The European Union has addressed the issue of the impact of third countries, from outside the EU, on the operation of the single market. Next year, the Commission will begin investigating sources of money giving foreign undertakings an advantage, including in public procurement procedures. Subsidised contractors will not get public contracts in the EU if awarding them a contract could disrupt the EU market.
In just a few weeks, the Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market will come into force. The regulation is already approved and is just awaiting publication in the Official Journal of the European Union. It will enter into force 20 days after publication.
The regulation introduces new obligations for undertakings subsidised by third countries, giving them a competitive advantage. Such funding might be devoted for example to domestic market activities, participation in public procurement procedures, or acquisition of domestic undertakings, including those of strategic importance.
Why the new regulation?
The purpose of the regulation is to introduce a harmonised framework for eliminating distortions and working towards a level playing field for undertakings competing in the internal market. It refers to foreign subsidies granted to undertakings conducting economic activity in the EU market, including Poland.
The Foreign Subsidies Regulation covers a loophole in EU regulations, which until now have only regulated state aid provided to undertakings by EU member states.
What is a foreign subsidy?
Under the regulation, a foreign subsidy is a financial contribution made, directly or indirectly, by a third country (outside the EU) that confers a benefit and is limited to at least one individual undertaking or at least one industry.
The concept of financial contributions includes a wide range of support measures, not only monetary transfers alone, but also granting special or exclusive rights to a given undertaking under non-market conditions. For example, these may include the transfer of funds or liabilities, e.g. capital injections, grants, loans, loan guarantees, fiscal incentives, tax exemptions, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt-to-equity swaps, or debt rescheduling.
Also, such monetary contribution must benefit a given undertaking in the internal market. This is the case when a certain benefit would not be obtained in normal market conditions. Anything that is a favourable anomaly under the given market conditions—low financing costs, tax exemptions, or business licences obtained through non-market methods—should be considered a prohibited subsidy.
From the point of view of examining foreign subsidies, it is irrelevant whether the financial contribution comes from a government institution, a foreign public entity or a private entity, if the legal and economic environment in a third country indicates that the action of a private entity is attributable to the third country.
Additionally, what matters is the moment when the entitlement to the subsidy arises, not the time of actual payment.
Foreign subsidies in public procurement
The regulation indicates that one of the manifestations of conducting business activity is the participation of an undertaking in public procurement and concession procedures. An undertaking that has received a foreign subsidy will have to explain it and demonstrate the lack of a negative impact on competition. Competitors may also be asked for their opinions.
Indicators of distortions in the internal market
The study of interference will take into account not only the actual impact, but also the potential negative impact on competition in the internal market, based on such indicators as:
- Amount of foreign subsidy
- Nature of foreign subsidy
- Situation of the undertaking, including its size and the situation of the relevant market or sector
- Level and evolution of economic activity of the undertaking concerned on the internal market
- Purpose and conditions attached to the foreign subsidy as well as its use in the internal market.
If the total amount of the subsidy does not exceed EUR 4 million during any consecutive period of three years, it will be deemed unlikely that the foreign subsidy distorts the internal market.
Most likely distortions
The regulation indicates that the highest likelihood of distortion occurs when a foreign subsidy is targeted at:
- Aid to an undertaking that, without the subsidy, would likely go out of business in the short or medium term, unless there is a restructuring plan that is capable of leading to the long-term viability of that undertaking and such a plan includes a significant own contribution by the undertaking
- Grant of an unlimited (in time or amount) guarantee to cover the debts or liabilities of the undertaking
- Unauthorised export support, contrary to the OECD Arrangement on Officially Supported Export Credits
- Facilitation of concentration
- Enabling an undertaking to submit an unduly advantageous tender on the basis of which the undertaking would be awarded a given public contract.
Determination of interference occurs through a balancing test, to determine whether the impact of a foreign subsidy can be generally assessed positively or negatively. If a negative impact is found, the European Commission will identify a solution to compensate for distortion. In this regard, the Commission is the only authority competent to apply the regulation. Such a solution is to ensure equal effects of its operation throughout the internal market.
The undertaking under investigation may provide explanations indicating that in the circumstances of the case, market distortion is not occurring.
If the negative effects prevail, the Commission will be able to impose redressive measures by decision and order the return of the foreign subsidy or accept the obligation of the undertaking concerned to redress the distortion caused by the foreign subsidy.
Examples of redressive measures
The commitments or redressive measures may consist of, for example:
- Offering access under fair, reasonable, and non-discriminatory terms to infrastructure, including research facilities, production capacity or key infrastructure, that was acquired or is supported by foreign subsidies
- Reducing production capacity or market presence
- Refraining from certain investments
- Licensing on fair, reasonable and non-discriminatory terms of assets acquired or developed with the help of foreign subsidies
- Publication of R&D results
- Divestment of certain assets
- Dissolution of concentration
- Repayment of the subsidy, including appropriate interest
- Committing to adjustment of the management structure of the undertaking.
Looking for foreign subsidies
On its own initiative and up to five years back, the Commission may cover specific undertakings in its investigation, based on its sources. Among other things, the review will include companies that have been awarded public contracts.
Foreign-subsidised companies need not fear losing the procurement awarded to them, but they will be required to provide the Commission with the requested information. After a preliminary review of foreign undertakings, the Commission will undertake detailed proceedings against those suspected of benefiting from illegal subsidies.
The Commission may demand any information from the undertaking under investigation, including about its bid submitted in a tender. The Commission may address other entities that submitted bids, including interviewing natural and legal persons. The Commission may also impose fines and periodic penalties.
The Commission’s powers will be time-barred 10 years after a given subsidy is granted.
Foreign subsidies in public procurement proceedings
In the context of procurement proceedings, the duty to report applies only to proceedings in which:
- The estimated value exclusive of VAT is EUR 250 million or more (in the case of contracts divided into parts, when the value of the parts is at least EUR 125 million), and
- The contractor, including its subsidiaries without commercial autonomy, holding companies and main subcontractors and suppliers participating in the same bid in the procurement proceeding, have received total financial contributions of EUR 4 million or more per each third country in the three years preceding the notification.
The contract notice with the indicated values includes information on the obligation to report or declare foreign financial contributions. In this case, the contractors shall notify the contracting authority of all foreign financial contributions received over the past three years. On the other hand, contractors who have not received subsidies are required in such proceedings to submit a declaration listing all foreign financial contributions received and confirm that foreign financial contributions received are not reportable.
In an open tendering procedure, the application or declaration is submitted only once, at the moment of submission of the bid, while in a multi-stage procedure it is submitted twice: with the request to participate and subsequently with the bid.
As soon as the application or declaration is submitted, the contracting authority shall forward it to the Commission. The Commission will investigate whether, in the three years preceding the notification, a foreign subsidy enabled the contractor to submit an unduly advantageous tender for construction works, supplies or services. This assessment is limited to the given proceeding.
The Commission will decide if the bid is to be rejected
The Commission may request clarifications and supplementary information. Then, it will issue a decision in which it may conclude that a bid is incorrect and should be rejected by the contracting authority.
The obligation to report foreign financial contributions applies to contractors, groups of contractors (consortia), as well as main subcontractors and main suppliers who are known at the stage of submitting a full notification or declaration or a full updated notification or declaration. A main subcontractor or supplier is one whose participation ensures key elements of contract performance, and one whose economic share exceeds 20% of the value of the submitted bid.
If the contractor fails to offer commitments or the Commission determines that such suitable solutions cannot be introduced, the Commission shall adopt an implementing act in the form of a decision banning the award of the contract to the given contractor.
During the preliminary review and in-depth proceedings, all procedural steps in the procurement procedure may be continued, except for award of the contract. If an in-depth investigation is being conducted against a given contractor, it cannot be awarded a contract until either the Commission has made a decision or the deadline for the Commission to make a decision has lapsed. The relevant deadlines are set forth in Art. 30 of the regulation. In single-stage proceedings, the Commission has 110 days (maximum 130 days) to make a decision, and in multi-stage proceedings 90 days from receipt of the final full application.
Fines for violations
The Commission may also impose fines and periodic penalty payments:
- Fine of up to 1% of the previous fiscal year’s turnover in the event of omissions or negligence in the presentation of information on the undertaking under investigation
- Periodic financial penalty of up to 5% of the average daily turnover for late submission of requested information, for each day late
- Fine not exceeding 10% of the undertaking’s total turnover in the preceding fiscal year when the contractor intentionally or negligently failed to report foreign financial contributions at all during the procurement process, or circumvented or attempted to circumvent the subsidy reporting requirements.
Anna Prigan, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners