Summary Notice Lessons on FSR Ex Officio Investigations

Since the European Union’s Foreign Subsidies Regulation (FSR) entered into force in 2023, the European Commission (the Commission) has only opened two in-depth ex officio investigations, both following preliminary reviews launched in April 2024 and both involving Chinese-owned companies.  In recent weeks, the Commission published summary notices describing the bases for opening these in-depth investigations.  These summary notices (Nuctech and Goldwind; together, the Summary Notices) offer the most detailed window into the Commission’s procedures and theories of harm in ex officio cases that we are likely to get for a year or more, until the Commission adopts its final decisions in these cases.

Procedure: Article 10 FSR authorizes preliminary investigations into “alleged foreign subsidies distorting the internal market” but sets no time limit for such investigations.  In the cases at hand, the preliminary investigations lasted 18 months or more (18 months in Nuctech; 19 in Goldwind; longer if in-depth investigations are opened into other wind turbine manufacturers targeted in the preliminary investigation phase).

Under Article 11(5) FSR, in-depth investigations should “as far as possible” last no longer than an additional 18 months.  If the Commission takes the full 18 months, these procedures will have lasted three years or more. The Commission’s ex officio timelines are thus in line with those for investigations of alleged anticompetitive agreements and abuses of dominant positions under Regulation 1/2003.

The Summary Notices shed little light on practical aspects of the investigations.  In Nuctech, the Commission conducted dawn raids at some of the target entities’ EU premises.  (The Court of Justice rejected Nuctech’s challenge to these raids.)  The Commission does not seem to have conducted dawn raids at Goldwind’s premises.  The Summary Notices make no mention of on-site inspections outside the EU, which are allowed under Article 15 FSR where the relevant government does not object.  There is also no indication whether the Commission used its powers under Article 13(6) FSR to request information from China and to “take a decision on the basis of the facts that are available to it” in case of non-cooperation.  The Commission’s main source of information in these cases must therefore be requests for information under Article 13 FSR.

Foreign subsidies:  The Summary Notices both identify the same three categories of foreign subsidies considered potentially distortive: grants, preferential tax measures, and preferential financing.  The Nuctech Summary Notice notes that foreign subsidies are considered only from July 2018, the five-year limit allowed by the FSR.  The Nuctech Summary Notice also mentions that the Commission may investigate other foreign financial contributions brought to its attention during the in-depth investigation, highlighting foreign subsidies related to technology development and liquidity support.

The Nuctech Summary Notice doesn’t describe the investigated grants but notes that they consisted in direct transfers of funds that would not have been available under normal market conditions and were limited to companies operating in specific sectors or carrying out activities specifically supported by China.  The Goldwind Summary Notice refers to insurance premium subsidies and R&D grants.

As regards preferential tax measures, the Nuctech Summary Notice mentions reduced corporate income tax rates, pre-tax “super deductions” for R&D costs, software VAT and other tax refunds.  The Commission considers these “specific” enough to qualify as foreign financial contributions, in that they are limited to companies recognized as “high-tech enterprises” or companies of a certain size or industry.  The Goldwind Summary Notice refers to reductions of corporate income tax and VAT refunds but does not discuss how these benefits are specific to Goldwind.

The Nuctech Summary Notice states that the preferential financing under investigation consists of loans on preferential terms granted by banks considered attributable to China. The Commission considers that those terms were likely influenced by favorable policies of Chinese public authorities for companies in Nuctech’s sector.  The Goldwind Summary Notice refers only to loans granted by banks whose actions the Commission preliminarily considers to be attributable to China.

Distortion:  In both Summary Notices, the Commission states that it found indications that the subsidies in question were liable to improve the beneficiaries’ competitive position in the EU, “thereby actually or potentially negatively affecting competition.”  This language suggests that a negative effect on competition in the EU can be presumed where a foreign subsidy is liable to improve a group’s competitive position in the EU.

The Nuctech Summary Notice, however, offers a somewhat more detailed explanation.  The Commission found indications that Nuctech has the ability and incentive to transfer part of the benefit from foreign subsidies to its EU activities based on very close functional, economic and organic links between Nuctech group members, the subsidies’ amount, the importance of price as a competitive driver and the absence of credible factors preventing (or rendering unlikely) the transfer of resources.  According to the Commission, Nuctech’s improved competitive position could actually or potentially negatively affect competition in the internal market by allowing Nuctech to offer customers lower prices or better commercial conditions than competitors, thus winning more tenders and strengthening its position. Better conditions could also reduce or eliminate competition by preventing or dissuading competitors from participating in certain tenders.  The Nuctech Summary Notice also notes that foreign subsidies may have contributed to Nuctech’s high rates of patent applications, which may have contributed to its market penetration.

The Goldwind Summary Notice notes that Goldwind’s foreign subsidies seem to support, directly or indirectly, Goldwind’s EU activities, either by being targeted to these activities or by freeing up resources. As with the Nuctech Summary Notice, the Commission cites “close functional, economic and organic links” among group members as providing the ability and incentive to transfer resources provided or freed up to cross-subsidise its EU activities. The Commission also found indications that Goldwind’s foreign subsidies could “actually or potentially negatively affect competition” by enabling it to offer lower prices, thereby winning more wind project tenders and increasing its presence in the EU.

Takeaways:  The Summary Notices are very brief, but they offer some insights into the Commission’s approach to ex officio investigations.  So far, the Commission hasn’t employed its most innovative powers, such as conducting dawn raids outside the EU and demanding information from non-EU governments.   The Commission’s investigations are on track to conclude in the same general timeframe as its Article 101 and 102 TFEU investigations.

The investigations call attention to the need for coordination between DG COMP and DG GROW, which handles FSR reviews in the public procurement context.  Ex officio investigations are conducted by DG COMP, which also took the lead in drafting the Commission’s recent guidelines on the concept of distortion and other FSR issues (the Guidelines).  Nuctech and Goldwind both participate in EU public tenders, but neither has engaged in an M&A transaction triggering an FSR notification requirement.

The Summary Notices reflect the broad approach to the concept of distortive foreign subsidy displayed in the Guidelines.  Even widely available categories such as R&D incentives are selective enough to qualify.  Similarly, a wide range of tax benefits qualify as selective if they are available to broad categories such as “high-tech enterprises” or companies in a particular industry. Even benefits to companies of a certain size qualify as selective and thus potentially distortive.  Preferential financing terms from banks considered attributable to a non-EU government also qualify, though the Summary Notices do not explain how the Commission determines which banks are attributable to a non-EU government or how it identifies preferential terms.

The Summary Notices also confirm the Commission’s broad approach to determining whether foreign subsidies improve a beneficiary’s competitive position and are liable to distort competition in the EU.  Even foreign subsidies granted and used outside the EU are liable to be considered distortive if they “free up” resources in non-EU group members that could theoretically be used to cross-subsidize EU activities, especially if group members have close functional, economic and organic links, as they typically do in large global organizations.  Unless the parties under investigation can point to affirmative factors preventing “cross-subsidization,” the Commission can effectively presume that foreign subsidies will distort competition in the EU without a single euro being transferred.

The Summary Notices, together with the Guidelines, arguably reflect a widening gap between theory and practice in FSR enforcement.  Under the Commission’s interpretations, a high percentage of large global groups, especially in sectors involving significant government involvement – such as energy, healthcare, information technology, telecommunications, transportation – receive significant foreign subsidies likely to be found distortive if investigated under these standards.  It would be impossible for the Commission to investigate more than a tiny fraction of these subsidies.

In practice, however, the Commission has only opened only two in-depth ex officio investigations, and each one takes years of effort.  Similarly, the Commission has only opened two in-depth investigations among over 300 M&A notifications, leading to calls to scale back the FSR’s M&A regime (see here).   A more realistic approach would require a more pragmatic definition of distortive foreign subsidies, for instance requiring some evidence that groups receiving foreign subsidies have or are likely to use those subsidies to support their EU activities.  Such an approach would keep the burden of proof where it belongs, on the Commission.