The European Challenge Against Foreign Subsidies Distorting the Internal Market: the New Regulation
The protection of the internal market has always been one of the main objectives of the European Union. The new EU Regulation 2022/2560, which came into force in January 2023, adds to the many regulatory sources that pursue this objective, filling an aspect that had been overlooked. This is the instrument chosen by the Union to tackle the challenge of distortions caused by foreign subsidies on the internal market, wich will apply from July 12, 2023. What new features have been introduced?
Article 107 of the Treaty on the Functioning of the European Union provides for cases of incompatibility of aid granted by a Member State to the internal market. The European legislator had not regulated the hypothesis in which economic aid, so feared for its impact on the internal market development, came from non-EU Member States.
Well, 16 years after the Treaty came into force, this oversight has been rectified. But what is meant by market distorting effects? This term refers to all those acts that can affect the proper functioning of the internal market. According to the new Regulation, a foreign subsidy is potentially distorting when it negatively affects competition in the internal market by improving the competitive position of one or more undertakings, thereby undermining the level playing field. To avoid these distortions, important powers of investigation and, if necessary, powers of remedy are attributed to the European Commission.
It is precisely the Commission that is obliged to assess on a case-by-case basis whether the granting of the foreign subsidy causes distortion. The task entrusted to the Commission does not seem at all easy. For this reason, articles 4 and 5 of the Regulation identify indicators, which are not exhaustive in order to determine the existence of a distortion and the categories of foreign subsidies most likely to cause such effects on the market. The Regulation has a special focus on public procurement procedures. Due to the sensitive nature of this area, a real preventive control is envisaged. Companies wishing to participate in a public tender have to declare foreign financing received. In the absence of such declaration, the contracting authority will grant a period of 10 days in which to submit it. If the declaration is not submitted, the company will be excluded from the tender. Declarations received by the contracting authority are subject to verification by the Commission. The latter will carry out a preliminary examination. If successful, it will authorize the award, otherwise an in-depth investigation will be initiated, which must be concluded within the next 110 days. Given the Commission extensive powers of investigation, such as inspections, the company has the right to defend itself in an adversarial manner.
The in-depth investigation may have several outcomes. The Commission may decide that the tender can be awarded without objection, or by requiring certain undertakings from the company so that the subsidy does not distort the market, or by prohibiting the award in favor of that company. The Regulation also provides for sanctions for companies that attempt to circumvent the provisions. The Commission decisions may be appealed before the Court of Justice within two months.
The Regulation seems to have good potential to protect the internal market. All that remains is to wait for the coming months to take stock of the new legislation.