The Commission provides initial clarifications on distortion and balancing tests.
In a recent staff working paper, the Commission set out a list of questions and answers on its application of the distortion and balancing tests in the Foreign Subsidies Regulation (FSR). This working paper provides some clarification of the Commission’s application of these tests in order to reach a determination of whether intervention is required. How does the Commission’s Q&A shed light on the role of economic evidence in FSR investigations?
The Commission’s Staff Working Paper includes 10 questions on the distortion and balancing tests in the FSR [1]. While this working paper is not yet a complete guidelines which are expected only at some point next year, they already give a good indication of where and what type of economic evidence will be relevant for the Commission’s assessments, particularly for merger and procurement cases.
Distortion: The Commission starts by defining its current view on what qualifies a distortion to the internal market in the context of the FSR. In doing so, the Working Paper establishes a two-pronged test:
The Working Paper, clarifies that, contrary to State aid, where a distortion of competition is assumed whenever a financial advantage is granted to a firm in a liberalised market, this presumption does not exist for foreign subsidies.
This gives firms receiving a foreign subsidy an opportunity to demonstrate or argue that a subsidy it has received does not create a distortion in the internal market. This can be done using the indicators listed in Article 4, although the Commission notes that “this list is not exhaustive nor mandatory” and that it will use relevant indicators to assess the distortive impact of each subsidy on its own merits. The indicators listed under Article 4 include the size and nature of the foreign subsidy, the situation of the undertaking and the conditions attached to the foreign subsidy. As such, the indicators appear generic enough and leave room for case-specific analyses.
The Working Paper clarifies that for subsidies listed under Article 5 there is a presumption that there is a distortion [2]. Even in this case, however, the firm receiving the subsidy has the opportunity to argue that its subsidy is not distortive. In particular, the Commission seems to be particularly attentive to unlimited guarantees and includes a question specifically targeted at its assessment of these guarantees. The Working Paper notes, for example, that indications that a firm would be bailed out in the event of a liquidity crisis can, by themselves, be seen as evidence of the existence of an unlimited guarantee.
Interestingly, the Commission appears to delineate a difference between the test for concentrations and procurement procedures. In notifications, the Commission focuses on subsidies granted in the past three years, but its assessment also takes into account the forward-looking impact of these subsidies on the merged entity. For example, the Commission gives the example of unlimited guarantees which, if extended to the target in a concentration, could distort the merged entity’s ability to compete post-merger by giving it advantageous access to credit. On the other hand, for procurement procedures, the test is only whether the subsidy has allowed the firm to submit an unduly advantageous offer. In this case, the Commission will consider, for example, how the offer compares with those of other participants and the procurer’s initial estimates, while taking into account any cost or other advantages which may justify the offer.
When it comes to balancing, the Working Paper states that any positive effects on “development of the relevant subsidised economic activity on the internal market” or “broader positive effects in relation to the relevant policy objectives, in particular those of the Union” should be taken into account. The Commission notes that these policy objectives could include, “for instance, considerations relating to a high level of environmental protection, social standards, or the promotion of research and development.” and notes that any objectives which are used under State aid rules will also be taken into account in FSR assessment. The Commission also notes that in the case of a procurement, it will also consider the availability of alternative sources of supply for the goods and services concerned (i.e. such that it will not in principle prohibit a single bid even if it is unduly advantageous). The Commission notes that it will take into account submissions from third parties, including Member States, on the balancing test.
The Working Paper also explains that foreign subsidies under Article 5 are less likely to be outweighed by positive effects, highlighting the higher burden of proof that any subsidy in that category would need to overcome.
Finally, the Commission clarifies that the balancing test can only work in the investigated firm’s favour. In particular, the outcome of the balancing test cannot be worse for the subsided firm than the alternative. This appears logical, given that the objective of the balancing test is to consider positive effects of the subsidy, while any negative effects should be assessed in the distortion test.
The competitive implications of foreign subsidies will depend on case-specific circumstances, and it is unrealistic to expect detailed guidance across the wide spectrum of potential scenarios particularly at such an early stage of the FSR’s application [3]. While more detail is likely to become public over the coming months as in-depth investigations are concluded and prohibition or other decisions published, the Commission’s Q&A document already provides some clarifications on the analysis which is relevant for the application of FSR.
[1] Commission Staff Working Document, Initial clarifications on the application of Article 4(1), Article 6 and Article 27(1) of Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market, available online at https://competition-policy.ec.europa.eu/document/download/b4c8bb13-839b-4bfb-8863-78b188523d22_en?filename=20240726_SWD_clarifications_on_application_of_FSR.pdf].
[2] This includes subsidies granted to ailing firms without a restructuring plan, unlimited guarantees, export financing measures, a subsidy directly facilitating a concentration and one that allows a firm to submit an unduly advantageous tender on a tender.
[3] The Commission has indicated that it will launch more detailed guidelines after a few years of the FSR’s application.
