Regulation on foreign subsidies distorting the internal market: what you need to know on the eve of its application


By Michel Ponsard and Benjamin de Sevin

11 July 2023                            

On 14 December 2022, the European Parliament and the Council adopted a regulation on foreign subsidies distorting the internal market. Intended to fill a gap in European Union law, which to date only governs aid granted to companies by Member States, this regulation now enables the European Commission to investigate distortions caused by subsidies from third countries, and to take measures to remedy them.

Its application from 12 July 2023 should lead companies operating in the European Union to question the financial contributions they receive from third countries, in order to identify those that constitute foreign subsidies distorting the internal market and could therefore lead the European Commission to impose redressive measures.

This identification is particularly important for companies involved in mergers or bidding for public procurement contracts, since from 12 October 2023 and above certain thresholds, they will have to notify these financial contributions in advance.

1. Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market (the “Regulation”) aims to fill a gap in European Union law.

Although there has long been a framework for aid granted to undertakings by Member States, until the adoption of the Regulation there was no instrument to address the distortions that subsidies granted by third countries can create. It is true that there are sector-specific regulations dealing with this issue[1], or general regulations with similar objectives[2], but none of them were equal to the challenge.

2. The importance of the anti-competitive effects that subsidies from third countries can have on the internal market, particularly in the context of mergers or the award of public contracts, has therefore led the European Union to adopt this new Regulation.

It enables the European Commission – the only authority competent to apply it – to investigate and act against foreign subsidies that distort the internal market, by giving it three tools: a general power of examination on its own initiative and two prior notification procedures, for mergers and public procurement.

The Regulation came into force on 12 January 2023 and will start to apply on 12 July 2023, except for the above-mentioned notification procedures, which will only apply from 12 October 2023.

What is a foreign subsidy that distorts the internal market?

3. The purpose of the Regulation is to establish a harmonised framework “to address distortions caused, directly or indirectly, by foreign subsidies, with a view to ensuring a level playing field“[3].

It therefore applies to foreign subsidies and enables the European Commission to remedy those that distort the internal market.

A broad definition of foreign subsidies

4. Article 3 of the Regulation states that “a foreign subsidy shall be deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries“.

Four elements are therefore required.

5. Firstly, a third country (i.e.outside the EU), or one of its emanations. The Regulation adopts an extensive approach here, inspired by the rules on State aid, since it may include not only central government or public authorities at all other levels, but also to public or private entities whose actions may be attributed to the third country[4] .

6. Secondly, an undertaking, i.e., according to the usual definition in European Union law, any entity engaged in an economic activity[5] .

However, the Regulation specifies that the company must carry out this economic activity “in the internal market“, which includes, among others, merging with or acquiring an undertaking established in the EU, or participating in a public procurement procedure in the Union[6].

It is not just non-European companies operating in the internal market that are targeted. European companies are just as concerned, including public companies.

7. Thirdly, a financial contribution granted to the company by the third country. This notion is also widely understood, as is the notion of the use of “State resources” in the context of State aid regulations. The Regulation provides a list of examples, covering transfers of funds or liabilities (capital injections, loans, guarantees, tax incentives, debt rescheduling, etc.), foregoing of revenue (tax exemptions, granting of exclusive rights without adequate remuneration, etc.), or the provision or purchase of goods or services[7] .

This point is crucial in the application of the Regulation, since it is these financial contributions that must be notified in the ex-ante control mechanisms presented below. The extensive approach adopted by the legislator and the relative indeterminacy of the scope of this concept mean that companies are faced with a difficult task of identification.

8. Lastly, the financial contribution must confer an advantage on the recipient undertaking, which covers anything that would not have been obtained under normal market conditions[8] . The advantage must also be selective, i.e. the contribution must be “limited, in law or in fact, to one or more undertakings or industries“. Once again, these two concepts can be found in State aid regulations, which can provide valuable guidance[9], for example regarding the use of the market economy operator test.

How does the Commission determine whether there is a distortion in the internal market?

9. Unlike State aid, foreign subsidies are not prohibited as a matter of principle. It is up to the European Commission to assess, on a case-by-case basis, whether such a subsidy distorts the internal market, as only such subsidies can be subject to redressive measures.

Two elements must be met: the foreign subsidy must be “liable to improve the competitive position of an undertaking in the internal market” and, “in so doing“, it must “actually or potentially negatively affects competition in the internal market” – which, here again, is reminiscent of the requirement, in the case of State aid, that the aid in question strengthens the position of an undertaking compared with other undertakings competing in trade between Member States[10] .

10. To guide the Commission in this analysis, the Regulation sets out indicators, thresholds and presumptions.

The existence of a distortion in the internal market must in principle be determined based on indicators, ofwhich the Regulation provides a non-exhaustive list (amount and nature of the subsidy, situation of the company, purpose of the subsidy, etc.).

The Regulation then sets two thresholds, corresponding to a presumption and an exclusion:

  • on the one hand, foreign subsidies of less than €4 million over three consecutive years are considered “unlikely to distort the internal market“[11];
  • secondly, foreign subsidies not exceeding the amount of de minimis aid within the meaning of State aid law (€200,000)[12], per third country and over three consecutive years, shall not be considered “to distort the internal market“.

Lastly, the Regulation provides for a list of categories of foreign subsidies considered most likely to distort the internal market (subsidies to an ailing undertaking, unlimited guarantees, subsidies directly facilitating a merger or enabling the submission of an unduly advantageous tender in a procedure for the award of a public contract or a concession)[13]. On this point, the Regulation seems to establish a real presumption, since for such subsidies the Commission is exempted from a detailed assessment, and it is up to the undertaking to demonstrate that there is no distortion of the internal market[14] .

Balancing the negative and positive effects of foreign subsidies

11. Finally, the Regulation allows the European Commission to weigh up the negative effects of the distortion of the internal market caused by a foreign subsidy against its positive effects[15], which may lead it to abandon any redressive measures, or at least to adapt them.

The positive effects to be taken into account are not precisely defined by the Regulation, which mentions those that may relate to the development of the economic activity concerned, but also admits any other positive effect[16]. The guidelines to be published by the Commission will specify this aspect.

What powers does the Commission have in the context of an ex officio review?

12. The Regulation confers on the European Commission a general power of examination on its own initiative, enabling it to apprehend any information, “from any source“, concerning alleged foreign subsidies distorting the internal market[17]. Companies will therefore be able to take advantage of this possibility to report aid received by their competitors from third countries to the European Commission.

The only limit to this power concerns public procurement, since its review can only concern awarded contracts (and not the award procedure, which comes under the notification procedure discussed below), and cannot lead to the annulment of an award decision or the termination of a contract.

Preliminary review and in-depth investigation

13. The Commission’s ex officio power is exercised in two stages: a preliminary review, which may lead to an in-depth investigation.

The preliminary examination is initiated if the Commission has information indicating the possible existence of a foreign subsidy distorting the internal market[18] .

If, at the end of this investigation, the Commission has sufficient evidence that a company has benefited from a foreign subsidy distorting the internal market, it adopts a “decision to initiate the in-depth investigation” and publishes a notice in the Official Journal inviting third parties to submit their views in writing. Failing this, it closes the preliminary review.

An in-depth investigation, when initiated, allows the Commission to “futher assess” the foreign subsidy in question.

Extended powers for the Commission

14. As part of the preliminary examination or in-depth investigation, the Commission may:

  • request all necessary information[19], not only from the undertaking under investigation, but also from any other undertaking or association of undertakings; such information may also be requested from Member States and third countries; it may also interview natural or legal persons.
  • or carry out the necessary inspections in the European Union[20] , the officials appointed for this purpose having considerable powers (on site or documentary checks, requests for explanations, affixing of seals, etc.), where appropriate with the assistance of officials from the Member State concerned; it can also carry out investigations outside the European Union if the third country concerned does not object[21] .

If the companies concerned fail to cooperate or refuse to submit to inspections, the Commission can impose fines or periodic penalty payments[22] .

The Commission may also take interim measures if there are sufficient indications of the existence of a foreign subsidy distorting the internal market and a risk of serious and irreparable damage to competition[23] .

What decisions can the Commission take following an in-depth investigation?

15. Following an in-depth investigation carried out as part of an ex officio review, and in principle within 18 months of the opening of this investigation:

  • if it finds that a foreign subsidy distorts the internal market, the Commission may impose redressive measures or make binding commitments proposed by the undertaking[24]; these may include offering access to infrastructure, reducing capacity or market presence, prohibiting certain investments, divesting assets or repaying the subsidy[25] ;
  • if it does not find that such a subsidy exists, or if the balancing test reveals greater positive effects, the Commission will take a decision to raise no objection.

What is the procedure for notification in the context of a concentration?

16. With effect from 12 October 2023, the Regulation impose a prior notification requirement of concentrations[26] that exceed certain thresholds, achieved in particular through financial contributions received from third countries by the parties to the transaction, in order to enable the Commission to verify, at the level of this concentration, whether these contributions may have created a distortion of competition.

This new ex ante control is combined with any examination of a transaction under competition rules by the Commission services if the thresholds of Regulation 139/2004 are reached, as well as, where applicable, with that applicable to foreign direct investment[27] .

What operations are notifiable?

17. Notifiable concentration[28], before the operation is implemented, are those that meet the following thresholds:

  • at least one of the undertakings involved in the merger, the acquired undertaking or the joint venture is established in the European Union and generates an aggregate turnover of at least €500 million in the European Union; and
  • the undertaking or undertakings concerned (acquiring group and acquired undertaking in the case of an acquisition, groups of undertakings involved in a merger or groups of undertakings setting up a joint venture and the joint venture) have received aggregate financial contributions of more than €50 million from third countries over the three years preceding the conclusion of the agreement.

As mentioned above, the concept of financial contribution is very broad and can cover aid received in many different forms (see no.7 above), including by entities whose actions can be attributed to a third country. The Regulation also specifies that all contributions received by all entities in the group of the undertaking concerned must be aggregated[29].

The notification obligation applies to transactions signed on or after 12 July 2023, if they have not been completed by 12 October 2023[30].

What is the notification and control procedure?

18. The control procedure – which takes the form of a preliminary review and, where appropriate, an in-depth investigation, as described above with some adaptations – is very similar to that for concentrations covered by Regulation 139/2004, whether in terms of the definition of the undertaking concerned for the purposes of determining whether the thresholds[31] have been reached, the calculation of the deadlines[32] from the date of full notification, the type of decision[33] or the financial penalties[34], but there are some specific features to this system.

Firstly, in order to assess the threshold of turnover achieved in the EU, it is not the acquiring group and the target that are taken into account in the case of an acquisition, but rather the “acquired undertaking”; similarly, in the case of the creation of a joint subsidiary, only the turnover of the joint subsidiary is taken into account; and finally, in the case of a merger, at least one of the undertakings involved in the merger must reach the turnover threshold.

On the other hand, the Commission may request prior notification of an operation, whether notifiable or even non-notifiable under the criteria of Article 20 of the Merger Regulation (and in particular the thresholds mentioned above), if it suspects that foreign subsidies may have been granted to the companies concerned during the three years preceding the operation[35] .

Finally, the commitments that companies may propose are only provided for in phase II within 65 days of the date on which phase II of the in-depth investigation begins (article 13 of the draft implementing regulation).

19. The information to be provided and the notification procedures will be specified in the implementing regulation to be adopted by the European Commission. 

What test will the Commission use?

20. The test is obviously different from the competition test. For all financial contributions that confer a selective advantage on a company, the Commission will look for the existence of a distortion in the internal market, according to the method presented above (see above no. 9 and 10), it being specified that in the context of this specific control, its assessment will be limited to the concentration in question[36] . It will then balance the negative effects of a foreign subsidy in terms of distortion of the internal market against the positive effects.

What is the notification procedure for public contracts and concessions?

21. In view of the particular risk of distortion of competition that foreign subsidies may pose in the context of public procurement procedures, in particular because they may enable a company to offer an unduly advantageous tender, the Regulation introduces a specific control procedure, based on prior notification or declaration by candidates of the financial contributions they have received from third countries.

What procurement procedures are involved?

22. This ex-ante control applies to all public procurement procedures in the traditional sectors[37] and the special sectors[38] , as well as to procedures for awarding concession contracts[39], except for[40]:

  • the award of contracts by a negotiated procedure without prior publication for reasons of extreme urgency; on this point there is a difficulty in relation to French law which, although the Directive on concession contracts does not provide for it, allows concessions to be awarded directly on the same ground[41], an award which could therefore, in principle, come under the prior notification procedure provided for by the Regulation.
  • the award of defence or security contracts covered by Directive 2009/81/EC of 13 July 2009.

It applies to framework agreements but not to contracts based on a framework agreement[42] .

23. However, the control only applies to award procedures where the estimated value of the contract or concession is equal to or greater than €250 million excluding VAT. In the case of allotment, the lot or lots for which the company in question is bidding must also exceed €125 million.

In the event of suspicion of foreign subsidies, the Commission may however request the notification by the economic operator concerned, in the context of any procurement procedure, of the foreign financial contributions which it has received[43] .

Notification or simple declaration of foreign financial contributions?

24. The obligation to notify concerns any candidate (or any group of candidates) for the above-mentioned procedures, where it has received, over the last three years, more than €4 million in financial contributions (as defined in 7 above) per third country[44] .

When assessing this threshold, account should be taken not only of subsidiaries with no commercial autonomy and parent companies of the candidate, but also of its main suppliers and subcontractors in thecontext of the procedure, i.e. those whose participation “ensures key elements of the contract performance“[45] and, in any event, those whose economic share of their contribution is exceeds 20% of the submitted tender[46] .

The notification shall therefore cover all foreign financial contributions received over the last three years by the candidate (or member of a group of economic operators) and the above-mentioned third parties – the main subcontractors and suppliers being expressly subject to this notification obligation, which the applicant shall submit on their behalf[47] .

25. Below the threshold of €4 million[48], candidates only have to list in a declaration all foreign financial contributions received, defined in the same way[49].

When and how are they submitted to the buyer?

26. The time of notification or declaration depends on the type of procedure:

  • in an open procedure, it is submitted only once, at the same time as the tender;
  • in a multi-stage procedure (restricted procedures, competitive procedure with negotiation, competitive dialogue, etc.), an initial notification or declaration is provided with the request to participate, then an updated notification or declaration is provided with the tender (or even the final tender if there is more than one); it should be noted here that the Regulation assimilates the negotiated procedure without prior publication to this type of procedure.

The notification or declaration is then sent to the Commission by the contracting authority.

27. A Commission implementing regulation will set out the procedures for filing, including notification and declaration forms. The draft regulation drawn up by the Commission provides for the possibility of pre-notification, enabling the content of a notification to be specified in advance, or even to be exempted from providing certain information.

28. Compliance with these formalities is important because, if no notification or declaration is made despite a request from the contracting authority, or if a notification is incomplete despite a request from the Commission, the tender is declared irregular and rejected[50] . The Commission may also impose fines[51] .

How does the Commission control notified financial contributions?

29. The Commission’s checks following a notification correspond to the preliminary examination and, where appropriate, the in-depth investigation described above. However, the procedures are adapted to this particular context, particularly in terms of deadlines.

The Commission’s review does not affect the progress of the award procedure, which may continue, except for the award of the contract to an economic operator who has notified foreign financial contributions, which is suspended until the adoption of a decision by the Commission or the expiry of the aforementioned time limits.

30. The Commission’s analysis (see above no. 9 and 10) is also adapted, as the Regulation specifies that, in the context of a procedure for the award of a public procurement contract, foreign subsidies distorting the internal market are “that enable an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned” and that the analysis of the existence of a distortion must be limited to the procurement procedure in question.

31. Lastly, the decisions that the Commission may take following an in-depth investigation differ from those provided for in the context of an ex officio review. While it may take a decision with commitments, or a no objection decision, there is no provision for it to take a decision with redressive measures.

If it finds that there is a foreign subsidy distorting the internal market, and if the economic operator fails to offer sufficient commitments, it may adopt a decision prohibiting the award of the contract, requiring the contracting authority to reject the tender concerned.


The Regulation is extremely important for European economic operators.

It benefits them because it now provides them with a legal instrument to defend themselves against operators benefiting from competition-distorting foreign subsidies, which is something new.

It also represents a constraint, because it means that, from now on, when any entity is purchased, audits must be carried out covering the financial contributions received by the target (but also by the acquirer) or by the companies concerned, to avoid discovering after the transaction that the deal is in danger of being cancelled.

The same applies to bids for public contracts or concessions exceeding the threshold of €250 million, for which bidders will have to list the financial contributions they have received, as well as those of their main sub-contractors and suppliers, failing which their tender will be rejected.

[1] See Council Regulation (EEC) No 4057/86 of 22 December 1986 on unfair pricing practices in maritime transport, and Regulation (EU) 2016/1035 of the European Parliament and of the Council of 8 June 2016 on protection against injurious pricing of vessels.

[2] See Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union, the purpose of which is to ensure the application of the World Trade Organisation Agreement on Subsidies and Countervailing Measures, but which only concerns the import of goods. See also Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investment into the Union, which only concerns foreign direct investment likely to undermine security or public order and is limited to setting a framework for Member States. V. finally, Regulation (EU) 2022/1031 of the European Parliament and of the Council of 23 June 2022  on the access of third-country economic operators, goods and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods and services to the public procurement and concession markets of third countries (also known as the International Procurement Instrument – IPI), which allows the Commission, when a third country restricts the access of European companies to its public procurement and concession contracts, to limit the access of companies from this third country to the EU public procurement and concession contracts (by a compulsory adjustment of the rating of their bids, or even by outright exclusion).

[3] Art. 1§1 of the Regulation.

[4] On this point, the approach adopted in the Regulation is reminiscent of that applied in the field of State aid, more specifically for the application of the criterion of imputability of the advantage to the State, for which the Commission recalls that “does not need to be demonstrated that, in a particular case, the public authorities specifically incited the public undertaking to take the measure in question” and that, on the contrary, “the imputability to the State of a measure taken by a public undertaking may be inferred from a set of indicators arising from the circumstances of the case and the context in which the measure was taken” (Commission Communication on the concept of “State aid” referred to in Article 107(1) TFEU – 2016/C 262/01, points 41 and 42).

[5] See in particular the Commission Communication on the concept of “State aid” as referred to in Article 107(1) TFEU – 2016/C 262/01, point 2).

[6] Art. 1§2 of the Regulation.

[7] Art. 3§2 of the Regulation.

[8] Regulation, recital 13.

[9] See in particular the Commission Communication on the concept of “State aid” as referred to in Article 107(1) TFEU – 2016/C 262/01, parts 4 and 5).

[10] This can refer to the combined application of the requirement that the aid distorts or threatens to distort competition and that it affects trade between Member States, both of which are provided for in Article 107(1) of the TFEU (see, in particular, the Commission Communication on the concept of “State aid” referred to in Article 107(1) of the TFEU – 2016/C 262/01, part 6).

[11] Art. 4.2 of the Regulation.

[12] On this point, the Regulation expressly refers to Article 3§2, 1er of Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid.

[13] Article 5§1 of the Regulation.

[14] See recital 20 of the Regulation and Article 5(2).

[15] Art. 6 of the Regulation.

[16] Recital 20 of the Rules of Procedure does, however, provide some guidance.

[17] Art. 9 of the Regulation.

[18] Art. 10 of the Regulation.

[19] Art. 13 of the Regulation.

[20] Art. 14 of the Regulation.

[21] Art. 15 of the Regulation.

[22] Art. 17 of the Regulation.

[23] Art. 12 of the Regulation.

[24] Art. 11 of the Regulation.

[25] Art. 7 of the Regulation.

[26] Art. 20 of the Regulation, the definition is identical to that in Regulation 139/2004.

[27] Article 44 of the Regulation specifies that the Regulation applies without prejudice to the application of Regulation 139/2004 and Regulation 2019/452.

[28]Art. 20.3 of the Regulations 

[29]Art.23 of the Regulations.

[30] Q&A from the European Commission.

[31]Art.20.3 of the Regulations

[32] Art. 24 of the Regulation (between 25 and 90 working days, unless commitments received in Phase II or deadlines suspended)

[33] If there are no objections within 25 working days, authorisation with or without a commitment, prohibition and injunction to dissolve the concentration (Art. 25 of the Regulations).

[34] Art. 26 of the Regulation of 1% or 10% of the total turnover achieved by the undertakings concerned in the previous year, depending on the type of infringement of the notification rules. It may impose periodic penalty payments of up to 5% of the total average daily turnover achieved by the undertaking concerned for each working day of delay from the date set in the decision (Art. 17.3 of the Regulation).

[35]Art. 21.5 of the Regulations

[36]Art. 19 of the Regulation

[37] Directive 2014/24/EU, of 26 February 2014 on public procurement.

[38] Directive 2014/25/EU of 26 February 2014 on procurement of entities operating in the water, energy, transport and postal services sectors.

[39] Directive 2014/23/EU of 26 February 2014 on the award of concession contracts.

[40] The awarding of contracts to a particular economic operator for artistic or technical reasons or because of exclusive rights is subject to an ad hoc obligation to inform the Commission of all financial contributions received (Art. 28.5 of the Regulation).

[41] See in particular CE, 4 April 2016, CAEM, req. n°396191; CE, 14 February 2017, SMPA, req. n°405157; CE, 5 February 2018, ville de Paris, req. n°416581; see since then, article L.3121-2 and R. 3122-1 of the French Public Order Code.

[42] Recital 42 of the Regulation.

[43] Art. 29.8 of the Regulation.

[44] Art. 28.1 of the Regulation.

[45] Recital 54 of the Regulation states that “Elements of the contract or concession may be regarded as key elements, in particular on the basis of their specific relevance to the quality of the tender, including specific know-how, technology, specialised personnel, patents or similar advantages available to the subcontractor or supplier, in particular where the tender depends on these elements to satisfy the major part of at least one of the selection criteria in the context of a procedure for the award of public contracts or concessions“.

[46] Art. 29.5 of the Regulation.

[47] Art. 29.1 and 29.6 of the Regulation.

[48] The wording of Article 29.1 of the Regulation is ambiguous on this point, as it may imply that all contracts below the threshold of €250 million are subject to the reporting obligation. However, it seems to us that such an interpretation cannot be accepted.

[49] Art. 29.1 of the Regulation.

[50] Art. 29.3 and 29.4 of the Regulation.

[51] Art. 33 of the Regulation.