The EC Issues Guidance on Assessing Market Distortions Under the Foreign Subsidies Regulation

The FSR came into force just over a year ago, on July 12, 2023. The EC has received numerous notifications and initiated several in-depth and ex officio investigations. However, many aspects of the EC's substantive assessment on the distortion of the internal market remain unclear. On July 26, 2024, the EC published a Commission Staff Working Document ("CSWD"), offering initial clarifications on some aspects of the substantive assessment under the FSR.

Structure of the Distortion of the Internal Market Test

The CSWD confirms that the FSR's "distortion in the internal market" assessment is a two-step assessment. First, there must be a link between the foreign subsidy and the economic activity on the internal market and, second, the foreign subsidy must actually or potentially negatively affect competition in the internal market. 

According to the CSWD, the EC must assess under Article 4 FSR whether a foreign subsidy distorts the internal market based on several indicators provided in Article 4 (1) FSR (detailed below). Consequently, the EC is required to analyze the impact of foreign subsidies on competition. This is different from EU State aid law, where the EC presumes a distortion of competition whenever a beneficiary receives a selective financial advantage from an EU Member State on a competitive market.

Indicators for distortion in the internal market and "most likely to distort" categories: The CSWD claims that the indicators in Article 4 FSR are neither mandatory nor exhaustive, and it is within the EC's discretion to determine which indicators to apply in evaluating the distortive effect of a subsidy, therefore potentially giving the EC more discretion, instead of providing more guidance for companies on the application of the FSR.

The CSWD also specifies that for subsidies falling under Article 5, i.e., which are deemed "most likely to distort" competition, the EC does not need to carry out a detailed assessment based on the indicators outlined in Article 4 of the FSR. Essentially, this reverses the burden of proof, so that an undertaking needs to show that foreign subsidies, despite being considered as "most likely to distort" under Article 5, do not actually distort the internal market in the specific circumstances of the case.

Assessment of distortion in the internal market in M&A: According to the CSWD, in relation to M&A, the distortion can be related to the acquisition process itself as well as to the market on which the combined entity is active post-concentration (most likely the target's market(s)), and the EC will consider one or the other or both of these potential distortions. In this respect, the Commission may evaluate whether the subsidies granted prior to the concentration are likely to distort the internal market post-concentration in the merged entity's activities. 

Foreign subsidies received by the acquirer are more likely to attract scrutiny and cause distortive effects than those received by the target or seller. 

Although the EC will consider the impact on competition in the target's market, the CSWD states that the assessment of concentrations under the FSR differs from the assessment under the EU Merger Regulation and that the outcomes of the two processes might be different. 

Assessment of distortion in the internal market in public procurement: The CSWD states that the EC will limit its assessment of distortion in the internal market to the specific public procurement procedure in question. 

In order to determine whether a foreign subsidy distorts the internal market, the EC will analyze two conditions: (i) if the tender submitted by the subsidized economic operator is unduly advantageous in relation to the works, supplies, or services concerned; and (ii) if there is a link between the granting of the subsidy and the tender, demonstrating a caused or risked distortion in a public procurement procedure.

The balancing test: According to the FSR, the Commission may balance the negative effects of a foreign subsidy in terms of distortion in the internal market against certain positive effects.

The CSWD indicates that, at this stage, the EC has not yet acquired substantial experience in applying and interpreting this balancing test. Therefore, the guidance is very limited and goes barely beyond a rephrasing of the FSR: 

• When conducting the balancing test, the EC must consider the positive effects of foreign subsidies on the development of the subsidized economic activity on the internal market, as well as broader EU policy objectives, such as environmental protection, social standards, or the promotion of R&D.
• Positive effects recognized under EU State aid rules will also be taken into account under the FSR. 
• The outcome of the balancing test can only be positive or neutral for the undertaking; it cannot result in the undertaking being worse off as a result of the test.