On 17 June 2020, the European Commission published a White Paper on levelling the playing field as regards foreign subsidies. The Commission now seeks views and input from all stakeholders on the options set out in the White Paper. The public consultation, which will be open until 23 September 2020, will help the Commission to prepare for appropriate legislative proposals in this area.
According to the Commissions, subsidies granted by non-EU governments to companies in the EU have an increasing negative impact on competition in the Single Market, but fall outside EU State aid control. In order to address this issue, the Commission now proposes several solutions:
Foreign Subsidies facilitating the Acquisition of EU Companies
In particular, it proposes a notification requirement for acquisitions of companies based in the EU. Companies benefitting from financial support of a non-EU government would need to notify their acquisitions of EU companies, above a given threshold, to the European Commission. Transactions could not be closed whilst the Commission’s review is pending. Should the Commission find that an acquisition is facilitated by a foreign subsidy and distorts the Single Market, it could either accept commitments by the notifying party that effectively remedy the distortion or, as a last resort, it could prohibit the acquisition.
Instrument to capture Distortive Effects of Foreign Subsidies
A supervisory authority, which would be a national authority or the Commission, could act upon any indication or information that a company in the EU benefits from a foreign subsidy. If the existence of a foreign subsidy is established, the authority would then impose measures to remedy the likely distortive impact, such as redressive payments and structural or behavioural remedies. However, it could also consider that the subsidised activity or investment has a positive impact, which outweighs the distortion and not pursue the investigation further.
Foreign Subsidies in EU Public Procurement Procedures
According to the Commission, foreign subsidies could also have a harmful effect on the conduct of EU public procurement procedures. Foreign subsidies may enable bidders to gain an unfair advantage, for example by submitting bids below market price or even below cost, allowing them to obtain public procurement contracts that they would otherwise not have obtained. Under this module, the White Paper proposes a mechanism where bidders would have to notify the contracting authority of financial contributions received from non-EU countries. The competent contracting and supervisory authorities would then assess whether there is a foreign subsidy and whether it made the procurement procedure unfair. In this case, the bidder would be excluded from the procurement procedure.
Amendment to Foreign Investment Review
On 18 June 2020, the German Federal Parliament passed an amendment to the Foreign Trade Act with only minor changes.
The draft law mainly mirrors the draft adopted by the German Federal Government on 8 April 2020. The main aspects of the draft law are
- A prohibition on implementing notifiable transactions before clearance;
- Criminal sanctions for “de facto” implementations; and
- A lowering of the prohibition criteria.
Notification requirements apply to direct or indirect acquisitions by investors from outside of the EU and EFTA of 10% or more of the voting rights in German companies active in the certain areas. The catalogue of economic sectors which are subject to a notification requirement has just very recently been extended by the so-called “Corona Amendment”. A further extension to sectors such as biotechnology, robotics, artificial intelligence and semiconductors is contemplated.
In future, all acquisitions which are subject to a notification requirement shall also be subject to a prohibition on implementation. This means that a notifiable investment in a German company will be provisionally invalid as matter of law. The legal transaction effecting the realization of an investment will only become (retroactively) effective once the German Ministry of Economics and Energy (BMWi) clears the acquisition or does not timely block the transaction or the clearance is deemed granted.
Further, various prohibitions are to be introduced to help prevent de facto implementation of a transaction that would undermine the intent and purpose of investment review. In particular, an acquirer may not have target company information disclosed to it that are relevant for the review of potential risks or the non-disclosure of which has been ordered by the BMWi. An acquirer is also to be prohibited from exercising voting rights, whether directly or indirectly. This includes accepting its voting instructions. It is furthermore prohibited to allow an acquirer profit distribution rights accompanying an acquisition or an economic equivalent thereof.
Violations of these prohibitions can be punished with up to five years in prison or with fines.
For a prohibition of an investment, an “anticipated impairment of public order or security” is to be sufficient in the future.
Changes made by the parliament concern the review periods that apply to investment review proceedings. The review period for preliminary (phase 1) proceedings will be shortened from three months to two months. Further, the draft law now clarifies in which cases the four months review period of the main (phase 2) proceeding can be extended, stopped or re-started. In particular, the main proceeding can be extended by up to four months in complex cases.
The draft law shall enter into force already in June or July 2020.
State Aids – Interim Financial Aid Program
On 12 June 2020, the Federal Government adopted the key points for the interim financial aid program.
Applicants: The interim financial aid is aimed – inter alia – at companies from all sectors of the economy, self-employed and members of the liberal professions.
Eligible Costs: Eligible costs will be continuous fixed costs incurred during the eligibility period, as established by contract or fixed by public authority and which cannot be altered unilaterally.
Term: The program runs from June to August 2020.
Form of Aid: The interim financial will provide a subsidy of
- 80% of fixed costs in the event of a drop in sales with more than 70%;
- 50% of fixed costs in the event of a drop in sales of between 50% and 70%;
- 40% of fixed costs in the event of a drop in sales between 40% and less than 50%
in the funding month compared to the same month of the previous year.
Maximum Amount: The maximum grant is EUR 150,000 for three months. For companies with up to five employees, the maximum reimbursement amount is EUR 9,000 for three months, for companies with up to ten employees, the maximum reimbursement amount is EUR 15,000 for three months. These maximum reimbursement amounts can only be exceeded in exceptional cases.
Procedure: The proof of the drop in sales and the reimbursable fixed costs is provided in a two-stage procedure. In the first stage (application) the application requirements and the amount of the refundable fixed costs must be substantiated with the help of a tax advisor/auditor, in the second stage (subsequent proof) these must be proved with the help of a tax advisor/auditor.
A continuously updated overview of the state aid measures can be found here.