European Union Targets Foreign Subsidies

"BRUSSELS -- European Union lawmakers struck a political agreement on new rules for companies that reap financial benefits from governments outside the bloc, pushing forward a proposal that sparked concern from some U.S. business groups.

The regulation, under a deal reached late Thursday, primarily targets companies from China and elsewhere with government backing. It would allow the European Commission, the EU's executive body, to block such businesses from making certain acquisitions or winning large public contracts if they previously benefited from foreign subsidies that regulators deem to be distortive.

Lawmakers have said the rules are needed to prevent heavily subsidized companies from competing unfairly against their European rivals. But some U.S. business groups said the initial proposal, put forward last year, was broad enough that a range of U.S. and other multinational companies could be affected because of how the text defined subsidies.

The legislation as drafted "catches a lot of other things in the net," Garrett Workman, senior director of European affairs at the U.S. Chamber of Commerce, said in an interview before the deal was reached. "It's actually quite challenging for basically any foreign company that's investing or doing business or even selling things into the EU."

The legislation still needs final approval from lawmakers in the European Parliament, but is unlikely to undergo significant changes. European Commission Executive Vice President Margrethe Vestager said she expects the new rules will start to apply around the middle of next year.

"Our commitment to protect the level playing field in Europe is expressed in the speed at which this agreement was reached," she said.

When the legislation comes into effect, companies that fall under it would have to report the financial contributions they get from non-EU governments and public authorities or risk hefty fines. The reporting rules would apply to companies with revenue of at least 500 million euros, equivalent to $524 million, that want to complete a merger or acquisition, and has received a financial contribution of at least 50 million euros, the commission said.

Companies bidding on a public contract valued at 250 million euros or more would have to notify regulators if they get a foreign financial contribution above a certain threshold.

If EU officials deem the contributions a company reports to be distortive, and believe their net effect is negative, they could block a deal, disqualify a company from a public-procurement process or impose binding commitments. The rules also allow investigators to look into whether subsidies are distorting the market outside the context of a merger or public procurement.

Based on the draft legislation, lawyers said the financial contributions companies might be required to report could include anything from a grant or loan meant to help a company get through the pandemic to a government infrastructure contract or even an electricity bill from a public utility.

Jay Modrall, a partner at law firm Norton Rose Fulbright who has followed the proposed move closely, said recently that the regulation would impose large compliance costs on companies that are involved in mergers, acquisitions and public procurement in Europe, including those based in Europe and the U.S.

"Nobody collects this information," he said. "Multinationals will need to design and implement new compliance procedures from scratch."

The American Chamber of Commerce to the EU and groups representing Japanese, Korean and other businesses in Europe also expressed concern about how the regulation might affect their members in a recent joint statement.

The proposed legislation doesn't single out individual countries, but the European lawmaker who led the negotiations said this week that they aren't meant to target the U.S.

"The elephant in the room is of course China, because this is the biggest threat," said Christophe Hansen, a member of the European Parliament from Luxembourg. He acknowledged some companies would face an additional administrative burden, but he said the legislation's high thresholds mean it would apply to only a limited number of cases.

The China Chamber of Commerce to the EU said Chinese companies win contracts in the bloc largely because of competitive advantages they acquired from competition in the Chinese market, and not because of subsidies.

BusinessEurope, a lobby group, said the deal would fill a regulatory gap." [1]

1. World News: European Union Targets Foreign Subsidies
Kim Mackrael. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 02 July 2022: A.9.