Brussels prepares new rules to clamp down on foreign public subsidies

Brussels is close to finalising new legislative powers that would enable it to crack down on market-distorting subsidies from foreign governments, as the EU seeks to defend itself from perceived unfair competition from capitals including Beijing. 

The proposed rules, a summary of which was seen by the Financial Times, represent a significant hardening in the bloc’s approach to state-backed competition from overseas. 

The draft legislation, which is set to be unveiled next week, will be interpreted as a challenge in particular to China at a tense moment for EU relations with Beijing. It comes after the EU and China struck a preliminary agreement for a landmark investment treaty at the end of last year — though ratification of the accord will take some time. 

The EU already has some tools to address foreign subsidies, including trade defence instruments and foreign investment screening to address potential security threats.

But its state aid rules only directly target cash handed out by European states. Officials worry that this has left a gap when it comes to subsidies from non-EU states that facilitate acquisitions in Europe or support the activities of companies in the bloc. 

Under the proposed regulation, which follows a Brussels white paper released last year, the European Commission would be empowered to intervene in takeovers of EU companies or public procurement bids when they are fuelled by state subsidies from outside the bloc. 

Under the new system, the largest and potentially most distorting takeovers or procurement bids would have to be notified to the commission in advance. These involve mooted takeovers of companies worth at least €500m, or procurement contracts worth at least €250m, according to two people familiar with the discussions. 

The commission could elect to open inquiries into other cases, with powers to request information and conduct on-site investigations, but foreign subsidies worth less than €5m would be deemed unlikely to distort the EU single market. Companies could be fined if they fail to comply with information requests or with orders to abandon a takeover plan.

Because of the lack of transparency of foreign state subsidies, the commission will use a series of “indicators” to assess the degree of potential distortion of the single market, including the size of any subsidy relative to the size of a given market or value of an acquisition. Certain kinds of subsidies, such as unlimited guarantees, will be seen as particularly distorting. 

Remedies would include behavioural or structural remedies — such as prohibiting a deal or selling off assets — and the repayment of subsidies received, together with interest.

The proposed regulation falls under the remit of Margrethe Vestager, the commission executive vice-president who oversees competition.

“In recent years, foreign subsidies appear in some instances to have had a distortive impact on the EU’s internal market, creating an uneven playing field for competition,” said the summary seen by the Financial Times.

In some instances these facilitated the acquisition of EU companies or distorted trade in services, to the detriment of competition. The government handouts include zero-interest loans, unlimited state guarantees, or tax subsidies. 

The legislative draft will soon be open to scrutiny from member states and the European parliament. However, it could be some years before the regulation becomes law and those involved warn that the proposals could still change.

EU officials said the proposals would also affect European companies if they were found to be receiving subsidies from outside the EU. “The origin of the money is what matters, even if it’s a European company,” said an official with direct knowledge of the proposals.

The commission said it had “no specific comment” to make on the proposals.

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