie, organized a webinar focused on “Foreign subsidies regulations for doing business with China” on 5 December 2023.
Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, welcomed the participants to the webinar and introduced the speakers. The EU regulation on foreign subsidies (FSR) has come into force, providing the EU Commission with broad investigative powers to assess any distortion of the internal market caused by subsidies granted by non-EU member states to any company active in the EU's internal market. Doing business has become more complex due to the geopolitical situation and the slowing down of the global and Chinese economy, but with the growth forecast of 5.5% for 2023 the Chinese economy is performing better than expected. Compared to the large economic players, China is still one of the fastest-growing economies in the world. The EU and China need each other more than ever and their economies are strongly interdependent. The cumulative foreign direct investment from the EU to China in the last 20 years has reached more than €140 billion. The figure for Chinese FDI into the EU is almost €120 billion. According to recent reports by the Rhodium Group, Chinese investments in the EU+UK went down by 22% compared to 2021 and reached €7.9 billion in 2022. A lack of Chinese M&A activity was the main reason. We also saw a substantial shift in the nature of Chinese investments in Europe. Driven by electric vehicle battery factories, greenfield investments now dominate activities in the region, accounting for almost 60% of China's total FDI in Europe in 2022. Battery investments are now the mainstay of Chinese investments in Europe. Chinese companies have become main players in Europe's green transition. Consumer products and automotive remain the top sectors for Chinese investments in the EU, accounting for three quarters of all Chinese investments in Europe.
Mr Fang Dongkui, Secretary General, China Chamber of Commerce to the EU (CCCEU), explained that the new EU regulation would have a significant impact on Chinese companies aiming to expand and operate in the European market. The CCCEU recently released its flagship report “Building trust, wishing prosperity” on the development of Chinese companies in the EU in 2023/2024. Our findings indicate a resilient growth trajectory for Chinese businesses in the EU. Nevertheless, this growth is overshadowed by increasing uncertainty. The evaluation of the EU business environment by Chinese companies has declined for the fourth consecutive year. This decline is primarily attributed to the EU's foreign subsidies regulation and its de-risking strategy. While these policies aim to ensure fair competition, they have inadvertently introduced complexities and apprehension, adversely affecting the business environment for Chinese companies. About 70% of the enterprises that responded to our survey expect the EU to improve policy support, particularly in areas such as intellectual property rights protection and funding for R&D activities. As we dive deeper into the impact of the FSR, it is becomes evident that nearly 37% of the Chinese companies we surveyed felt its effect. This regulation especially concerns businesses receiving government support, increasing compliance costs. The EU anti-subsidy regulation has immense importance for businesses seeking growth and development in Europe.
Mr Bram Hoorelbeke, Counsel, EU Competition and Regulatory Affairs Practice, Baker McKenzie, gave a presentation on Foreign Subsidies Regulations for doing business with China. The EU Regulation 2022/2560 on foreign subsidies distorting the internal market aims to protect the EU's geopolitical “open strategic autonomy”. This is a cry for help from the European companies that claim that they are subject to strict rules in the EU and need to compete in the EU with foreign companies that are not subject to that strict control on subsidies being granted. To level the playing field, they ask for an instrument to expand the EU regime to foreign companies.
The FSR in essence introduces three new control mechanisms. Two up-front mechanisms are the notification requirement for large M&A transactions and public tenders. They will require prior EU Commission approval if certain thresholds are met. The ex-post review mechanism is the possibility of the European Commission to open on its own initiative an investigation outside the scope of this mandatory notification regime. The Commission has exclusive competence to assess whether foreign subsidies threaten to distort the internal market and in addition they have to judge whether this distortion is outweighed by contributions to EU strategic goals.
When does the regime take effect? As of 12 July 2023, the Commission can examine on its own initiative any economic activity in the EU benefitting from a third country subsidy and it can also look back up to 10 years. For public procurement procedures and M&As, the notification requirement started on 12 October 2023. For deals signed after 12 July and that haven't been closed before 12 October, they need to be notified. The Commission announced that already 34 large M&A transactions have been notified for approval, exceeding in one month the total that the Commission expected on a yearly basis.
The three new control mechanisms are:
1. A suspensory notification regime for concentrations, as defined under EU merger control. The target company needs to be established in the EU, has an aggregate EU-wide turnover of at least €500 million in the previous financial year, and the aggregate of all third country financial contributions in the three years prior to the conclusion of the agreement exceeding €50 million.
2. A suspensory notification regime for large public tenders for tenders in any EU member state falling within the EU public procurement rules if their contract value is at least €250 million and, where the tender is divided into lots, the aggregate value of the lots is at least €125 million. If all financial contributions received by the bidder during three years prior to the submission of the bid amount to at least €4 million from a third country, participation in a qualifying tender must be notified for prior approval. Below the threshold of €4 million the bidder must declare a listing of all foreign contributions received by the bidder during the three years prior to the submission of the bid per country and a confirmation that their total value is below the €4 million threshold.
3. Ex-officio review of foreign subsidies in all other cases, which includes concentrations and public tenders that are below the notification thresholds. The Commission may use any information but there is no formal complaint mechanism and is it therefore not legally obliged to do anything with the information it receives. It is unlikely that the Commission will open ex-officio investigations as they will be busy with the notification cases.
The new rules have teeth. The Commission has broad investigative powers and penalties for non-compliance include up to 10% of global annual revenue for substantive infringements and up to 1% for procedural infringements.
A foreign subsidy is a financial contribution – a broad notion – provided directly or indirectly by a third country which confers a benefit to an undertaking active in the internal market and is limited, in law or in fact, to one or more undertakings or industries. A financial contribution includes the transfer of funds or liabilities, foregone revenue, and any proceeds from the provision or purchase of goods or services from third country governments. Any multinational will meet that threshold of €50 million foreign financial contribution. “Foreign” includes everything that you receive from any level of a government other than the 27 EU member states, foreign public entities or any private entity whose actions can be attributed to the third country. This is a very burdensome exercise in collecting information.
“Benefit” is not defined but corresponds to the concept of “advantage” in EU state aid law, e.g. everything a company could not have obtained under normal market conditions. The existence of benefit needs to be determined on the basis of comparable benchmarks. The benefit needs to be limited to one or more undertakings or industries.
The Commission cannot act on any foreign subsidy, it needs to have a distortive effect on the EU internal market. We do not know, however, what the Commission will take into account to determine this, but they might use the same tests as in EU state aid. Most likely to be considered distortive is aid granted to ailing firms with no viable restructuring plan, aid in the form of an unlimited guarantee, export credits not compliant with the OECD Arrangement, and aid directly facilitating a specific merger or public tender.
How to prepare for this administrative nightmare?
• Think about creating a repository to keep track of third country financial contributions and their risk profiles, that is whether they are most likely distortive
• Create a streamlined process when considering M&A transactions in Europe
• Create a streamlined process for FSR-notifiable tenders in Europe
• Develop a risk profile of largest/sensitive contributions
One of the most difficult areas of the FSR is the treatment of taxation. It is very hard to determine whether a tax holiday is of general application or not.
A Q&A session concluded the webinar.
