A practical introduction into the EU’s Foreign Subsidies Regulation and the Belgian Foreign Direct Investment legislation
July 2023 marks major changes in the EU’s landscape for foreign subsidies and foreign direct investments. It heralds the start of the application of the EU’s Foreign Subsidies Regulation and the entry into force of the Belgian Foreign Direct Investment screening mechanism. The latter mechanism was adopted to implement the EU’s Foreign Direct Investment Regulation.
The present client alert elaborates on these initiatives and guides you through the rules and procedures they introduce.
I. EU FOREIGN SUBSIDIES REGULATION
On 12 July 2023, the Foreign Subsidies Regulation (FSR), EU Regulation 2022/2560 , starts applying. The Regulation lays down tools and procedures for investigating and redressing foreign subsidies that distort the internal market. Additionally, the Draft Implementing Regulation (DIR) clarifies the practicalities of the FSR system.
This new regime specifically wishes to tackle foreign subsidies that are “distortive”. Distortive foreign subsidies improve the competitive position of an undertaking in the internal market. As a consequence, it actually or potentially negatively affects competition in the internal market.
Scope
The FSR’s scope of application is conditional on the presence of a “foreign subsidy”. For a “foreign subsidy” to exist, the following three criteria should be fulfilled.
First, there must be a direct or indirect financial contribution. The FSR provides for illustrations of financial contributions including, for example, (i) the transfer of funds or liabilities, such as capital injections, grants, loans and (ii) the provision of goods or services.
Second, the financial contribution has to originate form a third country (a non-EU Member State). Specifically, it should be obtained from (i) a third-country central government and public authorities, or (ii) a foreign public entity whose actions can be attributed to the third country, or (iii) a private entity whose actions can be attributed to the third country.
Third, the financial contribution shall be to the benefit of an undertaking, including a public undertaking which is directly or indirectly controlled by the third country. The undertakings should engage in an economic activity in the internal market.
Mandatory notification and ex officio investigations by the European Commission
The FSR regime introduces a mandatory filing obligation for public tenders and M&A transactions involving foreign subsidies. In the context of these notifications the European Commission has the exclusive power to examine the potential distortive character of the foreign subsidies involved.
For public procurement procedures, the filing obligation applies where the estimated contract value is at least EUR 250 million, and the bid involves a foreign financial contribution of at least EUR 4 million per third country.
For concentrations (e.g. M&A transactions), the obligation applies if the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least EUR 500 million and the transaction involves foreign financial contributions of more than EUR 50 million.
In addition, the European Commission can also request ad-hoc notifications for smaller concentrations and public procurement procedures if it suspects any subsidy to have a distortive character.
The notification obligation exists as of 12 October 2023. The obligation however already applies to agreements concerning notifiable concentrations concluded on 12 July 2023 (or later), but which have not yet been implemented on 12 October 2023. By contrast, concentrations for which the agreement was concluded on 12 July 2023 (or later), but which are implemented before 12 October 2023, do not need to be notified.
Second, the European Commission can also ex officio investigate all other market situations that involve potential distortive foreign subsidies.
Procedure
Following the information received or collected via the investigative tools, the European Commission will perform a balancing test. Exercising this test, the European Commission outweighs the potential positive and negative effect of the foreign subsidy to establish its possible distortive character.
If the European Commission establishes the distortive nature of the foreign subsidy, recourse can be made to (i) commitments, or (ii) redressive measures. Both instruments aim to remedy any distortion caused by a foreign subsidy in the internal market. They include, for example, the divestment of assets (structural remedy) or the publication of results of research and development (behavioural remedy). The Commission will only use redressive measures as a last resort option if the undertaking under investigation did not accept the necessary commitments.
Sanction
The Commission has the power to impose financial sanctions in case of non-compliance. Penalties may be up to 10 % of the aggregate turnover of the undertaking for a failure to notify concentrations or tenders or to comply by the Commission’s decisions. Alternatively, the Commission may opt to impose periodic penalties of up to 5% of the average daily aggregate turnover for each working day of non-compliance.
The European Commission recently also published a practical Q&A on the new Foreign Subsidies regime: Questions and Answers (europa.eu).
II. BELGIAN FOREIGN DIRECT INVESTMENT SCREENING MECHANISM
In addition to the EU Foreign Subsidies Regulation, another set of rules was created for addressing distortions caused by foreign investments. In this regard, the Foreign Direct Investment Regulation (FDI), EU Regulation 2019/452, sets out minimum requirements for EU Member States’ FDI screening mechanisms. The political tensions arising from the war in Ukraine and the Covid-19 pandemic heightened the need for such Regulation.
The Belgian Federal and Regional governments agreed on a foreign direct investment (FDI) screening mechanism which will come into force on 1 July 2023. The purpose of this mechanism is to prevent any risks arising from certain non-EU investments to Belgium’s national security, public order or strategic interests . The Belgian FDI mechanism is embodied by the Cooperation Agreement concluded between the Federal State and the Federated Entities.
Specifically, the FDI mechanism obliges investors from non-EU Member States to report certain direct investments in Belgium under threat of penalties. The notification obligation only applies to agreements concluded on or after 1 July 2023.
Scope
The scope of application of the Belgian FDI mechanism is essentially conditional on three criteria including (i) the origin, (ii) nature, and (iii) significance of the contemplated direct investment.
First, only investments by foreign investors are subject to the screening mechanism. Foreign investors are individuals and companies located outside the European Union, including any company in which one of the final beneficiaries has his principal place of residence outside the European Union.
Second, the mechanism only scrutinizes investments in certain sectors. The sectors cover the following industries.
- critical infrastructures (e.g., for energy, transport, health and defence);
- essential technologies (such as aeronautics) and raw materials;
- supply of critical inputs;
- access to sensitive information and personal data;
- private security and cyber security;
- electronic communications and media; and
- biotechnologies.
Third, the investment should lead to the acquisition of either control of the company concerned, or 10% or 25%, depending on the sector, of the voting rights of the target. Article 4, § 2 of the Cooperation Agreement clarifies this condition.
Mandatory notification
Notifications of investments falling within the scope of application must be submitted by the non-EU investor to the Interfederal Screening Committee (ISC). The ISC is a new public body created specifically for purpose of implementing the FDI mechanism. It is composed of representatives of the Federal State and Federated Entities.
In principle, notification must take place before the investment’s implementation. The notification must include relevant information on the non-EU investor (including ultimate beneficiary owners and activities), the investment (such as deal value and financing details), and the targeted Belgian entity.
Procedure
Once the notification has been submitted, the screening process consists of two main phases (i) the assessment procedure and (ii) the screening procedure.
- Assessment procedure – During the assessment procedure, the ISC conducts a high-level review of the notified investment. It decides whether to authorize the foreign direct investment or to initiate a screening procedure. This first phase can take up to 40 calendar days as from the date on which the file is deemed complete by the ISC.
- Screening procedure – If the assessment procedure reveals potential risks to strategic interests, national security or public order, a screening procedure is initiated. This second procedure is built further on the findings of the assessment procedure. The procedure takes 28 calendar days without prejudice to likely extensions or suspensions ordered by the ISC.
The final decision may result in authorization of the foreign direct investment, with or without a binding investor agreement providing for remedies (corrective measures), or in prohibition of the investment.
A decision not to accept a foreign direct investment may be appealed before the Market Court. The appeal does not suspend the contested decision.
If the Market Court overturns a decision in whole or in part, the case is referred back to the ISC, where the foreign investment is re-examined in a new screening procedure.
Sanction
Violation of the obligation to notify a foreign investment or the obligation to inform may be punished by penalties of up to 30% of the value of the investment. The penalty is imposed on the foreign investor.
Ex officio proceedings
In addition to reviewing notifications, the ISC is also empowered to initiate procedure ex officio in the absence of a notification. If such a procedure is initiated, structural adjustments and corrective measures may be imposed on parties for up to two years after the execution of an unnotified investment. In the case of proven bad faith, this period shall be extended to five years.
For investments agreements concluded prior to 1 July 2023, the ISC may open a screening procedure for up to two years (or five years in case of bad faith) after the execution of the investment in question if deemed necessary to safeguard Belgium’s national security, public order or strategic interests.
For further queries regarding on foreign subsidies and foreign direct investment, please contact our EU & Competition Law team.
